Seif examines key implications and ambiguities / Forced sale order for banks' assets / Where is the buyer and who will bear the losses?

A bank imbalance does not necessarily mean that debts exceed the real value of assets. Mismatched maturities between assets and liabilities, weak liquidity, and capital shortfalls can also be major causes. Therefore, the existence of assets alone is not a sign of a bank's financial health.

The former head of the central bank wrote in a special note to the Ambassador of Arjan: Banks should allocate the resources provided by depositors to the financing of production, investment and economic activities within the framework of credit standards and in compliance with the principles of risk management. Not that they will gradually become large collections of properties, real estates and commercial companies.

However, accepting this necessity does not mean approving any method and mechanism for its realization. Economic policy will be successful when, in addition to the correctness of the goal, the chosen tool, the conditions of its implementation and its possible consequences are also carefully examined.

From this point of view, the announcement of a limited deadline for the transfer of surplus assets of banks and the possibility of forced transfer of transferred assets to the asset management company of the banking network raises important questions: in the current conditions of the Iranian economy, do the capital market and the real estate market have enough capacity to absorb a significant amount of offered assets? Will the valuation of these assets be based on valid and reliable standards? And most importantly, will the transfer of these assets really lead to a reduction in the banks' dissatisfaction, or might it exacerbate the existing problems?

A market without effective demand is not a suitable place for forced selling

It is not possible to carry out the transaction only by the order of the seller or by setting a legal deadline. Selling an asset requires the presence of a buyer, sufficient purchasing power, and an agreement on the price. The larger the value of the property and the more limited the market, the more difficult it will be to find a suitable buyer.

This issue is more important in the current situation of Iran's economy. Uncertainty about political and economic developments, investment restrictions, the difficulty of predicting the return of economic activities, and doubt about the future of the markets have made investors more cautious in their decisions. In such an environment, it cannot be assumed that for every large asset offered by banks, there will necessarily be a buyer with sufficient financial power and willingness to pay the expected price.

Selling a large commercial complex, a collection of properties, or a significant block of stock in a company is different from selling small, conventional assets. The number of potential buyers of such assets is more limited and the decision to buy them depends on a more detailed assessment of the economic outlook, maintenance costs, required investment and expected returns.

In such a situation, setting a nine-month deadline for handing over assets does not automatically create a new capacity for demand. If there is not enough effective demand, banks may be forced to sell their assets at heavy discounts to meet the deadline. On the other hand, simultaneous supply of similar assets by several banks can increase supply pressure and lower prices even more.

As a result, a policy designed to improve the financial condition of banks may lead to a decrease in the value of their assets and the realization of more losses.

Therefore, a distinction must be made between obliging banks to plan for exit from business and forcing them to sell assets within a predetermined deadline. The first one can be part of the banking system reform program; But the latter, regardless of the market conditions and the capacity to absorb assets, does not necessarily lead to the desired result.

The dissatisfaction of banks; A problem beyond surplus assets

Banks' problems are not limited to holding real estate, real estate, or corporate stocks. An important part of their dissatisfaction is related to the inappropriate quality of assets, non-current claims, accumulation of losses, weak capital and the inability of some assets to generate income commensurate with the cost of financing. In some cases, the recoverable value of assets is lower than their registered value.

It should be noted that banks' dissatisfaction does not necessarily mean that debts are greater than the real value of assets; The disproportion of maturity of assets and liabilities, weak liquidity and capital deficit can also be one of its main factors. Therefore, the existence of assets alone is not a sign of the bank's financial health. What is important is the realizable economic value of the assets, their ability to generate cash flow and the suitability of these items with the bank's obligations.

If a bank is forced to sell its asset at a price lower than its realizable economic value, the loss from the sale may weaken its capital position and financial strength. Of course, if the recorded value of the asset is more than its true value, the sale can reveal the hidden loss; However, revealing accumulated losses is not the same as creating new losses, and a distinction should be made between the two.

The basic point is that the sale of surplus assets leads to real reform when the resources obtained from the sale, after deducting the costs and related obligations, help to improve the financial condition of the bank. If the assets are sold at heavy discounts or the resulting resources are used only to cover current obligations, the reduction of non-operating assets cannot be considered as a sign of the success of banking reforms.

The measure of success should be the real reduction of disparity, improvement of the quality of assets, strengthening of capital and reduction of the bank's dependence on the resources of the central bank; Not just the amount of property transferred or the number of transactions made.

asset management company; Solution or transfer of the problem?

The creation of a bank network asset management company can, if properly designed, help consolidate assets, manage them professionally, increase transparency and provide more favorable conditions for sales. Centralized asset management can even prevent scattered and rushed sales.

However, the transfer of ownership of an asset from a bank to an asset management company does not in itself mean an actual sale, cash collection or resolution of the dispute.

If the asset management company provides them with cash or financial bonds in exchange for receiving properties and shares of banks, it should be determined where the necessary resources are provided, what is the basis of the issued bonds, who are their buyers, and in case the assets are not sold or their value decreases, which institution will be responsible for compensating the deficit.

If the financing of this mechanism ultimately depends on creating new obligations for the government, increasing the debt of the banking network, or using the central bank's resources directly or indirectly, there is a risk that the issue will be transferred from the balance sheet of one institution to the balance sheet of another institution; Without the existing economic loss really disappearing.

Therefore, the asset management company should be designed based on accurate assessment of assets, stable financing, clear determination of responsibilities and a realistic plan for managing and selling assets. Also, it is necessary to avoid creating ambiguous obligations and transferring possible costs to public resources.

valuation; The decisive link in the success or failure of the plan

One of the most important considerations in handing over bank assets is how to determine their value. This matter becomes doubly important in the conditions of forced transfer; Because the set price directly affects the rights and interests of banks, shareholders and other stakeholders.

A distinction should be made between book value, expert value, fair value and realizable price in the market. These concepts are not necessarily the same. The registered value of a property in the bank's offices alone does not represent its current price. Expert appraisal, even if it is done in accordance with professional principles, does not necessarily show that the property in question can be sold at the same price in a limited period and under real market conditions.

Valuation of large assets, especially commercial real estate, multipurpose complexes, and corporate stocks, requires reliable information, standardized methods, market knowledge, assessment of future cash flows, and consideration of economic risks. If these factors are not considered properly, there may be a significant gap between the estimated value and the realizable price.

In our country, the necessity of establishing a national, coherent, up-to-date and reliable framework for asset valuation is still of particular importance. The lack of comprehensive national standards and effective quality control mechanisms can increase the scope of disputes, exercise of taste and conflict of interests. In the conditions of forced transfer of assets, such a situation increases the risk of violating the rights of the beneficiaries and even the occurrence of corruption.

Of course, the problem is not the absence of any rules or professional methods of valuation; Rather, it is necessary to create an integrated framework that clearly specifies valuation methods, professional requirements, experts' responsibility, how to handle disputes, and regulatory mechanisms.

From this point of view, the submission of the draft legal bill related to national valuation standards by the Ministry of Economic Affairs and Finance to the government is an important and significant step. The approval and effective implementation of this framework can help to increase the transparency of transactions, improve the quality of economic decisions and reduce the areas of corruption.

However, even the existence of valid standards does not replace the analysis of market conditions and measuring the purchasing power of applicants. A distinction must be made between the fair value of an asset and its realizable price under conditions of forced sale and time limit.

Real correction begins with recognizing the loss

The sustainable reform of the banking system cannot be achieved by external measures and changing the shape of balance sheets. Just as the nominal increase of capital through revaluation of assets, without improving the real condition of the bank, does not mean strengthening its financial strength, transferring assets to another institution, without determining their economic value and how to compensate for existing losses, cannot solve the problem by itself.

The starting point for real reform is a comprehensive assessment of banks' asset quality, or the Asset Quality Review (AQR) program. This assessment should determine the recoverable value of the assets, how much of the receivables are actually recoverable, how much the unrecognized losses are, and what is the real capital of the bank after reflecting these losses.

After that, a specific reform plan should be developed for each bank, according to its situation. For a bank, the gradual sale of assets unrelated to the main activity may be a good solution; For another bank, determining the assignment of non-current claims and capital increase is more necessary; And in some cases, restructuring of the financial structure, merger or implementation of legal mechanisms to deal with unhealthy banks is unavoidable.

As a result, one cannot prescribe the same prescription for all banks, despite serious differences in asset quality, capital position, debt structure and operating conditions.

Finally, the reform of the country's banking system is an undeniable necessity and the reduction of bank ownership should be pursued seriously. But the importance of the goal does not make us unnecessary to evaluate the effects of the selected tools.

In an economy that faces serious uncertainties, investment restrictions and weak effective demand in some property markets, forcing banks to sell a significant amount of property in a limited period can lead to lower prices, realizing more losses and weakening the financial status of some banks. If the asset transfer mechanism is designed without sustainable financing and determination of responsibility for losses, there will be a possibility of transferring the problem to another institution and creating new obligations for the economy.

In addition, until there is a standard and reliable framework for valuing assets and handling disputes, the risk of making decisions based on unrealistic values and violating the rights of stakeholders cannot be ignored.

Therefore, the solution is neither to ignore the need for banks to withdraw from banking, nor to indefinitely postpone reforms; Rather, it is to replace hasty sales with gradual reforms, expert, transparent and appropriate to the real conditions of the economy.

The final goal should be to correct the banks' balance sheets, identify and determine the assignment of accumulated losses, strengthen the real capital and return the banks to their main task, that is, equipping savings and efficiently financing economic activities.