A move by Iran to recover bad debts on behalf of banks has shed light on possible corrupt lending under the previous president and also suggests a fresh spirit of cooperation among its various centres of power.

A reported big increase in underperforming bank loans during the eight years of Mahmoud Ahmadinejad's presidency is seen by some as evidence of loans made on the basis of political favouritism as well the impact on business of Western sanctions.

President Hassan Rouhani's administration, in power for nine months, says bad debt in the banking system has reached a "critical" level - 15.6 percent according to the central bank - and has pointed the finger at cronyism under Ahmadinejad.

The authorities this week have handed the names of 575 of the biggest defaulters to the judiciary to try and recover some of the $33 billion owed. It has not released the names but some believe the bulk may have been borrowed by as few as 100 people and firms, suggesting some have debts in the many millions.

The extent of the difficulties for state and private banks is unclear but the bad debt hole may hamper Rouhani's plans to boost employment and raise living standards. That in turn is key to him building the popularity that may enable him to compromise with world powers who want to halt Iran's nuclear programme.

However, analysts also see positives in the new openness on the debt problem and moves to try and fix it.

Some say the fresh start may have been made possible by a more collaborative political climate cultivated by centrist cleric Rouhani - in marked contrast to the volatile, factionalised environment under the outspoken Ahmadinejad.

"There is a lot of determination between the government, parliament and judiciary to go after these people," said Tehran-based economist Rocky Ansari, who noted that the level of bad loans in Iran is four to five times the international norm.

"What differs today from previous efforts is coordination," added Ansari, managing partner of financial and legal advisory firm Cyrus Omron International.

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

"SITUATION CRITICAL"

Announcing the move to call time on big defaulters, Vice President Eshagh Jahangiri put bad debt in the banking system at 820 trillion rials ($33 billion), the official IRNA news agency said. That is a twelvefold increase in non-performing bank loans from 70 trillion rials in 2005, when Ahmadinejad took office, according to official figures cited by the newspaper Hamshahri.

Central bank governor Valiollah Seif, quoted by the semi-official ISNA news agency, said this week that bad debt had reached 15.6 percent of total bank loans. That is on a par with Italy and half that of Greece, according to World Bank data which puts non-performing bank loans at 4.0 percent worldwide.

"The banking system is in a critical situation, bordering alarm," Vice President Jahangiri said, blaming the rise in bad debt on an "upsurge in rent-seeking" - a dig at those favoured by the previous administration to make easy money.

Prosecutors are looking into loans made in breach of banking rules and at borrowers who took credit and failed to invest it in the projects for which they had notionally been granted.

Bijan Khajehpour of the Vienna-based Atieh International consulting firm said the bulk of bad loans were owed by about 100 people who had obtained them during Ahmadinejad's term.

They "were given loans without due process and due collateral, so a lot of what will happen will be political," said Khajehpour, who works closely with businesses in Iran.

At the same time, he added, the fact so many had turned sour reflected wider troubles in the economy: "It's an indication of how the economy is doing," he said. "The bad debt is a result of a chain effect. For example, one company goes bankrupt, suppliers' cheques bounce and they can't pay the creditors."

In most cases, barring the most corrupt cases of money lent with little prospect of redemption, banks have some sort of guarantee, Khajehpour said. But going to court to obtain payment "takes time and puts finance pressure on the economy".

He stressed that levels of collateral were high enough, in his view, that bad loans should not force banks out of business.

COOPERATION

The push to obtain repayment of the debts appears to be a rare joint effort by parliament, the executive and judiciary.

Calling for transparency, 15 members of parliament urged Rouhani to reveal the names of individuals owing more than 500 billion Iranian rials ($20 million). He has yet to do so.

Prosecutor-General Gholam-Hossein Mohseni-Ejei was quoted by ISNA saying people who had complied with rules and were unable to service loans because of genuine business difficulties had nothing to fear. But those who secretly diverted credits or had broken banking regulations or other laws would be in trouble.

Of the last category, Mohseni-Ejei said: "In this case, both the banks and lenders are in violation of the law."

The head of a Tehran-based consultancy said that Mohseni-Ejei appeared to have his eye partly on people who had close ties to the Ahmadinejad administration and thus had been in a special position to receive government contracts.

Many obtained loans at low rates on the premise that they would invest in projects furthering government efforts to create jobs, he said: "They would do the initial work to get the contract," he added. "But the projects were rarely completed."

Khajehpour in Vienna said, however, that problems in the government finances - partly a result of Western sanctions that have hit oil revenues - also led to defaults by firms:

"The government contracted out projects but then couldn't pay the contractors", generating a cycle of bad debt, he said.

State-owned Bank Melli, Iran's largest lender, held $12 billion or 35 percent of all bad loans in 2013, Hamshahri newspaper said. Of that, more than half had been lent to public sector entities with the rest in private hands.

The state could look at backing some debt relief to prevent the problem further eroding confidence in the economy.

Ahmadinejad's administration belatedly tried to temper the problem by dipping into Iran's sovereign wealth fund to offer new credits to stimulate the economy. It hoped that would let debtors earn new income. But it backfired when more credit was taken under false pretences, exacerbating bad debt levels.

In contrast, some expect Rouhani to look to a deal with the West on easing nuclear-related sanctions to bolster the economy.

Khajehpour noted that more than $4 billion in frozen Iranian state assets is being returned to it under an interim accord - money the government is using to pay its own creditors and so pump cash back into the domestic economy.

"Iran is using those funds to open letters of credit and pay debts," he said. "It's a bit of a cushion." – Reuters