May 16-2014
The government last week handed over to the Judiciary the names of 575 people who have defaulted on 820 trillion rials ($25 billion at the free market exchange rate) that they borrowed from Iran’s banks under the Ahmadi-nejad Administration.
The level of bad loans in Iran is four times the international average. The default volume announced last week amounts to an average of $43 million per defaulter.
The decision to go after big defaulters was announced by Vice President Eshagh Jahangiri. The 820 trillion rials in default is a 12-fold increase in non-performing bank loans from 70 trillion rials in 2005, when Ahmadi-nejad took office, according to official figures cited by the daily Hamshahri.
Politically, the move looked like a continuation of the effort to blame Iran’s economic disaster on the Ahmadi-nejad Administration. Economically, the immense volume of bad debts also paints the Islamic Republic as a veritable hotbed of corruption.
The immense increase in defaulted bank loans during Ahmadi-nejad’s presidency is taken by many as evidence many loans were made on the basis of political favoritism.
The authorities have not released the names of any of the 575 big debtors.
The extent of the difficulties posed for state and private banks is unclear, but the bad debt may hamper Rohani’s plans to create jobs.
Central Bank Governor Valiollah Seif said last week that bad debt had reached 15.6 percent of total bank loans. That is on a par with Italy and half that of Greece, according to World Bank data which puts non-performing bank loans at 4.0 percent worldwide.
“The banking system is in a critical situation, bordering alarm,” Vice President Jahangiri said, blaming the rise in bad debt on an “upsurge in rent-seeking,” a major bugaboo in Iran.
Rent seeking is spending wealth on political lobbying to increase one’s share of existing wealth without creating new wealth. The effects of rent seeking are reduced economic efficiency through poor allocation of resources, reduced wealth creation, lost government revenue, increased income inequality and national decline. Rent seeking often focuses on the manipulation of regulatory agencies to gain monopolistic advantages in the market while imposing disadvantages on competitors.
Prosecutors are looking into loans made in breach of banking rules and at borrowers who took funds but failed to invest them in the projects for which they had been granted.
Bijan Khajehpour of the Vienna-based Atieh International consulting firm said the bulk of bad loans were owed by about 100 people who had obtained them during Ahmadi-nejad’s terms in office.
They “were given loans without due process and due collateral, so a lot of what will happen will be political,” Khajeh-pour told Reuters.
At the same time, he added, the fact so many had turned sour reflected wider troubles in the economy: “It’s an indication of how the economy is doing,” he said. “The bad debt is a result of a chain effect. For example, one company goes bankrupt, suppliers’ checks bounce and they can’t pay the creditors.”
In most cases, barring the most corrupt cases of money lent with little prospect of redemption, banks have some sort of guarantee, Khajehpour said. But going to court to obtain payment takes time and puts financial pressure on the economy.
He stressed that levels of collateral were high enough, in his view, that bad loans should not force banks out of business.
The push to obtain repayment of the debts appears to be a rare joint effort by the Majlis, the Executive Branch and the Judiciary.
Calling for transparency, 15 Majlis deputies urged Rohani to reveal the names of people owing more than 500 billion Iranian rials ($15 million).
Prosecutor General Gho-lam-Hossain Mohseni-Ejai was quoted by the Iranian Students News Agency (ISNA) as saying people who had complied with the rules and were unable to make loan repayments because of genuine business difficulties had nothing to fear. But those who secretly diverted credits or had broken banking regulations or other laws would be in trouble.
Mohseni-Ejai said: “In this case, both the banks and lenders are in violation of the law.”
The head of a Tehran-based consultancy said that Mohseni-Ejai appeared to have his eye partly on people who had close ties to the Ahmadi-nejad Administration and thus had been in a special position to receive government contracts.
Many obtained loans at low rates on the premise that they would invest in projects furthering government efforts to create jobs, he said: “They would do the initial work to get the contract,” he added. “But the projects were rarely completed.”
Khajehpour said, however, that problems in the government finances—partly a result of Western sanctions that have hit oil revenues—also led to defaults by firms: “The government contracted out projects but then couldn’t pay the contractors,” generating a cycle of bad debt, he said.
State-owned Bank Melli, Iran’s largest lender, held 35 percent of all the bad loans in 2013, Hamshahri said. Of that, more than half had been lent to public sector entities with the rest in private hands.
The state could look at backing some debt relief to prevent the problem further eroding confidence in the economy.
Ahmadi-nejad’s Administration belatedly tried to temper the problem by dipping into Iran’s sovereign wealth fund to offer new credits to stimulate the economy. It hoped that would let debtors earn new income. But it backfired when more credit was reportedly taken under false pretences, exacerbating bad debt levels.