Trade Credit for Import into India
In earlier article “Trade Credit Extended Upto 5 Years for Infrastructure Firms” we had seen that RBI had allowed buyers credit to infrastructure firms till 5 years subject to conditions.
RBI has reviewed the policy as below:
- Tenure of Trade Credit (buyers credit / suppliers credit) for import of capital goods has been extended from 3 years to 5 years for companies in all sectors.
- Minimum tenure of buyers credit has been relaxed from 15 months to 6 Months. Which means trade credit can be taken and rollover in multiple of 6 months or more
- But banks cannot issue Letter of Credit / Letter of Undertaking /Comfort beyond 3 years (from the date of shipment)
- Amended Trade Credit Policy will come to force with immediate effect
- Policy cover both existing buyers credit as well as fresh buyers credit against capital goods. (As per RBI Master Circular : External Commercial Borrowing (ECB) and Trade Credit.
Observations
- Further clarity is required from RBI on “Banks cannot issue lou for period beyond 3 years“. As it seems that only large corporates will be able to take benefit of this extended tenure as overseas bank will not be keen on providing funds to SME without LOU / LOC issued by Indian Banks.
- Overseas Branches of Indian Bank and Foreign Banks will have to come out with a structure to take benefit of the extended tenure without LC /Letter of Undertaking / Letter of Comfort.
Reference
- RBI Circular : Trade Credit for Import India: Dated: 24 September 2013
- Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
- Revised Guidelines: Trade Credit for Import into India: Dated: 11-09-2012
- Buyers Credit Cost Calculation Sheet
Buyer's Credit & Supplier's Credit 
Sir
In Buyers cost calculations you have shown forward booking cost os 5.00 % while it is 7.20 %. this is causing confusion on the methods of arrviving at hedging cost. Please guide
Details given in the buyers credit cost calculation sheet is just an example to assist in filling details. Any one using it can edit and fill details as prevailing rates to arrive at actual cost / benefit.
Just wanted to if period can be extended beyond 5 years . Can client apply to RBI for extending the period beyond 5 years through AD.
One can try but my experience is that RBI does not approve it. Even Master Circular for ECB and Trade Credit say
“(ii) For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and up to five years (from the date of shipment). No roll-over/extension will be permitted beyond the permissible period.”
Policy cover both existing buyers credit as well as fresh buyers credit against capital goods. (As per RBI Master Circular : External Commercial Borrowing (ECB) and Trade Credit. Where is the same reflected?
Above interpretation is based on two circular
As per Master Circular ECB and Trade Credit: “the condition of ‘abinitio’ buyers’credit would be for 6 (six) months only for trade credits availed of on or before December 14, 2012.”
As per Trade Credits for Import into India (issued on 24 September 2013): “has also been decided to relax the ab-initio contract period of 15 (fifteen) months for all trade credits to 6 (six) months.”
thank you so much for the update sir,
but what does it mean by “Banks cannot issue lou for period beyond 3 years”.
we have buyers credit for capital items, as per earlier policy one of buyers credit which was availed on 12.01.12, B/L date is 13.09.11, due date for payment would fall on 28.07.14, but now it is five years means, do we have chance for next rollovers after 28.07.14, pls suggest.
Yes, you have a chance to rollover above buyers credit subject to overseas bank come up with a structure by which they can provide buyers credit without letter of undertaking / comfort or RBI approve local banks to issue lou / loc for period beyond 3 years
With respect to this new development, can the banks come up with the following mechanism ?
A) An importer avails Buyers Credit for 5 years.
B) The Bank gives a LOU/LOC/ for the first three years.
C) On expiration of the same, the same bank again gives a LOU/LOC for the remaining 2 years , thus accounting for a total tenure of 5 years.
Is such a structure possible ?
Structure mentioned by you is not be workable as RBI has prohibited bank from issuing lou beyond 3 years from the date of shipment.
Extract from RBI Circular:
RBI Circular : Trade Credit for Import India: Dated: 24 September 2013
The first time that the buyers credit availed for import of capital goods is for 180 days (as distinct from six months). Can it be rolled over now?
It depends on how your term loan is structured. Technically buyers credit if taken for 180 days can be rollover over for further tenure (in any combination) till 3 years gets exhausted. Subject to condition is that term loan approved by your bank allows you to take buyers credit for such tenure. Below two given article will give further light on your query.
Buyers Credit on Capital Goods
Buyer’s Credit Rollover
We have purchased Raw material with at sight LC. shall we made payment of LC through Buyers credit
Before one can answer the your question, below things needs to be checked.
A. Whether with your existing bank you have buyers credit limit
B. For what tenure have they sanction your buyers credit limit
If both the answer is positive, yes you can take buyers credit against your existing sight LC
We have taken buyers credit for 3 year and now wish to extend the same to 5 years. Please advise if we can take your assistance or could you guide us to some banks doing the same.
Technically it is possible to take buyers credit upto 5 years but practically it is not workable. RBI in its circular ECB and Trade Credit, has not allowed banks to issue Letter of Undertaking beyond 3 years. Without LOU, banks are not interest in providing buyers credit.
Can you please inform me what is the logic of rbi to allow buyers credit for 5 yrs, if banks are not allowed to give lou after 3 yrs. no banks will fund with out lou.
Large corporate are able to take advantage of this policy as banks are willing to lend them without lou but with higher cost. SME on other hand are not able to take advantage of the same as banks are not ready to lend them without lou.
Can buyers credit be taken for less than 6 months???
Can suppliers credit be taken for less than 6 months???
What exactly means by the ab initio contract period has to be of 6 months???
Answer to above question should be read only from perspective of buyers credit for tenure upto 5 years.
1. If buyers credit / suppliers credit on capital goods is taken for tenure less than 6 months, than the same cannot be extended beyond 3 years.
2. Word “abinitio” means from beginning. All existing and new buyers credit prior to this policy, should have taken buyers credit for period of minimum 6 months from beginning to take benefit of 5 years extension.
I had a LC of 2 years against foreign machine then I converted that to buyers credit. I had one roll over last month now second is in Feb 2017. I want to extend Buyers credit to 5 years now. What should I do in that case. My banker asking to contact RBI.
As mentioned above article, bank can issue LC / Buyers Credit upto 3 years. Post 3 years without undertaking overseas banks are not providing buyers credit. Provision of 5 years is only useful for those in case where
1. Suppliers is directly providing 5 years credit
2. Large Corporate where overseas bank provide them finance even without letter of undertaking.
In your case, after 3 years you will have to convert buyers credit into term loan.