Forbearance with Nonperforming Loans and Moral Hazards in Banking System: A Survey on Selected Iranian Banks

Document Type : Research Paper

Authors

Faculty of Economics, University of Tehran, Tehran, Iran.

10.22059/jte.2025.390060.1008980

Abstract

Present study investigates the impact of banking forbearance of Nonperforming loans using monthly data during the period of 2016-2024 for listed banks of Tehran Exchange Market. Facing nonperforming loans, one way is to deal with the collaterals and take NPL off the balance sheet. Conventional method being largely carried in Iran, without the presence of effective surveillance of central bank, is obtaining creative accounting and transfer the NPL to performing loans. This action as a Moral Hazards represents higher levels of loans to deposit ratio and will cause a systemic risk over banking system and then to aggregate monetary environment. Paper tests the mentioned hypothesis adopting PSTR model with variables consisting interest spread, loan to deposit ratio, NPL and Return on Equity of 10 banks. According to results, transition variable is loan to deposit ratio and divides banks into two regimes of high-risk and low-risk banks. In both regimes, the main determinant of reducing NPL is higher loan to deposit ratio which confirms the hypothesis which banks with more NPL take risky action and increase loans. Interest spread decreases NPL in both regimes and ROE has a significant effect for high-risk banks. As loan to deposit ratio tends to increase by bank actions, disturbs the destruction of bank money and simulates the growth of balance sheet of banks. It seems effective surveillance of central bank and reforming the auditing system of banks will be count as the crucial steps of controlling systemic risk caused by NPL and related crisis.

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References

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Journal of Economic Research (Tahghighat- E- Eghtesadi)
Volume 60, Issue 2
September 2025
Pages 960-983

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History

  • Receive Date: 06 February 2025
  • Revise Date: 19 July 2025
  • Accept Date: 04 May 2025

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