March 29, 2018

IMF published staff report and selected issues reports in the context of the 2018 Article IV consultation with the Islamic Republic of Iran. Directors underscored that financial sector reform should be a priority, in particular recapitalization and restructuring of viable banks, along with the resolution of non-viable banks. They highlighted that state-controlled banks should start preparing and implementing recovery plans as soon as possible. Directors also welcomed the progress in strengthening the AML/CFT framework and encouraged timely passage and implementation of the AML and CFT amendments in line with the FATF action plan.

The staff report highlights the need to securitize government’s debt to the Central Bank of Iran (CBI) and provide the CBI full autonomy. Directors agree that the new Central Bank Law should enhance the autonomy of CBI. In the past year, CBI merged or closed several Unlicensed Financial Institutions (UFIs) that threatened financial stability and contributed to excessive interest rate pressures. The legal framework was revised to make CBI the sole authority to license and regulate financial institutions. UFI assets and liabilities were transferred to existing Credit Institutions (CIs). The average Capital Adequacy Ratio (CAR) had fallen to 4.9% by end-June 2017 from 5.2% a year earlier and the nonperforming loans (NPLs) ratio had risen to 11.4%. The banking system continues to operate at a loss as the margin between mandated lending and deposit rates is insufficient to cover high operating costs and increasing provision expenses related to nonperforming assets. The proposal to tighten provisioning and loss recognition standards is a welcome step toward Basel II. The impact of the tighter standards on banks’ capital positions must be quantified and provided for under the recapitalization plan to ensure banks are adequately capitalized.

The staff report also reveals that CBI plans to undertake an independent Asset Quality Review (AQR), including related-party lending assessment to identify the financial system’s recapitalization needs. An AQR will help identify the true extent of non-performing assets, the value of associated collateral, provisions adequacy and credit risk management weaknesses. Staff urged CBI to move expeditiously with the AQR to contain financial stability risks and be prepared to take additional actions following its conclusion, including requiring banks to raise capital, resolve NPLs, improve credit risk management, tackle related-party lending, and demonstrate their commercial viability on a forward-looking basis. The restructuring of state-owned banks (SBs) should proceed now—since the AQR will take time. The authorities acknowledged the complexity and scope of banks’ problems and agreed on the need for action. They noted that NPLs and other frozen assets comprised 28% of banks’ total assets but that the exact recapitalization need will only be finalized once the AQR is completed.

The selected issues report highlights that the authorities have intensified efforts to develop a domestic government securities market. Iran has a well-functioning securities settlement infrastructure. The accounts for the securities are automated and the custody arrangements for the recording of securities ownership remain under the Iran Fara Bourse (IFB). The settlement system allows for T+1 settlement with delivery versus payment arrangement. Electronic platforms work to lower the cost, eliminate delays in trading and settlement and help protect against theft or forgery. IFB provides efficient and low-risk settlement facilities. From the market supervision perspective, the current system provides comprehensive, timely, and reliable information on holders of government securities and on trading developments. IFB also acts as the central depository and the market is supervised by Securities and Exchanges Organization (SEO). As the domestic government securities market develops, the authorities should move to a primary dealer system to aid diversification of the investor base and foster deeper markets.


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Keywords: Asia Pacific Iran Banking, Securities, PMI, Article IV, Basel II, AQR, NPLs, Resolution Planning, IMF