Production credit certificates, known by the Persian acronym Gam, are risk-free financing instruments in the monetary market.
Manufactures can and should use this finance credit to buy raw material, director of the Supply Chain Finance Affairs Bureau of the Central Bank of Iran said.
“Gam should not be used as a debt instrument in the capital market. With timely and efficient policies and the right values, we need to stop it from being cashed in the stock market. The best area for these certificates is in the production/supply chain,” Hamid Azarmand was quoted by IBENA as saying.
Under the dire economic conditions, he said, where inflationary expectations, US sanctions plus socio-political issues are piling pressure on businesses, some companies prefer to cash the certificates and accept some loss it entails.
“It is their choice. There is no hard and fast rule regarding the use of production credit certificates. But genuine producing firms working [to grow their business] keep Gam in supply chains and transfer them via banks.”
Azarmand said bonds cashed in the capital market account for an estimated 3.7% of the total debt market, and Gam’s share in this is negligible.
Gam is a market-oriented financial instrument that can be traded in the 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, the certificates have maturity dates. The supplier can cash the certificate by selling it in the stock market but money is not exchanged between the beneficiaries.
Rewarding First Steps
Azarmand said Gam’s defining feature is money creation without generating inflation, in that financing through this certificate ensures no money is created before production of a good.
“Banks have issued 460 trillion rials (some $1.25 billion) worth of Gam since its inception in early 2021.”
For the financial instrument to be successful, he said, “we needed incentives in collaboration with state organizations.”
The CBI held marathon talks with the government to convince decision-makers that the incentives were a subject of compulsion not convenience.
“For instance, we pushed government organizations to accept Gam from companies as social security insurance fees, and taxes. The government’s special economic council has agreed. This will help keep the certificate in production and supply chain and prevent it from being cashed.”
Azarmand recalled that the main challenge Iranian businesses face is lack of enough working capital and said Gam is an effective problem-solver.
“The overall economic climate will of course have an impact on efficacy and value of Gam as it does all bonds and securities. Given the soaring production costs, government-imposed pricing policies, high export tariffs and other handicaps, one need not be a rocket scientist to understand how difficult manufacturing and doing business has become.
We must not say, as some have in the recent past, that Gam is ineffective and unable to make the slightest difference for the better.”
Production units, he added, can also use Gam as an alternative to funding by banks or credit institutes, which comes without the hassles and bureaucracy tied to the latter. The credit certificates, he stressed, are guaranteed by banks, which gives it binding validity making it risk-free for the holder.
“When they were first offered, Gam could only be used in limited sectors. Now their scope has expanded to major manufactures, namely pharmaceuticals, food, agriculture, auto industry, auto parts, chemicals, electric and electronics, home appliances, commerce, construction material, engineering facilities, energy, and basic metals.”
Following an agreement between the Ministry of Industries, Mining and Trade with four banks on Monday, the number of banks that can now issue the certificates rose to 17.
“Based on government decisions, 20% of the working capital for production companies must be come supply chain finance in the current Iranian year,” Ali Salehabadi, the CBI governor said.
Gam is one of the integral components of the government’s initiative to implement supply chain finance (SCF). The CBI recently revised guidelines to make the best use of Gam in the SCF framework.
The SCF program was unveiled by the CBI in January to improve lending efficiency and gear bank loans toward production sectors.
SCF focuses on credit instruments rather than direct borrowing, minimizing the diversion of bank resources into non-production and speculative markets, plus improves and expands oversight of lending to manufactures.
