CBI Upgrades Credit Instrument Rules

EghtesadOnline: The Central Bank of Iran has revised rules guiding trade in “Productive Credit Certificates”, known by its Persian acronym Gam.

News ID: ۷۸۷۸۱۵

13 April 2022

Gam is a market-oriented financial instrument traded in money and capital markets.  Lenders assist credible 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.

As per the new guidelines published on the CBI website, the scope of Gam securities has been expanded to include natural and legal entities. Previously, they could be used only for manufacturers and legal entities.

In addition, the maturity date of the certificates is extended up to 12 months compared to the maximum nine months in the past. The minimum maturity period for Gam bonds is one month.

Henceforth owners of the securities have the option to either hold the bonds, sell them to banks or trade them in the bourse. In the past, they could not sell more than a sixth of the nominal value of bonds.

One of the revised rules pertains to the credit ceiling of bonds. To encourage businesses to use Gam bonds, companies can now apply for credit worth 120% of their sale in the last fiscal year as mentioned in their financial statements, albeit after deducting past outstanding loans.

The CBI also eliminated limits for issuing bonds under new  Gam format. In the past, banks could issue at least 65% of total Gam bonds for SMEs and the rest for big firms.

The CBI said 88 trillion rials ($320 million) Gam bonds was sold by banks since this credit instrument were launched early last year.

Gam is a pivotal CBI move to assist manufactures in need of cash and control inflation arising from injecting liquidity to manufactures.

Move Toward SCF

The CBI said revising the Gam guidelines seeks to help improve their use in the government’s initiative to implement the supply chain finance (SCF).

The SCF program was unveiled by the CBI in January to improve lending efficiency and navigate resources of banks toward financing production sectors, among other things.

SCF is a set of solutions to lower financing costs and improve business efficiency for buyers and sellers in a sales transaction.

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

The SCF focuses on “credit instruments” rather than direct borrowing, minimizing the diversion of bank resources into non-productive markets and speculative activities and increasing oversight of loans to production sectors.

The new lending procedure so far is limited to selected   businesses.  In its initial phase it is used to finance big  enterprises and will later be extended to SMEs, farmers, distribution networks, households and end consumers.

Banking and financial experts say the mechanism should go a long way in easing pressure on banks and help control the ballooning money supply.

Twelve banks have joined the program so far both state-owned and private.