Trade Credit Policy Framework

Trade Credit Policy Framework

Trade Credit Policy Framework

Reserve Bank of India has released a revised trade credit policy framework, by which it can be aligned with the amendment that is brought in by Foreign Exchange Management (Borrowing and Lending) Regulation 2018 and External Commercial Borrowing (ECB) Policy. With the Trade Credit Policy, the RBI reduces all-inclusive cost (all-in-cost) for overseas loans to the standard rate with an addition of 250 basis points from the previous 350 bps.

Types of Credit

There are three types of credit involved with Trade Credit Policy Framework namely

  • Trade Credit
  • Buyer’s Credit
  • Supplier’s Credit

Trade Credit

Trade Credits (TC) defines the credits that are extended by the bank, financial institution, overseas supplier and other permitted recognised lenders for the maturity that are specified in the framework for imports of capital/ non-capital goods allowed under the Foreign Trade Policy of the Government of India.

Buyer’s Credit

Buyer’s Credit refers to finance required to make payments for imports in India that are authorised by the importer, who is the buyer from a bank or a financial institution outside India.

Supplier’s Credit

Supplier’s Credit signifies the credit that is extended for imports directly by the overseas supplier rather than a bank or financial institution.

Significance of Trade Credit

Trade credit is a helpful tool for growing businesses. This arrangement effectively puts less pressure on the cash flow that is made by immediate payment. RBI does not have a prescribed format or manner in which TC arrangements/ loan arrangements would be documented. It is on the AD to make sure compliance with applicable parameters of the TC policy/ provision of Foreign Exchange Management Act, 1999 and to depend on the documents for underlying the TC arrangements.

Trade Credit Policy

The following are the revisions that are brought in by the Trade Credit Policy Framework.

ParticularNatureAs per the Previous FrameworkAs per the Revised Framework
ParametersInsertionNo provision

Two new parameters that are mentioned below:

  1. Foreign Currency (FCY) denominated TC.
  2. Indian Rupees (INR) denominated TC.
Automatic RouteSubstitutionAutomatic Route: Up to USD 20 million or equivalent per import transaction

Automatic Route:

  1. Up to USD 150 million or equivalent for every import transaction for gas/ oil refining and marketing, airline and shipping companies.
  2. Up to USD 50 million or equivalent for every import transaction.
Recognised LenderInsertionNo provision

For Suppliers’ Credit: 

Supplier of goods located outside India.

For Buyers’ Credit:

Financial institutions, banks, foreign equity holder(s) that are situated outside India and financial institutions in International Financial Services situated in India.

Period of TCSubstitution

For Capital Goods:

Maturity period is five years from the date of shipment

For non-capital Goods:

The maturity period is up to one year from the shipment date or the operating cycle, whichever is less.

For Capital Goods: Maturity shall be three years from the date of shipment.

For non-capital Goods:  The maturity period would be up to one year or the operating cycle, whichever is less.

For shipbuilders/ shipyards: The period of TC for import of non-capital goods can be up to three years.

All-in-cost ceiling per annumSubstitutionThe all-in-cost ceiling for raising TC is 350 basis points over six months LIBORBenchmark rate is plus 250 bps spread.
Exchange RateInsertionNo provision

Change of currency of FCY TC into INR TC: At the exchange rate that is existing on the date of the agreement between the parties concerned for such change or at an exchange rate, that is less than the rate prevailing on the date of the agreement, is considered to the TC lender.

For conversion to Rupee: The rate prevailing on the date of settlement.

Hedging provisionInsertionNo provision

FCY denominated TC:

  1. The entities raising TC are required to abide by the guidelines that are issued by the concerned sectoral or prudential regulator for foreign currency that is needed for hedging.
  2. Such entities comprise of a board-approved risk management policy.

INR Denominated TC: The overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with authorised dealers (AD) category/ banks in India.

Change of Currency of BorrowingInsertionNo provision

Under FCY denominated TC: Change of currency of TC from one freely convertible foreign currency to any other freely convertible foreign currency or INR is freely permitted.

Under INR denominated TC: Change of currency from INR to any freely convertible foreign currency is not permitted.

TC in Special Economic Zone (SEZ)/ Free Trade Warehousing Zone (FTWZ)/ Domestic Tariff Area (DTA)InsertionNo provisionTC in Special Economic Zone (SEZ)/ Free Trade Warehousing Zone (FTWZ)/ Domestic Tariff Area (DTA) can be raised by a unit or a developer in an SEZ with the inclusion of FTWZ for the purchase of non-capital and capital goods within an SEZ including FTWZ or from a different SEZ including FTWZ. An entity is DTA is also permitted to raise TC for the purchase of capital/ non-capital goods from a unit or a developer of an SEZ by including FTWZ.
Security for TCInsertionNo provision

The following would be kept as security to avail TC:

  1. Bank guarantees would be given by the ADs, on behalf of the importer, in favour of overseas lender of TC not more than a maximum period of the amount of TC.
  2. TC is secured by overseas guarantee that is issued by foreign banks and the overseas branches of Indian banks.
  3. Movable assets (including financial assets).
  4. Immovable assets (excluding land in SEZs).
  5. Corporate or personal guarantee for raising TC.
Guarantee for TCSubstitution

Import of non-capital goods (except gold, palladium, platinum, rhodium, silver etc.):

Ad category I banks are allowed to issue bank guarantees in favour of overseas supplier, bank or financial institution up to USD 20 million for every import transaction of a maximum period up to one year.

Import of Capital Goods: Can be for a maximum period up to three years.

  1. Bank guarantees would be given by the ADs, on behalf of the importer, in favour of overseas lender of TC not exceeding the amount of TC.

 

Period of such a guarantee should not be beyond the maximum permissible period for TC.

Monthly reportingInsertionNo provisionSuppliers’ credit beyond 180 days and up to 1-3 years from the date of shipment for non-capital/ capital goods have to be reported by the AD banks. Moreover, the permissions granted by the AD banks/ Regional offices of Reserve bank for settlement of delayed import dues in terms of the Master Direction on Import of Goods and Services that are from January 1, 2016, have to be reported by the AD banks.

 

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