As discussed in the earlier article, RBI issued a circular related to Trade Credit – New Regulatory Framework which has provided clarity on many aspects of Trade credit  (Buyers Credit / Suppliers Credit). One of this aspect is All-in-Cost Ceiling.

This article is about All-in-Cost definition, relevant extracts of RBI circular, what has changed and what will be its impact on trade credit products offered by banks.

Definition

1. As per Trade Credit : New Regulatory Framework

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.

2. As per New External Commercial Borrowings (ECB) framework

Benchmark rate in case of:

• Foreign currency denominated External Commercial Borrowing (ECB) / Trade Credit 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).
• Rupee denominated ECB (INR ECB) will be prevailing yield of the Government of India securities of corresponding maturity.

3. Older Definition as per RBI Master Direction on ECB and Trade Credit (updated on 22-Nov-2018):

Cost of raising Trade Credit: The all-in-cost ceiling for raising Trade Credit is 350 basis points over 6 months LIBOR (for the respective currency of credit or applicable benchmark).  The all-in-cost includes
arranger fee, upfront fee, management fee, handling / processing charges, out of pocket and legal expenses, if any.

4. As per Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 (17 Dec 2018)

For Rupee denominated trade credit, the all-in-cost shall be commensurate with prevailing market conditions or as prescribed by the Reserve Bank in consultation with the Government of India

What has changed in Definition ?

1. Ceiling per annum brought down from 6 Month Libor + 350 bps to benchmark rates plus 250 bps.
2. All-in-Cost ceiling per annum is now on benchmark rates plus spread per annum instead of saying 6 Month Libor plus spread per annum.
3. New terms like “rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR” are  all added to All-in-Cost definition.
4. Old terms like “Arranger Fee, Upfront Fee, Management Fee, handling / processing charges, out of pocket and legal expense, if any” are removed from the definition of all-in-cost.
5. Term guarantee fees is added to definition. It is further clarified under security of trade credit that “Trade Credit may also be secured by overseas guarantee issued by foreign banks / overseas branches of Indian banks“.

Impact of Above Changes

1. Benchmark is clearly defined for policy and market perspective keeping in mind post LIBOR world from 2021. New benchmarks which are already at work and which may become part of future trade credit products are:
   • UK: SONIA. Latest Rates
   • USA: Treasury Repo Rate.
   • Europe: EONIA
   • Swiss: SARON
   • Japan: TONAR
2. Guarantee fee as a part of all-in-cost ceiling will impact only those importers which are arranging trade credit against bank guarantee issued by overseas bank or Indian bank overseas branches. Not applicable for bank guarantee issued  by local bank.
3. Benchmark Rate definition has not defined pricing for rupee denominated Trade Credit; where as; earlier definition was that all-in-cost based on prevailing market conditions or as prescribed by the Reserve Bank. It will have no impact as of now as no banks are offering INR based trade credit. In future RBI will need to clarify if earlier definition is still active or the benchmark rate definition will have to be modified.

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 Circular: Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 : Dated 17 Dec 2018
6. Article: Buyers Credit & Suppliers Credit in Rupee (INR)