Banks in Iran are struggling to get their loans back from companies, both state-owned and privately-held, because of the collapse of the Iranian economy in 2013 and the continuing weak state of the country’s manufacturing base.

Valiollah Seif, governor of the Central Bank of Iran (CBI), said on November 15 that the amount of non-performing loans in the country’s banking system has dropped from 15% of total loans three years ago to around 11% today. He said he hoped that the figure would fall around 5 percentage points over the next 12 months.

The central bank has previously announced it would prepare two banking reform bills that will become law in the next Iranian year (starting March 20, 2017), which in theory should strengthen the hand of banks.

However, the overall picture throughout the system may be in an even worse state than the central bank thinks.

According to Tehran’s prosecutor general, Mohammad-Reza Pasandideh Sahebi, in comments in Banker magazine, the amount of non-performing loans in several banks represents 60-80% of all loans currently active in the banking system.

The trouble for banks, which provide 90% of the credit, is that the system for dealing with individuals and companies that cannot repay their debts is in its infancy.

Loans in Iran are generally guaranteed by a property deed to the value of the loan, either by the signee of the loan or a close confident, are generally difficult to obtain for commercial and residential customers because of the absence of credit checks.

A debtor is immediately if he/she fails to repay his monthly repayments. There is also a very limited debt collection system as there is no bailiff system in place.

Private sector debt to the banking sector reached IRR8,400tn ($264.7bn) at the end of the Iranian month of Shahrivar (September 21), Financial Tribune in Tehran reports. Of that amount, IRR817tn ($25.6bn) was in interest payments, which indicates a 27% growth y/y, and a 15.7% increase in size compared to six months ago. Private banks accounted for 64.6% of private sector debt, while government banks accounted for 20% of those debts, according to the CBI.

As one Singaporean-based investment firm advisor said to bne IntelliNews: “Iran’s banking system is in far from decent shape, and several years of giving out bad loans are now hitting the system … there is no liquidity in the banks overall.”

Meanwhile, public sector debt is also swelling as Hassan Rouhani’s government attempts to overhaul the country’s antiquated infrastructure, while government oil revenues remain under pressure from the low oil price.

Iran government debts to the country’s banking sector skyrocketed in the first six months of the Iranian year (started March 20) to just over IRR2,000tn ($64bn), denoting an increase of 17.4% y/y.

The government may face issues repaying its debts as the predicted windfall from the lowering of sanctions under the Joint Comprehensive Plan of Action have not yet materialized, because foreign banks and companies remaining hesitant to do transactions for fear of further US sanctions.