Iran Push to Recover Bad Debt Highlights Black Hole but Signals New Era

Iran's push to recover bad debts shows the extent of potentially corrupt lending practices under the previous administration.

A reported surge in underperforming bank loans made during the tenure of Mahmoud Ahmadinejad's presidency is being interpreted as an indication that loans were made as political favours, Reuters reported. The increase in bad loans also ties in with the period of tougher US economic sanctions on Iran.

President Hassan Rouhani's administration said bad debt in the country's banking system had reached a critical level and blamed political cronyism under Ahmadinejad.

According to central bank statistics, 15.6% of loans in state and private banks were at risk of not being recovered.

Iranian authorities have launched a bid to recover part of the $33bn outstanding. A list of 575 names of the largest defaulters was handed to the judiciary.

Vice-president Eshagh Jahangiri said bad debt in the banking system amounted to 820 trillion rials ($33bn), the official IRNA news agency said. That would mark a twelvefold increase in non-performing bank loans from 70 trillion rials in 2005, when Ahmadinejad took office, Hamshahri newspaper reported.

Central bank governor Valiollah Seif said that bad debt had reached 15.6% of total bank loans. That figure would put Iran in similar territory to Italy in terms of percentage of bad debt according to World Bank data.

"The banking system is in a critical situation, bordering alarm," Jahangiri said. He blamed soaring bad debt on an "upsurge in rent-seeking" – hinting at cronyism under Ahmadinejad.

While the issue highlights an economic black hole in Iran's banking system, some analysts believe the move signals a turning point for Iran.

Tehran-based economist Rocky Ansari said that the move suggested a collaborative political climate exists in Rouhani's Iran.

"There is a lot of determination between the government, parliament and judiciary to go after these people," Ansari told Reuters.

"The environment is ripe for them to cooperate closely."