New Format Will Help Ease Supply Chain Problems: CBI

EghtesadOnline: The Central Bank of Iran has launched a new framework to help finance the supply chain, a senior bank official said.

News ID: ۷۸۷۵۴۲

01 January 2022

Mostafa Qamari-Vafa, head of CBI public relations, made the announcement in a note on his social media account Friday.

Supply chain finance (SCF) is a set of solutions that aim to lower financing costs and improve business efficiency for buyers and sellers in a sales transaction.

SCF methodologies work by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this paradigm, buyers agree to approve their suppliers' invoices for financing by a bank or other outside financier.

“This is good news for the manufacturing sector,” Qamari-Vafa wrote on twitter. “Funding businesses will be a continuous process along supply chains,” he said, adding that it will replace the conventional method where businesses directly borrowed from banks.

“The ultimate goal is to cut the prime cost of products and expedite funding for manufactures.”

Prime costs are a firm's expenses directly related to the materials and labor used in production. It calculates the direct costs of raw materials and labor that are involved in the production of a good. Direct costs do not include indirect expenses, such as advertising and administrative costs.

The official underscored the new program’s potential to enhance transparency and efficient allocation of much-needed resources by ensuring that nonconformity of funds is minimized.

Targeted Funding

The mechanism such that it would help banks meet the needs of manufacturing units without creating “non-productive liquidity”.

Based on the operational framework unveiled by the CBI, the new SCF scheme is an extension of the CBI’s credit policies, promoting key indicators of the banking system and improving the balance sheets of banks.

It is geared to foster economic growth by facilitating the finance process of manufacturing companies in non-inflationary ways.

In implementing the plan, the CBI will perform as policymaker and regulators and lenders as the 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”.

The regulator said it has communicated to the banks instructions on how to employ electronic negotiable instruments and Gam securities.

A negotiable instrument is a signed document that promises a sum of payment to a specified person or the assignee. The document may also appear in electronic format.

Gam is a market oriented financial instrument traded in money and capital markets.  Through this instrument lenders help businesses by offering a tradable credit certificate similar to LCs.

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.

The use of Gam as a financing instrument was approved by Money and Credit Council in late 2019. Save for a limited use in the auto industry, the instrument has been rarely used either by banks or industries.

Loans Diverted

While CBI data show a sharp increase in lending, it has come under mounting criticism in recent months for lax supervision over how and why billions of dollars in loans and credit have been used more by owners of non-manufacturing units and less by the key production sector.

The issue was taken up again earlier in the week by Gholmahossein Shafei, head of the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA) in a meeting with the CBI boss Ali Salehabadi

“Lending has deviated from the production sector in recent years,” he complained, and demanded a complete overhaul of lending policies that have done little to lift domestic production.

“Production units, namely industries, mines and agriculture accounted for 40% of bank loans last year (2020-21),” Shafei recalled, citing CBI data.

“Numbers show that production companies don’t receive a fair share of loans while resources have poured largely into speculative activity, which apparently have a higher profit margin, offer gains in the short-term and are less risky”.

Voicing the concern of prominent academia, economists and pundits, he said this unacceptable and unhelpful pattern has not only created financial strains for businesses but also undermined the stability of  asset markets.