Suppliers Credit

What can be termed as Suppliers Credit?

Over the years Indian importers have used Suppliers Credit and Buyers Credit as two different modes of Import financing. RBI had defined them as Trade Credit under Master Direction for ECB and Trade Credit.

Suppliers Credit structure was understood as financing of import usance Letter of Credit (LC) by Overseas branches / Foreign banks  where as Buyers Credit was considered as financing against LOU/LOC till it was stopped by RBI.

Under new RBI Circular “Trade Credit : New Regulatory Guidelines” a confusion arose on what structure can be called  Suppliers Credit ?

In this article we will compare the trade credit circular, what is the confusion, what has changed in relation to suppliers credit, Impact on Local Bank and Overseas Branches and Impact on Importers.

Definition

Old Circular New Circular
Master Direction: ECB and Trade Credit updated on 22 Nov 2018 Trade Credit – New Regulatory Framework
Definition of Trade Credit Trade Credits refer to the credits extended by the overseas supplier, bank and financial institution for maturity up to five years for imports into India. Depending on the source of finance, such trade credits include Suppliers’ Credit or Buyers’ Credit. 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.
Definition of Suppliers Credit Suppliers’ credit relates to the credit for imports into India extended by the overseas supplier Depending on the source of finance, such Trade Credit include suppliers’ credit and buyers’ credit from recognised lenders.
Definition of Buyers Credit Buyers’ credit refers to loans for payment of imports into India arranged by the importer from overseas bank or financial institution Depending on the source of finance, such Trade Credits include suppliers’ credit and buyers’ credit from recognised lenders.
Recognised Lender for Suppliers Credit Overseas supplier, bank and financial institution For suppliers’ credit: Supplier of goods located outside India.
Recognised Lender for Buyers Credit Overseas supplier, bank and financial institution Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in International Financial Services Centres located in India.

What has changed ?

  1. Source of finance defines whether it is suppliers credit or buyers credit.
    • If an importer arranges finance against import usance LC from overseas branch, it will be classified as buyers credit.
    • Supplier gives credit of 180 days on DA/usance LC etc., it will be considered as suppliers credit.
  2. New circular now also defines recognised lender
    • Suppliers Credit: Supplier of goods is the recognized lender.
    • Buyers Credit: Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in International Financial Services Centres located in India.

What is the confusion ?

Importers, Bank, and Overseas Branches over period of time started using terms Suppliers Credit for financing of import usance LC.

With Trade Credit : New Regulatory Framework, RBI defined recognised lender for suppliers credit as supplier. This created a confusion

  • Whether RBI has stopped suppliers credit as market new it (import usance LC finance).
  • What is suppliers credit ?
  • What will import usance LC financing product  be called now?
  • Whether the current structures of financing import usance LC will still remain ?

Clarifications

  1. No. RBI has not stopped import usance LC finance. Now it would be know by another name.
  2. Suppliers Credit means financing provided by supplier. If supplier gives 180 days credit for import under DA/usance LC, it will be consider as suppliers credit. Importer will have no roles as  supplier is giving finance directly or arranging for finance and also bearing the cost of it.
  3. Some of the alternative terminology for import usance LC can be
      • Usance Payable at Sight (UPAS)
      • LC Discounting LC Backed
      • LC Backed Reimbursement Finance etc.
  4. Below two structure will not be affected by above changes which are currently active:

Impact on Local Bank and Indian Bank’s Overseas Branches

  • Overseas Branches will have to change the name of the product under which they are currently sourcing the business
  • Local Banks will have to change classification for reporting to RBI.

Impact on Importer

From the perspective  of importer there will be no change in process which they used to follow for arranging financing against import usance LC. Only thing they will have to get acquainted with new terminology which banks will use to give financing against it.

Conclusion

In William Shakespeare’s words : “What’s in a name? That which we call a rose by any other word would smell as sweet”.

Terminology used for Suppliers Credit will change but underlying structure will remain the same.

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

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