There are growing indications that the Iranian banking system is in crisis, weighed down by a proliferation of non-performing loans. Although there is no timely financial reporting to speak of in Iran, a number of recent news stories suggest to me that the country’s banks are in a great deal of trouble.

• Central Bank of Iran Governor Mahmoud Bahmani was quoted by Iranian newspaper Ettelaat in late January as saying: ‘How would it be possible for the banking system to show any profit with US$48bn worth of loans in arrears [?]’. These bad loans equate to nearly 25% of the banking sector’s total loans, a remarkably high figure. It is impossible to corroborate Bahmani’s claim with other published figures (there are none), but I see no reason why he would overstate the problem.
• This US$48bn figure compares to total bank capital (in August 2009) of only US$22.2bn. Already the banking sector is highly leveraged – the sector’s assets-to-equity ratio was 21.1 in August – which means that an uptick in asset write downs could see banks’ capital buffers wiped out, or at least considerably diminished, extremely quickly.
• The public’s confidence in the banking system is at a low ebb too. Indeed, rumours began circulating in January, after the government placed a daily limit of roughly US$15,000 on cash withdrawals from banks, that Bank Melli (Iran’s largest lender) and Bank Mellat were on the verge of declaring bankruptcy. Bank Melli’s financial manager refuted the rumours, but the fact that they gained traction in the first place, and that the bank was forced to make a public statement of denial is rather telling. So is that the fact that the government put on these withdrawal limits in the first place – they may have justified the move on the grounds of fighting money laundering, but I am pretty sceptical.

All in all, the extent of the NPL problem is such that I can’t rule out the possibility of one or more of Iran’s large state-owned banks being forced into declaring bankruptcy, in turn resulting in a system-wide meltdown. Having said that, I fully expect the government to do all it can to stave off this threat, possibly via capital injections into struggling banks, but I nonetheless caution that the stability of the banking sector is by no means guaranteed. On top of international sanctions, the government’s dire fiscal situation and ongoing domestic political unrest, a banking crisis is the last thing Iran’s leaders want right now.