Incase of raw material imports, RBI had delegated approving powers to Authorised Dealers (Banks) for Trade Credit (Buyers Credit / Suppliers Credit) for a tenure upto 1 year from the date of shipment. Bank’s based on internal policies decided customerwise tenure. Because of variation in policies between banks, few importers used buyers credit for arbitrage.
On 11th July 2013, RBI revised the policy by linking Trade Credit to Operating Cycle.
Maturity prescriptions for trade credit on the non-capital goods, the maturity period is up to one year from the date of shipment or the operating cycle whichever is less.
In simple terms operating cycle is period for which funds are blocked in business. Every business transaction passes through a Operating Cycle– from initial cash – to Credit Purchase of raw material – to Manufacturing Process – to Credit Sales to Customer – to Realisation of Book Debts – to payment to creditors- and again in Cash
Business owner fill this gap by using their own funds and banks funds by way of Fund Based and Non Fund based limits.
How to Calculate Operating Cycle (Net Operating Cycle)
Net Operating Cycle = Days Stock Held (1) + Days Sales Outstanding (2) – Days Payable Outstanding (3)
(1) Days Stock Held = (Average Stock * 365) / Cost of Goods Sold
A. Average Stock = (Opening Stock + Closing Stock) / 2
B. Cost of Goods Sold = Opening Stock + Purchases – Closing Stock
(2) Days Sales Outstanding = (Debtors * 365) / Sales
(3) Days Payables Outstanding = (Creditors * 365) / Cost of Goods Sold
How will Bank Implement
At the time of sanctioning of fresh limits or renewal of existing limits, banks will have to define Operating Cycle of every importer and based on sanction tenure, importer will be able to take buyers credit.
Impact of the Policy
- Buyers Credit beyond Operating Cycle has stopped.
- Rollover of Buyers Credit beyond Operating Cycle has stopped. This is having negative impact of genuine imports whose operating cycle has gone up because of economic downturn.
- Few importers who were using Buyers Credit for Arbitrage has stopped.
- Article: Period of Buyers Credit Linked to Operating Cycle
- RBI Circular Reviewing All in Cost ceiling and Tenure of Trade Credit: Dated: 11-07-2013
- 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