The Money and Credit Council approved the outlines of a plan to streamline policies and procedures for recapitalization of manufacturing units.
Proposed by the Central Bank of Iran, the plan is dubbed “productive credit certificate” and was approved after extensive studies by CBI experts.
The action plan will be discussed in detail in the upcoming MCC meeting, according the CBI website.
In a meeting with representatives from the Iran Chamber of Commerce, Industries, Mines and Agriculture in October, CBI boss Abdolnasser Hemmati said the plan would help banks meet the financial needs of manufacturing units without creating “non-productive liquidity”.
As per the plan, lenders will help credit-worthy businesses by offering a six-month tradable credit certificate similar to a LC. The certificate should be submitted to the supplier of raw materials, machinery and equipment.
Like shares, certificates can be traded in the stock market and the supplier can cash it in the market.
It appears that the main purpose behind the scheme is to avoid inflation emanating from the inflow of new liquidity.
“By doing so, we are trying to finance manufactures without raising liquidity and in ways other than pumping new cash,” Hemmati told reporters on the sidelines of a Cabinet meeting on Wednesday.
It could be inferred from Hemmati’s statements on not using liquidity for non-productive sectors that rampant liquidity over the past several years has not been used to help fund the working capital of manufacturing units.
Rather, it was injected in non-productive activities, particularly in currency trade, real estate and the chaotic auto market, which in turn increased public demand in the three sectors and consequently led to price gauging and galloping inflation with no one ready to take responsibility.
25% Growth in Liquidity
Liquidity is Iran surpassed 197, 99.1 trillion rials ($172 billion) by end of third month of the current calendar year to June 21, according to a CBI report. This indicates a 25.1% growth compared to the corresponding month last year.
Although few details are known about the plan, the ultimate goal seems to help ensure that funds earmarked for manufactures are strictly used for the intended purpose, not for non-productive needs like brokerages and avaricious intermediaries.
Earlier CBI’s Hemmati reiterated plans to readjust policies regarding recapitalization of manufacturing units and ensure that the loans are in the service of raising production levels and curbing inflation.
“Any plan undertaken for recapitalization should in the first place ensure that the loans meet the working capital needs of businesses. Second, it should be utilized only by production units. Should this not happen, the result would be more inflation and more price shocks”, Hemmati wrote in an Instagram post.
According to a report on corporate loans, banks and credit institutions paid 3, 382 trillion rials ($29 billion) during the first six months of the current fiscal year (March 20- Sept. 22), out of which 2,111.7 trillion rials ($18 billion) was given to help recapitalize manufactures.
Representing more than 55% of the total loans in H1, the figure indicates a year-on-year hike of 13.5%, with the mining and industrial sector topping the list at 40.8%.
The CBI said the large share of recapitalization loans was largely due to the regulator’s concerns about manufactures struggling in the increasingly difficult economic climate, coupled with the tanking of the rial, higher raw material prices and mounting pressure of the new US economic sanctions.
Production costs have surged in recent months following sharp volatility in currency rates last year that pulled the rial to unprecedented lows. By extension this resulted in steep price rises of goods and services sourced from in and outside the country.
The volatility and instability pushed many businesses toward insolvency as most struggled to meet their capital needs from banks already saddled with soured loans and bad debts.
