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MCC Launches Debt Purchase Contracts

MCC Launches Debt Purchase ContractsMCC Launches Debt Purchase Contracts

The Money and Credit Council has said henceforth banks must allocate a maximum of 10% of their participatory loans to enterprises under “debt purchase contracts” to help stimulate sales and ease inventories, ISNA reported.

The new decision comes amid a series of efforts by monetary authorities in Tehran to help the troubled manufacturing sector. Injecting cash into production has been on top of the agenda of commercial banks since last year, with almost 60% of loans allocated to the key sector under mounting pressure due to recession and decline in purchasing power.

In another interesting move, banks have envisaged 100 million rials ($2,950) as loan for newlyweds to purchase locally-manufactured durable goods that would lift demand in tandem with production.

MCC’s most recent measure also helps manufacturers to sell on long-term basis with the help of debt purchase contracts with commercial banks.

Debt purchase contracts, widely used in Islamic banks around the world, had not been popular among Iran’s commercial banks. But now things should change.

Under the contracts, a long-term debt can be purchased for a portion of the face value of the debt. In the case of debt purchase contracts within the banking system, the creditor or debt seller sell an overdue debt to the bank as the debt buyer at a price lower than the debt’s face value.

“The decision is an indication of the will and determination of economic policy makers to inject cash into manufacturing enterprises and boost recovery,” the head of Iran’s Chamber of Commerce, Industries, Mining and Agriculture Mohsen Jalalpour said.

However, time will tell if the plan can deliver as its success will rely mostly on its appeal to manufacturers, distributors and buyers.

Financialtribune.com