The Money and Credit Council - a top body in charge of making monetary and banking decisions - approved a plan dubbed as the ‘productive credit certificate’ better known by its Persian acronym Gam.
It was approved as part of the Central Bank of Iran’s measures to optimize management of liquidity injected into distressed manufactures, the CBI’s website reported.
MCC approved the outlines of the plan two weeks ago.
“The plan will pave the way to raise working capital of businesses with the help of guarantees provided by banks and credit institutions, and tapping the capacities of private sector,” the CBI said.
Gam is a market oriented financial instrument that can be traded in money and capital markets. As per the plan, lenders will help credible businesses by offering a tradable credit certificate similar to a LC. The certificate should be submitted 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.
Elaborating on the mechanism, Ali Salehabadi, head of the Iranian Association of Islamic Finance, said banks work as intermediaries between buyer and the seller. “For example, if a factory wants to buy raw material it can submit the certificate with the maturity date of three months to the seller. The seller then can either cash it in the bank or sell the certificate in the stock market,” he told a press conference Tuesday.
This means that the certificate can be used both in the money market and stock market, according to Salehabadi.
In a meeting with representatives from the Iran Chamber of Commerce, Industries, Mines and Agriculture in October, CBI governor Abdolnasser Hemmati said the mechanism would help banks meet the financial needs of manufacturing units without creating “non-productive liquidity”.
Hemmati has said that the main purpose behind the scheme is to avoid inflation emanating from new liquidity.
Finding New Ways
“By doing so, we are trying to fund manufactures without raising liquidity and in ways other than pumping new money,” he said.
Liquidity in Iran surpassed 19,790 trillion rials ($162 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.
As inferred from the CBI governor’s earlier comments, the ultimate CBI goal appears to ensure that funds earmarked for manufactures are strictly used for the intended purpose, not for non-productive needs like brokerages by avaricious middlemen and intermediaries.
Earlier Hemmati had spoken about 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 purposes. 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 lent 3, 382 trillion rials ($27 billion) during the first six months of the current fiscal year (March 20- Sept. 22), out of which 2,111.7 trillion rials ($17 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.
Instability and currency rate fluctuations in the market pushed businesses toward insolvency as they struggled to meet their capital needs from banks already saddled with soured loans and bad debts.
