Introduction:

Reserve Bank of India (‘RBI’) vide notification dated 13th March, 2019 (RBI/2018-2019/140) had notified revised framework for trade credit.

Purpose:

To align Trade credit framework in line with amendment brought in by Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 notified on 17th Dec, 2018 and External Commercial Borrowings (ECB) Policy notified on 16th January 2019.

The article below covers the changes brought in by the new framework of Trade Credit Policy.

Meaning:

Trade Credit:

Trade Credits (‘TC’) refer to the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for maturity, as prescribed in this framework, for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India. Depending on the source of finance, such TCs include suppliers’ credit and buyers’ credit from recognised lenders.

 Buyer’s Credit:

Means finance for payments of imports in India arranged by the importer (buyer) from a bank or financial institution outside India.

Supplier’s Credit:

Means credit extended for imports directly by the overseas supplier instead of a bank or financial institution.

Applicability:

The revised framework of Trade Credit Policy will come into force with immediate effect.

Comparative Analysis for Trade Credit Policy:

The Comparative analysis of the changes brought in by the notification has been reproduced hereunder:

Particular Nature Under erstwhile framework Under revised framework Our comments, if any
Parameters Insertion No such provision Two new parameters are defined which are as follows:

1. Foreign currency (‘FCY’) denominated TC

2. Indian Rupee (‘INR’) denominated TC

Automatic Route Substitution Automatic Route:

Upto USD 20 million or equivalent per import transaction

 

Automatic route:

Upto USD 150 million or equivalent per import transaction for oil/gas refining & marketing, airline and shipping companies

Up to USD 50 million or equivalent per import transaction

Not only the limit for general imports has been increased, but also the problems faced by oil/ gas refining and marketing companies, airline and shipping companies due to large ticket size of the transactions have been recognized.
Recognised Lender Insertion No such provision
  • For suppliers’ credit: 

Supplier of goods located outside India.

  • For buyers’ credit: 

Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in International Financial Services Centres located in India.

 

The intention is to ensure that the credit arranged by the buyers are either from regulated financial institutions or foreign equity holders.

 

 

Period of TC Substitution For capital goods:

Maturity period is 5 Years from the date of shipment

 

For non-capital goods:

The maturity period is up to 1 year from the date of shipment or the operating cycle whichever is less

For capital goods:

Maturity shall be 3 Years from the date of shipment

For non-capital goods:

The maturity period shall be up to 1 year or the operating cycle whichever is less 

For shipyards / shipbuilders:

The period of TC for import of non-capital goods can be up to 3 years

The reduction in the tenure is in line with the changes in the minimum average maturity requirements in case of ECBs. In majority of cases, the minimum average maturity of ECBs is 3 years or more.
All-in-cost ceiling per annum Substitution The all-in-cost ceiling for raising TC is 350 basis points over 6 months LIBOR (for the respective currency of credit or applicable benchmark)  Benchmark rate is plus 250 bps spread. This is a reduction in the all-in-cost ceiling.
Exchange rate Insertion No such provision Change of currency of FCY TC into INR TC:

At the exchange rate prevailing on the date of the agreement between the parties concerned for such change or at an exchange rate, which is less than the rate prevailing on the date of agreement, if consented to by the TC lender

For conversion to Rupee:

The rate prevailing on the date of settlement.

 
Hedging Provision Insertion No such provision FCY denominated TC

1. The entities raising TC are required to follow the guidelines for hedging, if any, issued by the concerned sectoral or prudential regulator in respect of foreign currency exposure.

2. Such entities shall have 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 I banks in India.

This is an additional requirement laid down.

 

Further, a board approved risk management policy will also have to be laid down.

Change of currency of borrowing Insertion No such provision Under FCY denominated TC

Change of currency of TC from one freely convertible foreign currency to any other freely convertible foreign currency as well as to 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) Insertion No such provision TC can be raised by a unit or a developer in a SEZ including FTWZ for purchase of non-capital and capital goods within an SEZ including FTWZ or from a different SEZ including FTWZ

An entity in DTA is also allowed to raise TC for purchase of capital / non-capital goods from a unit or a developer of a SEZ including FTWZ.

Security for TC Insertion No such provision The following may be kept as security for availing TC:

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

2. TC may also be secured by overseas guarantee issued by foreign banks / 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 TC Substitution Import of non-capital goods (except gold, palladium, platinum, rhodium, silver, etc):

AD Category I banks are permitted to issue bank guarantees in favor of overseas supplier, bank or financial institution up to USD 20 million per import transaction for a maximum period up to 1 year

Import of capital goods:

Can be for a maximum period up to 3 years

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

 

Period of such guarantee cannot be beyond the maximum permissible period for TC.

Monthly reporting Insertion No such provision

Suppliers’ credit beyond 180 days and up to 1 year/3 years from the date of shipment for non-capital/capital goods respectively, should also be reported by the AD banks.

Further, permissions granted by the AD banks/Regional offices of Reserve Bank for settlement of delayed import dues in terms of paragraphs B.5 and C.2 of the Master Direction on Import of Goods and Services dated January 1, 2016 should also be reported by the AD banks.

This is an additional requirement on the entities availing TC.

Conclusion

Trade credit is a helpful tool for growing businesses. This arrangement effectively puts less pressure on cash flow that immediate payment would make. RBI has not prescribe any format or manner in which TC arrangements / loan agreements are to be documented. It is on the AD for ensuring compliance with applicable parameters of the TC policy / provisions of Foreign Exchange Management Act, 1999 and to rely on documents for the underlying TC arrangements.

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