In Iran, there are two main approaches to how to avoid a looming banking crisis. The first is to get the Central Bank of Iran (CBI) to implement a major quantitative easing (QE) program — the introduction of new money into the money supply — in a bid to provide troubled banks with immediate liquidity. The second, less risky, solution aims to help out financial institutions without QE. Advocates of the latter approach are very worried about the inflationary consequences of the CBI printing money. As such, they urge banks to embrace structural reforms and address their nonperforming loans (NPLs) — which are estimated at 1,100 trillion rials ($33.9 billion) in value — in a more “serious” way.

Widely backed by officials responsible for monetary and fiscal policy, the second approach has been pursued in past years. Yet toxic loans and assets have remained a major problem facing Iranian banks. In this vein, the implementation of a major QE program is highly unlikely — at least as long as moderates are in office. For the incumbent moderates, single-digit inflation has been a central economic goal and an objective that has finally been achieved after decades of double-digit inflation. Though the CBI has already significantly curbed the general level of consumer prices, fear of high inflation has not yet disappeared. Thus, the monetary regulator staunchly opposes any policy that could increase money supply, and hence prices.

In a recent speech, CBI Gov. Valiollah Seif warned that growing money supply can be a serious “threat” to one of the most important achievements of the administration of President Hassan Rouhani, referring to its successful inflation control. Addressing a gathering of bank executives on March 12, Seif called for stricter efforts to control money supply, leading economic daily Donya-e Eqtesad reported. He also urged bank CEOs to take “more serious” action on NPLs, wondering why the NPL ratio, which was curbed to 10.2% in March 2016, has rebounded to 11.6% this month.

The NPL crisis has its roots in policies dating back to the previous administration of conservative Mahmoud Ahmadinejad (2005-2013). Back then, banks were forced to grant extensive loans to influential individuals, who in some cases provided fake collateral to lenders. As a result, lenders now have no leverage to hold these major debtors accountable to pay back what they owe. Yet the CBI is still saying that if bankers pursue their debts intensely, they will be able to reduce NPLs considerably. Seif implied in his March 12 speech that major debtors have remained in close relationships with influential figures, including some bank managers — hinting that if this wasn’t the case, the debtors would’ve given in to the pressure on them by now.