RBI has issued a new regulatory framework for Trade Credit (TC) on March 13, 2019 effective immediately. Details of the circular is given below. In next articles we will cover the major changes in the RBI circular.

Major highlights of the RBI circular are

1. What be termed as Suppliers Credit ? As per the new circular Only those finance provided by Supplier of goods located outside India can be termed as suppliers credit. Some example finance provided by supplier can be DA Document or Usance LC for 180 days etc. Import Usance LC finance arrange by importer will hence forth  be called UPAS, LC backed Reimbursement Finance, or LC Discounting or any other term given by local / overseas branches.
2. Banks can issue Bank Guarantee for availing trade credit. Few private sector banks earlier where insisting on giving SBLC to only their overseas branches for trade credit. But with this circular understanding should be that banks can now issue guarantee / SBLC to any overseas banks / branches, FI, Foreign Equity holder and IFSC Branches.
3. The directions on issuance of guarantee mentioned under this provision shall come into force from the date of publication, in the Official Gazette, of the relative Regulations issued under FEMA.  As of 18-Dec-2019, above Gazette is yet to be issued.
4. Changes in all-in-cost ceiling and definition.
5. Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for Foreign Currency Trade Credit.
6. Option for 5 year trade credit has been removed.
7. Non-banking financial companies (operating from IFSCs) will now be able provide trade credit.
8. Another header created in amount for which Trade Credit can be availed by oil/gas refining & marketing, airline and shipping companies. Per Transaction Maximum Amount permissible will be USD 150 Million.
9. Policy to avail trade credit for Shipyard and Shipbuilder.
10. New Definition of all in costing pricing (It includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR). Thus would it mean 6 Month + 250 bps would also included bank guarantee fee charged by local bank ?
11. Hedging Provision.
12. Change of Currency of borrowing.
13. Policy and process of Trade Credit related to SEZ, FTWZ and DTA.
14. Security which can been offered for Trade Credit, creation of charge and related process.
15. Authorised Dealer (AD) Banks to decide on formats or manner in which Trade Credit arrangements / loan agreements are to be documented.
16. Role of Local Banks in Trade Credit.
17. Procedure in case of Invocation of Guarantee.
18. Definition of Foreign Equity Holder as per New External Commercial Borrowings framework
19. What importers will have to do henceforth to avail buyers credit / trade credit.
20. What will be changes in accounting treatment for buyers credit against Bank Guarantee in importers books of account.

Definition

There are few terms in the circular which have asked to be referred to respective acts or other circular. Their definition has been provided from respective act / circulars.

As per SEZ Act 2005

1.  “Special Economic Zone (SEZ)” means each Special Economic Zone notified under the proviso to sub-section (4) of section 3 and sub-section (1) of section 4 (including Free Trade and Warehousing Zone) and includes an existing Special Economic Zone;
2. “Free Trade and Warehousing Zone (FTWZ)” means a Special Economic Zone wherein mainly trading and warehousing and other activities related thereto are carried on;
3. “Domestic Tariff Area (DTA)” means the whole of India (including the territorial waters and continental shelf) but does not include the areas of the Special Economic Zones

As per RBI Circular on New External Commercial Borrowings framework

1. Foreign Equity Holder: It means
   • (a) direct foreign equity holder with minimum 25% direct equity holding by the lender in the borrowing entity,
   • (b) indirect equity holder with minimum indirect equity holding of 51%, or
   • (c) group company with common overseas parent.
2. Benchmark rate: Benchmark rate in case of foreign currency denominated ECB/ TC (FCY ECB/TC) refers to
   • 6-month London Interbank Offered Rate (LIBOR) rate of different currencies
   • or any other 6-month interbank interest rate applicable to the currency of borrowing, for eg., Euro Interbank Offered Rate (EURIBOR).
   • Benchmark rate in case of Rupee denominated ECB (INR ECB) will be prevailing yield of the Government of India securities of corresponding maturity.

Circular Copy

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.

1. Important terms used:

1.1. All-in-Cost: It includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR. Withholding tax payable in INR shall not be a part of all-in-cost.

1.2. Approval route: TC can be raised either under the automatic route or the approval route. Under the approval route, the prospective importers are required to send their requests to the Foreign Exchange Department, Central Office, Reserve Bank of India through their Authorised Dealer (AD) Banks for examination.

1.3. Automatic route: For the automatic route, the cases are examined by the Authorised Dealer Category-I banks.

1.4. Special Economic Zone & Free Trade Warehousing Zone: They shall have the same meaning as assigned to them in Special Economic Zones Act 2005 as amended from time to time.

Note: Other important terms like Authorised Dealer, Benchmark Rate and Foreign Equity Holder used in this circular shall have the same meaning as assigned to them in the New External Commercial Borrowings framework (A. P. (DIR Series) Circular No. 17 dated January 16, 2019).

2. Trade Credit Framework:

TC can be raised in any freely convertible foreign currency (FCY denominated TC) or Indian Rupee (INR denominated TC), as per the framework given in the table below:

Sr. No.	Parameters	FCY denominated TC	INR denominated TC
i	Forms of TC	Buyers’ Credit and Suppliers’ Credit
ii	Eligible borrower	Person resident in India acting as an importer
iii	Amount under automatic route	Up to USD 150 million or equivalent per import transaction for oil/gas refining & marketing, airline and shipping companies. For others, up to USD 50 million or equivalent per import transaction.
iv	Recognised lenders	1. For suppliers’ credit: Supplier of goods located outside India. 2. For buyers’ credit: Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in International Financial Services Centres located in India. Note: Participation of Indian banks and non-banking financial companies (operating from IFSCs) as lenders will be subject to the prudential guidelines issued by the concerned regulatory departments of the Reserve Bank. Further, foreign branches/subsidiaries of Indian banks are permitted as recognised lenders only for FCY TC.
v	Period of TC	The period of TC, reckoned from the date of shipment, shall be up to three years for import of capital goods. For non-capital goods, this period shall be up to one 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 three years.
vi	All-in-cost ceiling per annum	Benchmark rate plus 250 bps spread.
vii	Exchange rate	Change of currency of FCY TC into INR TC can be 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, exchange rate shall be the rate prevailing on the date of settlement.
viii	Hedging provision	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. Such entities shall have a board approved risk management policy.	The overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back to back basis.
ix	Change of currency of borrowing	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.	Change of currency from INR to any freely convertible foreign currency is not permitted.

3. Trade Credits in Special Economic Zone (SEZ)/Free Trade Warehousing Zone (FTWZ)/ Domestic Tariff Area (DTA):

3.1 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 subject to compliance with parameters given at paragraph 2 above. Further, 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.

3.2. TC transactions in respect of SEZs and DTAs as permitted above should also be in compliance with applicable provisions of SEZ Act, 2005 as amended from time to time. For TC transactions related to SEZ, date of transfer of ownership of goods will be treated as TC date. As there will be no bill of entry for sale transactions within SEZ, the inter unit receipt generated through NSDL can be treated as an import document.

4. Security for Trade Credit:

The provisions regarding security for raising TC are as under:

4.1. Bank guarantees may be given by the ADs, on behalf of the importer, in favour of overseas lender of TC not exceeding the amount of TC. Period of such guarantee cannot be beyond the maximum permissible period for TC. TC may also be secured by overseas guarantee issued by foreign banks / overseas branches of Indian banks. Issuance of such guarantees i.e. guarantees by Indian banks and their branches/subsidiaries located outside India will be 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.

4.2. For the purpose of raising TC, the importer may also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee for raising TC. ADs may, therefore, be allowed to permit creation of charge on security offered / accept corporate or personal guarantee, duly ensuring that:

• (i) there exists a security clause in the loan agreement requiring the importer to create charge, in favour of overseas lender / security trustee on immovable assets / movable assets / financial securities / issuance of corporate and / or personal guarantee;
• (ii) No Objection Certificate, wherever necessary, from the existing lenders in India has been obtained;
• (iii) such arrangement is co- terminus with underlying TC;
• (iv) In case of invocation, the total payments towards guarantee should not exceed the dues towards TC; and
• (v) Creation/ enforcement / invocation of charge shall be as per the provisions contained in Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 or any other relative Regulations framed under the Foreign Exchange Management Act, 1999 and should also comply with FDI/FII/SEZ policy/ rules/ guidelines.

Note: The directions on issuance of guarantee mentioned under this provision shall come into force from the date of publication, in the Official Gazette, of the relative Regulations issued under FEMA.

5. Reporting requirements:

TC transactions are subject to the following reporting requirements:

5.1. Monthly reporting: AD Category I banks are required to furnish details of TCs like drawal, utilisation, and repayment of TC approved by all its branches, in a consolidated statement, during a month, in Form TC to the Director, Division of International Trade and Finance, Department of Economic Policy and Research, RBI, Central Office, Fort, Mumbai – 400 001 (and in MS-Excel file through email) so as to reach not later than 10 th day of the following month. Each TC may be given a unique identification number by the AD bank. Format of Form TC is available at Annex IV of Part V of Master Directions – Reporting under Foreign Exchange Management Act dated January 1, 2016, as amended from time to time.

Note: Suppliers’ credit beyond 180 days and up to one year/three 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, as amended from time to time, should also be reported by the AD banks as per the aforesaid procedure.

5.2. Quarterly reporting: AD Category I banks are also required to furnish data on issuance of bank guarantees for TCs by all its branches, in a consolidated statement, at quarterly intervals on the eXtensible Business Reporting Language (XBRL) platform. For the above purpose AD banks may login to the site https://secweb.rbi.org.in/orfsxbrl/ using their User name, Password and Bank code. For downloading the relevant form, AD banks may follow the link ‘DownloadReturns Package’ and download the form. After following the successive steps, AD banks may upload the file. For User name and Password, AD banks may write by email along with contact details. Clarification required, if any, may also be sent to the aforesaid email of the Reserve Bank and/ or may be communicated at Telephone No. 022-22601000 (extension- 2715). Guide for using XBRL website is also available under the Help option on the same page. Format of this statement is also available at Annex V of Part V of Master Directions – Reporting under Foreign Exchange Management Act dated January 1, 2016, as amended from time to time.

6. Role of ADs:

While the primarily responsibility of ensuring adherence to the TC policy lies with the importer, the ADs are also expected to ensure compliance with applicable parameters of the TC policy / provisions of Foreign Exchange Management Act, 1999 by their constituents. As the Reserve Bank has not prescribed any format or manner in which TC arrangements / loan agreements are to be documented, ADs may consider any document to satisfy themselves with the underlying TC arrangement. ADs should ensure that there is no double financing on account of these transactions between 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. ADs should also ensure that for import of non-capital goods, the period of TC, as applicable, is lower of operating cycle or one year (three years for shipyards / shipbuilders).

FAQ

1. Is the conversion of BC into Term Loan still allowed under RBI revised circular dated March 13, 2019

Answer: Buyers Credit  can be converted to Term Loan any time by making payment toward BC. Revised circular is about availing BC and not related to conversion of BC to term loan.

Reference

1. Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations: Updated on 26 Mar 2019
2. RBI Circular : Trade Credit Policy – Revised framework: Dated 13 Mar 2019
3. RBI Circular: New External Commercial Borrowings (ECB) framework : Dated 16 Jan 2019
4. Old RBI Master Direction on ECB and Trade Credit: Updated till 22 Nov 2018
5. RBI Master Direction: Import of Goods and Services: Updated 02 Feb 2018
6. RBI FAQs on Trade Credit : Updated as on 26 Dec 2018
7. SEZ Act, 2005
8. SEZ Rules
9. Foreign Trade Policy 2015-2020 : Free Trade and Warehousing  Zone
10. SEZ Online Manual Intra SEZ Transfer