The Industry Ministry and the Central Bank of Iran are stepping up efforts to expand the supply chain finance (SCF) program.
CBI Governor Ali Salehabadi, Minister of Industry Reza Fatemi-Amin and CEOs of some banks in a meeting on Saturday discussed how best to implement the CBI-initiated SCF program.
SCF methodologies work by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under the system, buyers agree to approve their supplier invoices for financing by a bank or other outside financier.
According to a press release seen on the CBI website, Salehabadi said “the SCF program will carry the burden of financing the manufacturing sector by about 50%”, adding that it is potentially capable of entirely replacing conventional financing methods.
He underscored the need to brief bank staff across the banking industry on the ways and means of implementing the plan.
The new SCF is geared to foster economic growth by facilitating funding for domestic manufactures in non-inflationary ways.
Hailing the initiative, Fatemi Amin pointed to the role of SCFs to help achieve 8% economic growth. “Given the rise in production costs, higher wages and changes in allocating subsidized currency, realizing economic growth targets is possible only via SCFs,” he was quoted as saying.
Pilot Phase
Pointing to one key merit of the plan, the minister said it can and should help minimize diversion of funds from flowing into non-productive and speculative markets because the mechanism is such that monitoring the funding process in its entirety will be possible.
The meeting decided on a pilot phase for the scheme in seven provinces for five selected industries from April 21.
Based on what is known about the plan, it will be used to support major economic enterprises in its initial phases and later extended to SMEs, farmers, distribution networks, households and end consumers.
Based on its operational framework announced by the CBI, the SCF scheme is an extension of the CBI credit policy promoting key indicators of the banking system and improving bank balance sheets.
Banking and financial experts concur that the mechanism will go a long way in easing pressure on banks and help control the ballooning money supply.
In implementing the plan, the CBI will perform as policymaker/regulator and lenders as executors. To this end, the CBI has developed new financing instruments and optimized existing ones, namely electronic negotiable instruments and the Productive Credit Certificate, known by its Persian acronym “Gam”.
Earlier in the week, the CBI published on upgraded version of rules governing the Gam instrument to promote the SCF program.
Gam is a market-oriented financial instrument that can be traded in money and capital markets. Lenders assist businesses by offering tradable credit certificates similar to LCs. The certificate can be given to suppliers of raw materials, machinery and equipment.
Like bonds, certificates have maturity dates. The supplier can cash the certificate by selling it in the stock market. Liquidity is not exchanged between beneficiaries in this manner.
As per the guidelines published on the CBI website, the scope of Gam securities will be expanded to include both natural and legal entities. Previously, they could be used only for manufactures and other legal entities.
In addition, the maturity date of the said certificates is extended up to 12 months from the maximum nine months in the past.
Under the new guidelines, owners of the securities have the option to either hold the bonds or sell them to banks or trade them in the bourse.
To encourage businesses to use Gam bonds, firms can borrow 120% of the value of their sales in the latest fiscal year.
