New Article: RBI Circular: Trade Credit : New Regulatory Framework

Latest RBI Circular : RBI stops Buyers Credit. As is circular copy given below. Please refer bold section. 

• Short Term Debit – Trade Related Credit Outstanding as on Sept 2017 was $91.063 billion (Refer Page 14).  This includes both LC and Buyers Credit transaction. Was not able to find bifurcated amount. But one can be sure it would be substantial amount which above  decision going to impact.
• The instrument is blamed taking the focus away from the system failure in PNB
• PNB fraud case both LOU and LC transactions were involved. Action has been taken against LOU transaction but no changes has been made to LC transactions.
• Importers are going to get effected severely because of this move, as this will dry up liquidity
• Non Performing Assets (NPA) of banks will go up in coming quarters as this move leave importers short of liquidity.
• Pure Speculation: RBI has come out with this move after 1 month of PNB Fraud case. During this period, it seems RBI has found other lapse which are yet to come to public domain. Can be related to PNB or other bank.

What Importer can do on immediate basis ?

Raw Material Import

1. Take Adhoc limit from banks for immediate outstanding payments
2. Incase of outstanding transactions (DA/DP/LC/ Usance LC), ask supplier for extension of credit period.
3. Move existing non fund based limits from BC to LC usance limits.
4. For future transactions ask suppliers to accept  Usance LC which can be discounted at Libor rates.
5. Increase fund base limit by moving some portion of non fund limit to fund base limit

Capital Goods Import

1. Take External Commercials Borrowing (ECB) against existing buyers credit. (Infrastructure Companies – Bridge Finance before availing ECB)
2. For new import of capital goods ask suppliers for  usance LC for 3 years and get it discounted. For suppliers it will be sight payment.
3. For new import use ECA (Export Credit Agency) finance (will add an article shortly on this)
4. Convert into term loan

RBI Circular

Attention of Authorised Dealer Category – I (AD Category – I) banks is invited to paragraph 2 of A.P. (DIR Series) Circular No. 24 dated November 1, 2004 and paragraph No. 5.5 of Master Direction No.5 dated January 1, 2016 on ‘External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers’ (Master Direction), as amended from time to time, on the issuance of LoUs/ LoCs/ guarantees for Trade Credits for imports into India under delegated powers of AD banks.

2. On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of LoUs/ LoCs for Trade Credits for imports into India by AD Category –I banks with immediate effect. Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.

3. AD Category-I banks may bring the contents of this circular to the notice of their constituents and customers.

4. The aforesaid Master Direction No. 5 dated January 01, 2016 will be updated to reflect the changes. The changes will be applicable from the date of issuance of this circular.

5. The directions contained in this circular have been issued under sections 10(4) and 11(1) of the Foreign Exchange Management Act, 1999 (42 of 1999) and are without prejudice to permissions/ approvals, if any, required under any other law.

Reference

1. Discontinuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits
2. Implication on Buyers Credit because of PNB Fraud
3. RBI 2016 Circular : Frauds Related to Trade Finance Transactions – Misuse of SWIFT
4. Buyers Credit Secondary Market
5. Bank Audit – Buyers Credit and Nostro Account
6. India’s External debt as at End-September 2017