* Push against defaulters reveals "critical" hole for banks
* Loan problem is test for Rouhani's bid to boost economy
* More cooperative mood may raise pressure for solution
* Creditors include figures with likely ties to previous
By Michelle Moghtader
DUBAI, May 8 A move by Iran to recover bad debts
on behalf of banks has shed light on possible corrupt lending
under the previous president and also suggests a fresh spirit of
cooperation among its various centres of power.
A reported big increase in underperforming bank loans during
the eight years of Mahmoud Ahmadinejad's presidency is seen by
some as evidence of loans made on the basis of political
favouritism as well the impact on business of Western sanctions.
President Hassan Rouhani's administration, in power for nine
months, says bad debt in the banking system has reached a
"critical" level - 15.6 percent according to the central bank -
and has pointed the finger at cronyism under Ahmadinejad.
The authorities this week have handed the names of 575 of
the biggest defaulters to the judiciary to try and recover some
of the $33 billion owed. It has not released the names but some
believe the bulk may have been borrowed by as few as 100 people
and firms, suggesting some have debts in the many millions.
The extent of the difficulties for state and private banks
is unclear but the bad debt hole may hamper Rouhani's plans to
boost employment and raise living standards. That in turn is key
to him building the popularity that may enable him to compromise
with world powers who want to halt Iran's nuclear programme.
However, analysts also see positives in the new openness on
the debt problem and moves to try and fix it.
Some say the fresh start may have been made possible by a
more collaborative political climate cultivated by centrist
cleric Rouhani - in marked contrast to the volatile,
factionalised environment under the outspoken Ahmadinejad.
"There is a lot of determination between the government,
parliament and judiciary to go after these people," said
Tehran-based economist Rocky Ansari, who noted that the level of
bad loans in Iran is four to five times the international norm.
"What differs today from previous efforts is coordination,"
added Ansari, managing partner of financial and legal advisory
firm Cyrus Omron International.
"The environment is ripe for them to cooperate closely."
Announcing the move to call time on big defaulters, Vice
President Eshagh Jahangiri put bad debt in the banking system at
820 trillion rials ($33 billion), the official IRNA news agency
said. That is a twelvefold increase in non-performing bank loans
from 70 trillion rials in 2005, when Ahmadinejad took office,
according to official figures cited by the newspaper Hamshahri.
Central bank governor Valiollah Seif, quoted by the
semi-official ISNA news agency, said this 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 dig at those favoured
by the previous administration to make easy money.
Prosecutors are looking into loans made in breach of banking
rules and at borrowers who took credit and failed to invest it
in the projects for which they had notionally 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 Ahmadinejad's term.
They "were given loans without due process and due
collateral, so a lot of what will happen will be political,"
said Khajehpour, who works closely with businesses in Iran.
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' cheques 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 finance 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 parliament, the executive and judiciary.
Calling for transparency, 15 members of parliament urged
Rouhani to reveal the names of individuals owing more than 500
billion Iranian rials ($20 million). He has yet to do so.
Prosecutor-General Gholam-Hossein Mohseni-Ejei was quoted by
ISNA saying people who had complied with rules and were unable
to service loans 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.
Of the last category, Mohseni-Ejei 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-Ejei appeared to have his eye partly on people who had
close ties to the Ahmadinejad 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 in Vienna 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 $12
billion or 35 percent of all bad loans in 2013, Hamshahri
newspaper 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.
Ahmadinejad'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
taken under false pretences, exacerbating bad debt levels.
In contrast, some expect Rouhani to look to a deal with the
West on easing nuclear-related sanctions to bolster the economy.
Khajehpour noted that more than $4 billion in frozen Iranian
state assets is being returned to it under an interim accord -
money the government is using to pay its own creditors and so
pump cash back into the domestic economy.
"Iran is using those funds to open letters of credit and pay
debts," he said. "It's a bit of a cushion."
($1 = 24,797 Iranian rials)
(Editing by William Maclean and Alastair Macdonald)