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

RBI revised Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 on December 17, 2018 (link in reference). Revision is made to ECB guidelines, Trade Credit, borrowing by banks outside India and others.

This articles covers changes made to Trade Credit guidelines.

“Trade Credit” refer to the credits extended by the overseas  supplier, bank /financial institution for imports into India in accordance with the trade credit framework decided by the Reserve Bank of India (RBI). Depending on the source of finance, such trade credits include both suppliers’ credit and buyers’ credit

Guidelines for trade credit is covered in Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers.

With this notification, RBI has made below change in above Master Direction.

1. Purpose

Earlier circulars were not explicit about whether units based in SEZ (Special Economic Zone) can avail trade credit. Reason being, as per SEZ Act 2005, SEZ is not part of India and for availing trade credit it was necessary that goods were imported into India. In the revised guidelines, Trade Credits can be raised for the purpose of import of non-capital and capital goods

• Within a Special Economic Zone (SEZ) or
• From a different SEZ
• As both of above are allowed, it can be interpreted that trade credit can also be availed by SEZ against import from outside India.

2. Amount of Borrowing

Without RBI approval, importers can now raise trade credit up to USD 50 Million equivalent per import transaction. Earlier limit was USD 20 Million.

3. Recognized Lender

Earlier the circular limited trade credit lenders to Overseas suppliers, banks and other financial institutions. With revised circular foreign equity holders and financial institutions in International Financial Services Centres (IFSCs) in India are added as recognized lender.

No clear process / structure on funding and prepayment is provided on transaction funded through foreign equity holder. Also how will tracking and reporting mechanism work.

4. Cost

• In case of foreign exchange trade credit, all in Cost ceiling is revised from 6 Month L+350 bps to 6 Month L+250 bps
• For Rupee denominated trade credit, the all-in-cost shall be commensurate with prevailing market conditions or as prescribed by the RBI.

5. Security and Guarantee

Now borrower may provide security to the lender / suppliers, as specified by the RBI from time to time. The borrower may also provide corporate and / or personal guarantee as security for the borrowing subject to terms and conditions as specified by the RBI. In earlier circulars, for availing trade credit there was only two option, either trade credit was availed without any security (like supplier providing credit) or banks issuing guarantee to overseas supplier, bank or financial institution.

Who will benefit ?

1. Large corporate
   • Less case for RBI Approval as per transaction limit increased to $50 Million.
   • Corporate can now give personal guarantee and/or corporate guarantee as security for trade credit.
2. With clarity on regulation, SEZ units will be able to avail trade credit for imports from outside India, within SEZ and purchase from different SEZ.
3. SME will benefit as all-in-cost ceiling has come down. Since RBI restricted LOU and LOC use for trade credit, overall cost for trade credit has gone up and some bank were charging as high as 6 Month L+350 bps.
4. With addition of Foreign Equity Holder as recognized lender, one more option for companies to raise finance for trade credit.

Notes

• Above regulation is effective from date of publishing (Dec 17, 2018)
• Refer Schedule II (Trade Credit for Import) in Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (Link in reference)
• Master Direction for ECB and Trade Credit is yet to be updated with revised guidelines.

Reference

1. 1. Foreign Exchange Management (Borrowing and Lending) Regulations, 2018: Dated: December 17, 2018 : Refer Schedule II
   2. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers : Updated as on November 22, 2018
   3. SEZ Act, 2005