C O N F I D E N T I A L SECTION 01 OF 02 RPO DUBAI 000009

SIPDIS

E.O. 12958: DECL: 2020/01/07
TAGS: PGOV IR ECON PREL
SUBJECT: IRAN BANKING ON ROPES AS BAD LOANS HIT RECORD HIGH

CLASSIFIED BY: Alan Eyre, Director, DOS, IRPO; REASON: 1.4(B), (D),
(E)


1. (C) SUMMARY: A January 3 Central Bank of Iran (CBI) report
indicates non-performing loans (NPLs) jumped from USD 40 billion to
48 billion from mid-September to mid-November. NPLs now account
for nearly 26 percent of all outstanding domestic loans. CBI
ascribed the increase in bad loans to the domestic effect of the
general global economic slowdown, and expects this trend to
continue. Over the last six months Iran's General Inspections
Organization (GIO) has warned that bad loans are on the rise,
blaming it at least partially, on questionable lending methods and
state-owned banks' incompetence in collecting. One IRPO business
contact hypothesized that so many loans in recent years were
insufficiently collateralized, sometimes only by letters from
state-backed institutions like the IRGC, most banks can not collect
if loans go bad. Ahmadinejad's political opponents sought to lay
the blame at his feet, citing Executive branch interference and
political favoritism in lending. In the absence of any change in
government policy, the CBI and state-owned banks are responding by
cutting liquidity and making new loans difficult to obtain. These
actions will most hurt legitimate, domestic businesses and
investors in the short-term and slow any economic recovery. Given
the precarious state of bank asset quality, any attempt by
President Ahmadinejad to pressure banks to lend again to select
credit-risky borrowers could further endanger the banking sector.
END SUMMARY.


2. (SBU) On January 3, the CBI released a report showing delinquent
loans jumped in value from USD 40 to 48 billion from mid-September
to mid-November. Iranian banks have approximately USD 19 billion in
capital, USD 177 billion in deposits, and 188 billion in client
loans. Hence, delinquent loans represent approximately 26 percent
of all loans carried by Iranian banks, five times the international
standard. Additionally, Iran's banking sector has an aggregate
asset-to-equity ratio of 18.2, more than two times their GCC
counterparts. In fact, USD 48 billion in arrears represents nearly
2.5 times total bank capi

tal. As a result, Iranian banks are in a
precarious position and do not have much of a capital buffer to
absorb prospective loan losses.


3. (U) In a January 3 interview with state news agency Mehr, CBI's
Credit Supervision Head Hamid Tehranfar said he believes the
current NPL surge is tied to "difficult economic conditions in the
country" brought on by the worldwide economic crisis. Additionally,
he said he expects to see the number of defaults continue to grow,
given that "the country is in a period of stagnation."


4. (SBU) Other state institutions argue the problem runs much
deeper. Concerns about the amount of delinquent loans and who the
borrowers are were first raised by, head of Iran's GIO (under
Iran's Judiciary branch Mostafa Pourmohammadi) in mid-October 2009
when he announced that Iranian banks were carrying approximately
USD 38 billion in delinquent loans. BBC Farsi reported January 4
that the GIO's investigation showed most loans are held by a small
number of borrowers and some of the most toxic are concentrated
within an even smaller subset of those borrowers. According to the
GOI report, one thousand borrowers hold approximately USD 34
billion in loans with 90 of them collectively responsible for USD 8
billion in unpaid loans.


5. (C) According to Iranian economic news daily 'Donya-e Eqtesad',
in its report the GIO said "worthless letters of credit and
collateral" issued to borrowers as well banks' mismanagement in
collecting overdue payments were the reasons for the increase in
NPLs. One IRPO business contact provided an example, saying that a
number of the bad loans are tied to individuals who received credit
using an IRGC guarantee and used the capital to start new
businesses. He told us one of his acquaintances, who he said was
not an IRGC member, in early 2009 received a loan to import rice on
the basis of such an IRGC letter and without collateral. According
to our contact, his friend imported the rice, but with the economic
slowdown and a surplus of rice in Iran, he has not sold it. Asked
about the loan, our contact says the loan remains outstanding
though if the rice sells, the friend hopes to re-pay it. If the
bank attempts to collect, chances of recouping the loan amount will
prove difficult as the bank has no collateral to use as leverage.


6. (C) Given the opacity of the Iranian banking sector, it is
difficult to determine what percentage of default borrowers are
beneficiaries of government cronyism (such as the one our contact

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highlighted), but such claims are being made by some senior
government officials, who are also regarded as Ahmadinejad's
political opponents. According to Donya-e Eqtesad, in a January 3
meeting with officials to discuss delinquent loans Judiciary Head
(and brother of Majlis Speaker Ali Larijani) Hojjatoleslam Sadegh
Larijani said that the Judiciary "needs to fight this economic
corruption." The same article quotes the head of the State Audit
Organization as saying the problem stems from "poor management and
regulation of banks" as well as lack of transparency.


7. (C) In the absence of any official government statement about
the delinquencies or change in policy, the CBI has announced that
it is considering new regulations, including increased fines and
refusal to issue new checkbooks for those with any overdue loan
payments. Speculation about such actions plus general concern
about political instability seems to be raising popular concern
about the health of the banking sector. Reformist website Iran
Press News reported December 31 that banks have started to limit
the amount of cash withdrawals due to "unprecedented withdrawal of
people's cash from banks." In mid-December, the CBI issued a
circular giving banks the authority to seize savings or checking
deposits from a debtor, guarantor, or "first-degree relative" if
the primary debtor had a delinquent loan in order to settle
payment.


8. (C) Individual actions by banks to try and protect their cash
positions while not disclosing their motivations will probably only
exacerbate public concern. One IRPO contact told EconOff that on a
recent trip to Iran, he asked for a new checkbook at Bank Saderat
and was refused due to a new unpublished policy that requires he
keep more than the current USD 1500 he has in his checking account
to warrant a checkbook. Our contact says in the fifteen years he
has had an account at Bank Sederat this is the first time that the
bank has tied his right to a checkbook to his deposit balance and
raises his suspicion about how "his money is being used."


9. (C) COMMENT: It is no secret that state-owned banks were
effectively forced to give low-interest loans to (often
state-owned) companies to help boost economic growth in recent
years. This pressure from the government to lend to credit risky
Iranian individuals and companies seems to have come full circle
with bad loans now piling up. Enforcement of new standards for
loans will most likely cut liquidity across the marketplace in the
short-term hurting a broad swath of legitimate, domestic borrowers.
A weaker, highly leveraged commercial banking sector dragged down
by state-owned banks will most likely perpetuate economic
stagnation and slow any economic recovery in coming years.


10. (C) COMMENT (CONT): The lack of a government response to date
about the growing problem of bad loans and the poor health of the
banking sector also reflects negatively for the sector's long-term
future. Even if the government props up the banking sector by
injecting further capital, deteriorating asset quality and the
potential drawing down of banks' capital accounts will nonetheless
constrain their ability to make new loans for the foreseeable
future. END COMMENT.
EYRE