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Term-Deposit Rate Ceiling May be Decreased to 15%

22 May, 2016

Vistar Business Monitor

Abdol-Naser Hemmati, the ex-head of the banks coordination council, announced that bankers would meet in two weeks’ time to approve a plan to further reduce deposit rate ceiling to 15 percent from 18 percent.

One of the main concerns of banks is that further decline in deposit rate ceiling may cause billion of rials in term-deposit accounts to leave commercial banks for credit and financial institutions, which have not yet authorized by the central bank and other markets such as FOREX and gold.

This move of deposits from banks to the parallel markets may worsen the credit crunch banks are now facing. Hammati said that the negative competition of banks for attracting more capital in any available means has now reduced. He expressed hope that banks would abide by the Central Bank’s call for a further decline in interest rates. He said one of the tools applied by the regulator to reduce this negative completion among banks was the serious warning banks were receiving from the CBI.

The negative competition of banks to attract more term-deposit accounts is affected by the output of parallel markets. There are a few markets now which can produce 15 percent in annual profit at low risks. On the other hand, as inflation has been curbed, the high interest rate of banks and institutions seem to have remained attractive for depositors.

Although the ceiling of the interest rate for deposits has been decreased in the past months, inflation has also been reduced. As a result the real deposit rate is still standing at a high level. Despite the fact that lower interest rate could generally be in favor of the economy, a further decline in interest rates might make banks return to the negative competition with financial institutions again to attract more deposits, given the dire financial situation of banks.

Hence, the inflation rate and the output rate of parallel markets will be two major factors that can push banks whether or not resume negative competition with unauthorized financial institutions to offer higher deposit rates than those officially agreed on. If the output of parallel markets is high, banks will be more likely to refuse calls on further reductions of interest rates. And as the regulator is not yet equipped with effective leverage to push commercial banks to abide by, any disciplinary measure could turn the environment very tense. On the other hand, year-over-year inflation has been frozen for a few months now, giving signals that it could be increase again. If that happens, deposit rates might be increased accordingly. 

The capital market could be considered as one the main gates of incoming capital as the global oil market has been giving positive signals, in case interest rates keep falling later in the year and both banks and financial institution stick to the announced policies of the central bank. However, as it is unlikely that all institutions follow the rules, the capitals will most probably remain in banks, fueling the existing liquidity problems in the country.


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