Letter of Credit Clauses Related to Suppliers Credit

Supplier’s Credit is a structure of financing Import into India. In this structure, overseas suppliers or financial institutions outside India provide financing to importer on Libor linked rates against Usance letter of credit (LC). Supplier’s credit internationally is also known as Usance Payable at Sight (UPAS) structure.

As mentioned in earlier article “Letter of Credit – MT700 format”, there are 40 fields in LC.  In relation to suppliers credit transaction,  Importer will have to get below fields modified as per the requirement of Overseas Bank. Bank to Bank fields and clauses might differ but overall below information needs to be captured.

MT700 Field – Suppliers Credit

1. Field 39C: Additional Amounts Covered

This field is added to cover usance interest amount over and above the LC amount captured in Field 32B. Some banks incorporate this field in LC while others add this condition in Field 47A

Example: Usance Interest for 180 days not exceeding 6 month Libor + 80 bps p.a. prevailing on the date of negotiation

2. Field 41A / 41D: Available With…By…

Overseas bank will expect the LC to be restricted at their counter and details will be added to Field 41A or 41D with By Negotiation.  By Negotiation means  Nominated / Overseas Bank will negotiate the draft drawn on the Confirming Bank / LC issuing Bank to part with the funds on sight basis or at a future date.


BANKBHUBXXX (Swift Address / BIC), Bank ABC (Singapore)
By Negotiation

3. Field 42C:  XXX day ( from BL date or Negotiation date)

Tenor of drafts to be drawn under the documentary credit. Usance tenor will depend on operating cycle of applicant (importer) and / or agreement between applicant and beneficiary (supplier). Tenor details has to be specific like tenor can be from date of BL, from date of invoice, from date of negotiation etc. Also suppliers may insist on mentioning Usance Bill Payable at Sight.


  • 180 Days from the Date of Shipment
  • 180 Days from the Date of Shipment, Usance Payable at Sight

4. Field 47A : (Additional Conditions):

Depending on overseas bank, additional conditions may be added in LC. Below are two examples, one of Indian Bank overseas branch and another of Foreign Bank.

Bank A Clauses (Indian Bank Overseas Branch)

  1. Discounting: L + xxx bps p.a. (From date of discounting till maturity of bill).
  2. Fixed Charges @ USD xxx handling of documents and courier charges per set of Documents.
  3. We, ……Bank, confirm that KYC and AML due diligence has been carried out by us for the applicant (Name of the Company) before issuing above letter of credit as envisaged by Reserve Bank of India and have been complied with. The accuracy and integrity of the transaction has been ensured with respective entry in Core Banking System and the transaction is found to be in order. Further, the transaction does not involve any banned / black-listed entity as per the latest list of sanctioned country/entity.
  4. We, .…..Bank, certify that all applicable Reserve Bank of India Guidelines with regards to the said Letter of Credit Transaction have been complied with. The account of the importer is Standard as per IRAC norms.
  5. We confirm that in case of delayed payment, USD 100 or equivalent as penal charges and overdue interest with Penal interest rate @ 10.50% over and above applicable Libor will be paid by us.
  6. Documents Prior to the date of LC are not acceptable.

Bank B Clauses (Foreign Bank)

  1. Interest from the Date of Negotiation till due at ‘Libor + ….. percent p.a.’ to be borne by Applicant.
  2. LC Restricted for negotiation through Bank B, Singapore Branch
  3. LC will be overdrawn to the extent of the above interest payable by Applicant
  4. Bank B, Singapore Branch shall finance / pay beneficiary at sight with usance interest of  180 days on a/c of the applicant.

5. Field 78: Instructions to the Paying/Accepting/Negotiating Bank

In this field, issuing bank provide instructions to the paying, accepting or negotiating bank. Below is an example where Issuing bank is instructing the negotiating bank on how to handle the documents and process of negotiation.


Presenting bank is required to dispatch documents with the original letter of credit and amendments to Bank B address___________. Such documents must reach the Bank B counters on or before the latest presentation period and within the LC expiry date. Bank B will forward the documents to …..(issuing bank address)….. Upon receipt of acceptance from issuing bank, Bank B is authorised to discount the bill with the discounting interest for usance period to be charged to applicant.

6. Field 71B: Charges 

Field list what charges are applicable and who will be responsible for which charge. Incase of suppliers credit, interest and other charges are usually  borne by the applicant.


All banking charges outside India is to the account of the beneficiary except interest and other charges of the USD XXX (Negotiation  +Swift+Courier) is to be borne by the applicant.

7. Field 49: Confirmation Instructions

Confirmation in simple terms is an undertaking  in addition to that of the issuing bank, to honour or negotiate complying documents as per LC.

Depending on what is the agreement between beneficiary and applicant, any of the below three code is added to LC.  Incase where LC is confirmed or May Add option is selected, field 71B will specify who will bare the charges for the same.

  • Confirm. Incase of confirmed LC, getting confirmation and charges is applicant’s responsibility.
  • May Add. Incase of May Add option, getting confirmation and charges is beneficiary’s responsibility.
  • Without. Without means confirmation cannot be added to this LC.

8. Field 57A: ‘Advise Through’ Bank – FI BIC

LC has to be advised to beneficiary. Overseas bank may either insist of advising the same through their counter or may ask issuing bank to directly forward the LC to the beneficiary bank and provide a copy of the same in MT799 or MT999.  Depending on the overseas bank, this will contain details of advising bank.


Bank C Sydney, Australia

Related Articles

  1. Suppliers Credit Meaning and Process
  2. Types of SWIFT Message used in Letter of Credit and Suppliers Credit
  3. Letter of Credit – MT 700 Format

Letter of Credit – MT 700 Format

Earlier article “Types of Swift Message used in Letter of Credit and Suppliers Credit” discussed details related to Category 7 message. This article further explore MT700 used for Letter of Credit Issuance. This will help importers understand various fields in MT700, related UCP 600 reference etc.


  • There are 40 field in MT700
  • 11 Mandatory field and 29 Optional fields
  • Maximum length: 10,000 characters
  • A Relationship Management Application (RMA) authorisation is required in order to sign a MT700 message.
  • Either field 39A or 39B, but not both, may be present
  • When used, fields 42C and 42a must both be present
  • Either fields 42C and 42a together, or field 42M alone, or field 42P alone may be present. No other combination of these fields is allowed
  • Either field 44C or 44D, but not both, may be present

Usage Rules

  1. When the documentary credit message exceeds the maximum input message length, additional documentary credit information should be transmitted via one or more MTs 701. Up to eight MTs 701 may be sent in addition to the MT 700
  2. Information conveyed in a designated field in the MT 700 must not be repeated in any related MT 701. Information in any related MT 701 must not conflict with any information that is present in this MT 700.
  3. Unless otherwise specified, a documentary credit advised to the beneficiary or another advising bank based on a SWIFT message constitutes an operative credit instrument.
  4. For freely negotiable documentary credits, if the Receiver does not further transmit the credit by MT 710, it must add sentences to the effect that:
    • The advice to the beneficiary must be presented at each negotiation
    • The negotiating bank must note each negotiation on that advice.
  5. To avoid misunderstandings, where possible, banks are to use identifier codes rather than expressions such as ourselves, yourselves, us, or you.
  6. The advising bank must advise a documentary credit, including all its details, in a way that is clear and unambiguous to the beneficiary.

MT 700 Format Specifications

Status: M = Mandatory, O = Optional

Status Tag Field Name Field Info
M 27 Sequence of Total This field specifies the number of this message in the series of messages sent for a documentary credit, and the total number of messages in the series.

If only MT700 is issued it will say 1/1. If in addition one MT701 is sent for the same LC, it will day 1/2

M 40A Form of Documentary Credit This field specifies the type of credit

  • Irrevocable,
  • Irrevocable Transferable,
  • Irrevocable Standby,
  • Irrevoc Trans Standby
M 20 Documentary Credit Number Documentary credit number which has been assigned by the Sender.
O 23 Reference to Pre-Advice Use of this field indicates that the documentary credit has been pre-advised
M 31C Date of Issue Date On Which The Issuing Bank (Sender) Considers The Documentary Credit As Being Issued.
M 40E Applicable Rules

This field specifies the rules the credit is subject to. If LC is silent it will be deemed as irrevocable as per Art.3 of UCP 600

  • Eucp Latest Version,
  • Eucpurr Latest Version,
  • Isp Latest Version,
  • Othr,
  • Ucp Latest Version,
  • Ucpurr Latest Version
M 31D Date and Place of Expiry Art.6.d. of UCP 600 stipulates that every credit must state the date of expiry of credit.

Expiry Date would be the last date for presentation of documents by the beneficiary under the letter of credit and is referred to as validity date of letter of credit

Along with the date of expiry, credit must also specify the place for presentation of documents as per Art.6.d, where the LC expires.

O 51a Applicant Bank Bank of the applicant customer, if different from the issuing bank.
M 50 Applicant Party on behalf of which the documentary credit is being issued.
M 59 Beneficiary Party in favour of which the documentary credit is being issued.
M 32B Currency Code, Amount Currency code and amount of the documentary credit.
O 39A Percentage Credit Amount Tolerance

Tolerance denotes the variance that has to be built around the LC amount, to arrive at the actual availability amount for the LC

  • The positive tolerance is the percentage that should be added to the LC amount, to arrive at the Maximum LC Amount.
  • The negative tolerance is the percentage that should be subtracted from the LC amount, to arrive at the Minimum LC Amount.
O 39B Maximum Credit Amount

This field further qualifies the  documentary credit amount.

Not Exceeding

O 39C Additional Amounts Covered Additional amounts available to the beneficiary under the terms of the credit, such as insurance, freight, interest, etc
M 41a Available With … By …

As per Art.6.b. of UCP 600, the Issuing Bank must indicate how a credit is available, whether

1) By Sight Payment : Nominated / Overseas Bank will make payment on receipt of documents
2) By Deferred Payment : Nominated/ Overseas bank will make payment on due date
3) By Acceptance :  Nominated/ Overseas Bank will accept the draft to make payment on due date provided the draft is drawn on them – this normally is done when the credit is confirmed or restricted
4. By Negotiation :   Nominated / Overseas Bank will negotiate the draft drawn on the Confirming Bank/LC issuing Bank to part with the value on sight basis or at a future date.

O 42C Drafts at … Tenor of drafts to be drawn under the documentary credit.
O 42a Drawee This field identifies the drawee of the drafts to be drawn under the documentary credit.
O 42M Mixed Payment Details This field specifies the payment dates, amounts and/or method for their determination in a documentary credit which is available by mixed payment.
O 42P Negotiation / Deferred Payment Details This field specifies the payment date or method for its determination in a documentary credit which is available by deferred payment or negotiation only.
O 43P Partial Shipments

LC should indicate expressly whether partial shipments are allowed or not. If nothing is stated, by virtue of Art.31.a of UCP 600, the partial shipments are deemed as allowed.

  • Allowed
  • Conditional
  • Not Allowed
O 43T Transhipment

Articles 19 to 24 of UCP 600 allow transhipment even if the credit specifically prohibits transhipment. In the light of these provisions, it is up to the banks to act prudently as per instructions of applicant and to allow transhipments wherever credit allows combined transport

  • Allowed
  • Conditional
  • Not Allowed
O 44A Place of Taking in Charge/Dispatch from…/Place of Receipt This field specifies the place of taking in charge (in case of a multimodal transport document), the place of receipt (in case of a road, rail or inland waterway transport document or a courier or expedited delivery service document), the place of dispatch or the place of shipment to be indicated on the transport document.
O 44E Port of Loading/Airport of Departure Port of loading or airport of departure to be indicated on the transport document.
O 44F Port of Discharge/Airport of Destination Port of discharge or airport of destination to be indicated on the transport document.
O 44B Place of Final Destination/For Transportation to…/Place of Delivery Final destination or place of delivery to be indicated on the transport document.
O 44C Latest Date of Shipment Latest date for loading on  board/ dispatch/ taking in charge.
O 44D Shipment Period Specifies the period of time during which the goods are to be loaded on board / despatched /taken in charge
O 45A Description of Goods and/or Services While stating the description of goods, excessive details (particularly technical specifications etc.) must be avoided. They should be as brief as possible. Reference to proforma invoices must be avoided. In the description, INCO terms such as ‘CIF MUMBAI’, ‘FOB TOKYO’ etc. should be stated. In the description of goods either quantity or unit price should necessarily be mentioned.
O 46A Documents Required Description of any documents required.
O 47A Additional Conditions Description of further conditions of the documentary credit.
O 49G Special Payment Conditions for Beneficiary This field specifies special payment conditions applicable to the beneficiary, for example, post-financing request / condition
O 49H Special Payment Conditions for Receiving Bank This field specifies special payment conditions applicable to the receiving bank without disclosure to the beneficiary, for example, post-financing request/conditions for receiving bank only.
O 71D Charges

This field may be used only to specify charges to be borne by the beneficiary. In the absence of this field, all charges, except negotiation and transfer charges, are to be borne by the applicant.

  • Agent,
  • Comm,
  • Corcom,
  • Disc,
  • Insur,
  • Post,
  • Stamp,
  • Telechar,
  • Warehous
O 48 Period for Presentation in Days As per Art.14.c of UCP 600, every credit which calls for a transport documents must stipulate a specified period of time after the date of issuance of the transport documents during which beneficiary must present the documents to the nominated bank (for settlement). If no such period is stipulated, banks will not accept documents presented later than 21 days after the date of shipment.
M 49 Confirmation Instructions

This field contains confirmation instructions for the Receiver (advising bank).

  • Confirm,
  • May Add,
  • Without
O 58a Requested Confirmation Party Bank which is requested to add its confirmation or may add its confirmation.
O 53a Reimbursing Bank Name of the bank which has been authorised by the Sender to reimburse drawings under the documentary credit. This may be a branch of the Sender or the Receiver, or an entirely different bank.
O 78 Instructions to the Paying/Accepting/Negotiating Bank This field specifies instructions to the paying, accepting or negotiating bank. It may also indicate if pre-notification of a reimbursement claim or pre-debit notification to the issuing bank is required.
O 57a Second Advising Bank This field identifies the bank, if different from the Receiver, through which the documentary credit is to be advised / confirmed to the beneficiary.
O 72Z Sender to Receiver Information Additional information for the Receiver.

Types of SWIFT Message used in Letter of Credit and Suppliers Credit

SWIFT system is used for Bank to Bank communication and Bank to Corporate communication. There are different type of Swift messages format related to specific purpose. This article focuses on Category 7 message.

Category 7 supports messages which are exchanged between Banks involved in the Documentary Credit and guarantee business.

Post RBI’s ban on Letter of Comfort and Letter of Undertaking, importers have started using Letter of Credit and Suppliers Credit instead of Buyer’s Credit . This article is to help Importers understand different type of swift messages used for the said product.

MT 700 Issue of a Documentary Credit

This message is sent by the issuing bank to the advising bank. It is used to provide the terms and conditions of a documentary credit.

MT 701 Issue of a Documentary Credit

This message is sent in addition to an MT 700 Issue of a  Documentary Credit, when the information in the documentary credit exceeds the maximum input message length of the MT 700.

MT 707, 708 Amendment to a Documentary Credit

It is used to inform the Receiver about amendments to the terms and conditions of a documentary credit issued by the Sender or by a third bank. The amendment is to be considered as part of the documentary credit.

MT 710 Advice of a Third Bank’s or a Non-Bank’s Documentary Credit

This message is sent by an advising bank, which has received a  documentary credit from the issuing bank or the non-bank issuer, to the bank advising the beneficiary or another advising bank. It is used to advise the Receiver about the terms and conditions of a documentary credit.

MT 732 Advice of Discharge

This message is sent by the issuing bank to the paying/negotiating or accepting bank. It may also be sent by the paying / accepting / negotiating bank to the bank from which it has received documents. It is used to advise the Receiver that the documents received with discrepancies have been taken up.

MT 734 Advice of Refusal

This message is sent by the issuing bank to the bank from which it has received documents related to a documentary credit. It may also be sent by the bank nominated to pay/accept/negotiate/incur a deferred payment undertaking to the bank from which it has received documents.

It is used to advise the Receiver that the Sender considers the documents, as they appear on their face, not to be in accordance with the terms and conditions of the credit and that, consequently, it refuses them for the discrepancies stated. The Sender also provides the Receiver with details regarding the disposal of the documents.

This message type may also be used for claiming a refund.

MT 740 Authorisation to Reimburse

This message is sent by the issuing bank to the reimbursing bank.

It is used to request the Receiver to honour claims for reimbursement of payment(s) or negotiation(s) under a documentary credit.

The MT 740 authorises the reimbursing bank to debit the account of the Sender, or one of the Sender’s branches if so indicated, for reimbursements effected in accordance with the instructions in the MT 740.

MT 742 Reimbursement Claim

This message is sent by the paying/negotiating bank to the bank authorised to reimburse the Sender for its payments/negotiations.

It is used to claim reimbursement of payment(s) or negotiation(s) under a documentary credit, as relevant to the reimbursing bank.

MT 750 Advice of Discrepancy

This message is sent by the bank to which documents have been presented, to the issuing bank. It may also be sent to a bank nominated to pay/accept/negotiate/incur a deferred payment undertaking.

It is used to advise the Receiver that documents which have been presented are not in accordance with the terms and conditions of the credit.

The MT 750 is a request for authorisation to take up documents. Authorisation may be provided using an MT 752 Authorisation to Pay, Accept or Negotiate; a negative reply to the request may be provided using an MT 796 Answers.

MT 752 Authorisation to Pay, Accept or Negotiate

This message is sent by the issuing bank, or the nominated bank if so authorised by the issuing bank, to a paying/accepting/negotiating bank in response to a request for authorisation to pay/accept/negotiate/incur a deferred payment undertaking previously requested via an MT 750 Advice of Discrepancy or otherwise.

It is used to advise the Receiver that documents may be taken up, notwithstanding the discrepancies, provided they are otherwise in order.

MT 754 Advice of Payment/Acceptance/Negotiation

This message is sent by the paying, accepting or negotiating bank, or the bank incurring a deferred payment undertaking, to the issuing bank. It may also be sent by the bank to which documents have been presented to a bank that has been nominated to pay/accept.

It is used to advise the Receiver that documents were presented in accordance with the credit terms and are being forwarded as instructed.

The MT 754 may also be used:

  • for the settlement of the payment/negotiation
  • as a pre-notification of a reimbursement claim from the claiming bank to the issuing bank
  • as a pre-debit notification from the claiming bank to the issuing bank.

Note: Where a pre-debit notification from the reimbursing bank to the issuing bank is required, banks should use the MT 799 Free Format message, specifying the future date of debit.

MT 756 Advice of Reimbursement or Payment

This message is sent by the issuing bank to the bank from which it has received documents or by the reimbursing bank to the bank from which it has received a reimbursement claim. It may also be sent by the bank nominated to pay/accept/negotiate/incur a deferred payment undertaking to the bank from which it has received documents.

It is used to advise the Receiver about reimbursement or payment, to that bank, for a drawing under a documentary credit for which no specific reimbursement instructions or payment provisions were provided.

The account relationship between the Sender and the Receiver is used unless otherwise expressly stated in the message.

MT 759 Ancillary Trade Structured Message

This message is sent to request or to provide information, such as a fraud alert or a financing request, concerning an existing trade transaction such as a documentary credit, demand guarantee, standby letter of credit or an undertaking (for example, a guarantee, surety, etc.).

This message must not be used where an existing MT message is available, and it should be used rather than the MT 799.

MT 790 Advice of Charges, Interest and Other Adjustments

This message type is sent by an account servicing institution to the account owner.

It is used to advise charges, interest or other adjustments which have been debited or credited to the account owner’s account. It provides details of charges which are previously unknown to the Receiver.

MT 791 Request for Payment of Charges, Interest and Other Expenses

This message type is sent by a financial institution to another financial institution.

It is used to request the payment of charges, interest and/or other expenses which are previously unknown to the Receiver.

MT 792 Request for Cancellation

This message is:

  • sent by a financial institution to request a second financial institution to consider cancellation of the SWIFT message identified in the request.
  • sent by a corporate customer to request a financial institution to consider cancellation of the SWIFT message identified in the request.

If the Receiver of the request for cancellation has already acted on the message for which cancellation is requested, the MT n92 asks for a retransfer, that is, reversal, with the beneficiary’s consent.

MT 795 Queries

This message type is:

  • sent by a financial institution to another financial institution.
  • sent by a corporate customer to a financial institution.
  • sent by a financial institution to a corporate customer.

It is used to request information or clarification relating to a previous SWIFT or non-SWIFT message or to one or more transactions contained therein.

MT 796 Answers

This message type is:

  • sent by one financial institution to another financial institution.
  • sent by a corporate customer to a financial institution.
  • sent by a financial institution to a corporate customer.

It is used to respond to an MT n95 Queries or MT n92 Request for Cancellation and other messages where no specific message type has been provided for the response. This message should use the same category digit as the related queries message or request for cancellation.

MT 799 Free Format Message

This message type is used by financial institutions to send or receive information for which another message type is not applicable.

Major changes in ITR 1 (Sahaj) for AY 2018-19

Income Tax Return Form – 1 (Sahaj) is applicable to only Resident Individuals having Incomes from Salaries or Pension, One House property, Other sources and having total income upto Rs. 50 lakhs.  The new ITR-1 form is not applicable to Non-residents and Residents but not ordinarily resident (RNOR).

ITR 1 For Resident Individuals

The major changes in ITR-1 for the Assessment year 2018-19; Financial year 2017-18 are as below:

1. Income from Salary / Pension – Item No. 1: In the new form disclosure is required as per Form 16 under below heads:

  • Salary (excluding all allowances, perquisites and profit in lieu of salary)
  • Allowances not exempt
  • Value of perquisites
  • Profits in lieu of salary
  • Deduction u/s 16
Income from Salary / Pension

2. Income from One House Property  – Item No. 2: Earlier net income from house property was required to be furnished, now details under below heads are required:

  • Gross rent received/ receivable/ letable value
  • Tax paid to local authorities
  • Interest payable on borrowed capital
Income from One House Property

3.New Insertion Item No. 2 vi – Note : Maximum Loss from House property that can be set-off is INR 2,00,000.

4. New Insertion Item No. 4 – Note: To avail the benefit of carry forward and set off of loss, please use ITR-2

5. Deductions under Chapter VI A – Item No. 5 – Headings of Various deduction sections from 80C to 80U has been clearly specified. Section 80D  has been further sub classified under:

  • a) Health insurance premium
  • b) Medical expenditure
  • c) Preventive health check-up

6. Fee u/s 234F – Item No. 15d :

  • A new field has been inserted to fill the details of late filing fees. Fees for filing of Income Tax Return after due date. Assessee shall now be required to pay the late filing fees mandatory under section 234F along with interest under section 234A, 234B and 234C before filing of return of income.
  • Cases where the total income is less than Rs 5 lakhs, late filing fee is Rs 1,000.
  • Cases where the total income is Rs 5 lakhs and above, if the income tax return is filed after the due date (July 31, 2018) but on or before the December 31, 2018, there will be late filing fee of Rs 5,000.
  • Cases where the total income is Rs 5 lakhs and above, if the return is filed after December 31, 2018 but on or before the March 31, 2019, there will be late filing fee of Rs 10,000.
  • After March 31, the returns cannot be filed.

7. Details of Tax Deducted at Source

  • Item No. 19 TDS2 – Details of Tax Deducted at Source from Income OTHER THAN Salary [As per FORM 16 A issued by Deductor(s)] : Column for amount claimed in the hands of spouse if section 5A is applicable, has been removed.
  • New Insertion – Item No. 20 TDS3  Details of Tax Deducted at Source [As per 26QC furnished by the Deductor(s)]
    1. Permanent Account Number (PAN) of the Tenant
    2. Name of the Tenant
    3. Amount which is subject to tax deduction
    4. Year of tax Deduction – 2017
    5. Tax Deducted – Amount of Tax deducted as per form 26AS
    6. Amount out of (column 5) claimed this Year  – It means out of the total amount of tax deducted for the relevant year, how much is to be claimed in this assessement year. The remaining amount is allowed to be carried forward in future years. For example TDS deducted in FY 2017-18 is Rs. 200 and claimed in this year is Rs. 150, then amount in column 5 will be Rs. 200 and column 6 will be Rs. 150. Hence remaining Rs. 50 will be allowed to carried forward in next year.
Tax Deducted at Source

8. Details of Tax Collected at Source – Item No. 22 TCS – Details of Tax Collected at Source [As per FORM 27D issued by the Collector(s)] : Column for amount claimed in the hands of spouse if section 5A is applicable, has been removed.

9. Exempt income (For reporting Purposes) – Item No. 27 (d) 

  • Headings of various exempted income under section 10 has been clearly specified.
  • It has also specified list of Nature of Income to be selected from Allowance exempt under section 10
Exempted Income


  • Requirement of Bank account details of Non-residents have been removed. Non-residents can no longer opt for the ITR-1 form. Only ITR-2 and ITR-3 forms are applicable to them.

11. Verification –  “I am making this return in my capacity as” – Individual or Self

12. New Insertion – Item No. 28  Only if the return has been prepared by a Tax Return Preparer (TRP) below details will be required to be filled by TRP

  • Identification No. of TRP
  • Name of TRP
  • If TRP is entitled for any reimbursement from the Government, amount thereof
Tax Return Preparer

For further assistance kindly contact us on +919825223809

Revised Nature of Business or Profession Codes for ITR Forms – AY 2018-19

Nature of Business or Profession Code is required to be furnished in ITR 3, ITR 4, ITR 5 and ITR 6. In the new Income tax return (ITR) forms for A.Y 2018-19, below changes are made in Nature of Business or Profession Codes. 

Nature of Business is further classified in following major Sectors: Agriculture, Animal Husbandry & Forestry, Fish Farming, Mining and Quarrying, Manufacturing, Electricity, Gas and Water, Construction, Real Estate and Renting Services, Renting of Machinery, Wholesale and Retail Trade, Hotels, Restaurants and Hospitality Services, Transport & Logistics Services, Post and Telecommunication Services, Financial Intermediation Services, Computer and Related Services, Research and Development, Professions, Education Services, Health Care Services, Social and Community Work, Culture and Sport, Other Services, Extra Territorial Organisations and Bodies.

Major Changes :

  1. For Partners new code has been introduced for showing share of income from partnership firm.
  2. Number of Sectors has been increased from 9 to 22
  3. Number of classification has been increased from 74 to 345
  4. Additional sectors which have been classified are
    • Fish Farming with 6 Sub Sectors
    • Renting of Machinery with 9 Sub Sectors
    • Social and Community Work with 9 Sub Sectors
    • Research and Development with 3 Sub Sectors
    • Extra Territorial Organisations and Bodies
  5. Various Business or Professions which were earlier falling under Others; are now been classified under specific Sub Sectors.
  6. Trading Wholesalers and  Trading Retailers have been further sub classified from 2 to 28 Sub Sectors
  7. Trading Others (old code 0204) has not been specifically shown

Important points to know

  1. n.e.c. stands for “not elsewhere classified”
  2. New code 00001 – Share of Income from firm only – This code is to be used by the partners for showing Income received from Partnership firm.
  3. New code 09027 – Wholesale of other products not elsewhere classified would include wholesale of products other than motor vehicles, sale of motor parts and accessories, agricultural raw material, food & beverages and tobacco, metals and metal ores, household goods, construction material, hardware and sanitary fittings, cotton and jute, raw wool and raw silk, other textile fibres, industrial chemicals, fertilizers and pesticides, electronic parts & equipment, other machinery, equipment and supplies, waste, scrap & materials for re-cycling.
  4. New code 09028 – Retail sale of other products not elsewhere classified would include retail sale of products other than textiles, apparel, footwear, leather goods, household appliances, hardware, paint and glass, automotive fuel, motor vehicles, motor parts and accessories, Retail sale of all goods in specialized stores, non-specialized stores, medical suppliers, agencies and stores.
    • For Example : Retail sale of Electrical goods like lights, bulbs, wires etc.
  5. New code 10012 – Other hospitality services not elsewhere classified would include all activities under hospitality services other than Hotels, Motels, Inns and Dharmshalas, Guest houses and circuit houses, Dormitories and hostels at educational institutions, all types of accommodations, all kinds of Restaurants, Canteens, Independent caterers, Casinos and other games of chance.
    • For Example : Supply of Food packets by any means other than restaurants, canteens and catering.
  6. New code 16019 – Other professional services not elsewhere classified would include professions other than Legal profession, Accounting, book-keeping and auditing profession, Tax consultancy, Architectural profession, Engineering and technical consultancy, Advertising, Fashion designing, Interior decoration, Photography, Auctioneers, Business brokerage, Market research and public opinion polling, Business and management consultancy activities, Labour recruitment and provision of personnel, Investigation and security services, Building-cleaning and industrial cleaning activities, Packaging activities, Secretarial activities.
    • For Example : Professors, Pilots
  7. New code 21008 – Other services not elsewhere classified would include all services other than Hair dressing and beauty treatment, Funeral and related activities, Marriage bureaus, Pet care services, Sauna and steam baths, massage salons, Astrological and spiritualists’ activities, Private households as employers of domestic staff

Below table shows comparison of new codes with earlier codes:

Sector Sub-Sector New Codes Nature of Business Old Codes
Share of Income from firm only 00001
Growing and manufacturing of tea 01001 Manufacturing Industry [Tea, Coffee] 0119
Growing and manufacturing of coffee 01002 0119
Growing and manufacturing of rubber 01003 Manufacturing Industry [Agro-based industries] / Manufacturing Industry [Rubber] 0101 / 0116
Market gardening and horticulture specialties 01004
Raising of silk worms and production of silk 01005 Manufacturing Industry [Agro-based industries] 0101
Raising of bees and production of honey 01006
Raising of poultry and production of eggs 01007
Rearing of sheep and production of wool 01008 Manufacturing Industry [Agro-based industries] 0101
Rearing of animals and production of animal products 01009
Agricultural and animal husbandry services 01010
Soil conservation, soil testing and soil desalination services 01011
Hunting, trapping and game propagation services 01012
Growing of timber, plantation, operation of tree nurseries and conserving of forest 01013
Gathering of tendu leaves 01014
Gathering of other wild growing materials 01015
Forestry service activities, timber cruising, afforestation and reforestation 01016
Logging service activities, transport of logs within the forest 01017
Other agriculture, animal husbandry or forestry activity n.e.c 01018
FISH FARMING Fishing on commercial basis in inland waters 02001
Fishing on commercial basis in ocean and coastal areas 02002
Fish farming 02003
Gathering of marine materials such as natural pearls, sponges, coral etc. 02004
Services related to marine and fresh water fisheries, fish hatcheries and fish farms 02005
Other Fish farming activity n.e.c 02006
MINING AND QUARRYING Mining and agglomeration of hard coal 03001 Contractors [Mining Contractors] 0504
Mining and agglomeration of lignite 03002 Contractors [Mining Contractors] 0504
Extraction and agglomeration of peat 03003 Contractors [Mining Contractors] 0504
Extraction of crude petroleum and natural gas 03004 Manufacturing Industry [Petroleum and Petrochemicals] 0113
Service activities incidental to oil and gas extraction excluding surveying 03005 Service Sector [Others] 0714
Mining of uranium and thorium ores 03006 Contractors [Mining Contractors] 0504
Mining of iron ores 03007 Contractors [Mining Contractors] 0504
Mining of non-ferrous metal ores, except uranium and thorium ores 03008 Contractors [Mining Contractors] 0504
Mining of gemstones 03009 Contractors [Mining Contractors] 0504
Mining of chemical and fertilizer minerals 03010 Manufacturing Industry [Fertilizers, Chemicals, Paints] 0108
Mining of quarrying of abrasive materials 03011 Contractors [Mining Contractors] 0504
Mining of mica, graphite and asbestos 03012 Contractors [Mining Contractors] 0504
Quarrying of stones (marble/granite/dolomite), sand and clay 03013 Manufacturing Industry [Marble & Granite] 0111
Other mining and quarrying 03014 Contractors [Mining Contractors] 0504
Mining and production of salt 03015
Other mining and quarrying n.e.c 03016
MANUFACTURING Production, processing and preservation of meat and meat products 04001 Manufacturing Industry [Others] 0124
Production, processing and preservation of fish and fish products 04002 Manufacturing Industry [Others] 0124
Manufacture of vegetable oil, animal oil and fats 04003 Manufacturing Industry [Vanaspati & Edible Oils] 0123
Processing of fruits, vegetables and edible nuts 04004 Manufacturing Industry [Others] 0124
Manufacture of dairy products 04005 Manufacturing Industry [Others] 0124
Manufacture of sugar 04006 Manufacturing Industry [Sugar] 0118
Manufacture of cocoa, chocolates and sugar confectionery 04007 Manufacturing Industry [Others] / Manufacturing Industry [Sugar] 0124 / 0118
Flour milling 04008 Manufacturing Industry [Flour & Rice Mills] 0109
Rice milling 04009 Manufacturing Industry [Flour & Rice Mills] 0109
Dal milling 04010 Manufacturing Industry [Others] 0124
Manufacture of other grain mill products 04011 Manufacturing Industry [Others] 0124
Manufacture of bakery products 04012 Manufacturing Industry [Others] 0124
Manufacture of starch products 04013 Manufacturing Industry [Others] 0124
Manufacture of animal feeds 04014 Manufacturing Industry [Others] 0124
Manufacture of other food products 04015 Manufacturing Industry [Others] 0124
Manufacturing of wines 04016 Manufacturing Industry [Others] 0124
Manufacture of beer 04017 Manufacturing Industry [Others] 0124
Manufacture of malt liquors 04018 Manufacturing Industry [Others] 0124
Distilling and blending of spirits, production of ethyl alcohol 04019 Manufacturing Industry [Others] 0124
Manufacture of mineral water 04020 Manufacturing Industry [Others] 0124
Manufacture of soft drinks 04021 Manufacturing Industry [Others] 0124
Manufacture of other non-alcoholic beverages 04022 Manufacturing Industry [Others] 0124
Manufacture of tobacco products 04023 Manufacturing Industry [Tobacco] 0121
Manufacture of textiles (other than by handloom) 04024 Manufacturing Industry [Textiles, Handloom, Powerlooms] 0120
Manufacture of textiles using handlooms (khadi) 04025 Manufacturing Industry [Textiles, Handloom, Powerlooms] 0120
Manufacture of carpet, rugs, blankets, shawls etc. (other than by hand) 04026 Manufacturing Industry [Textiles, Handloom, Powerlooms] 0120
Manufacture of carpet, rugs, blankets, shawls etc. by hand 04027 Manufacturing Industry [Textiles, Handloom, Powerlooms] 0120
Manufacture of wearing apparel 04028 Manufacturing Industry [Textiles, Handloom, Powerlooms] / Manufacturing Industry [Others] 0120 / 0124
Tanning and dressing of leather 04029 Manufacturing Industry [Others] 0124
Manufacture of luggage, handbags and the like saddler and harness 04030 Manufacturing Industry [Others] 0124
Manufacture of footwear 04031 Manufacturing Industry [Others] 0124
Manufacture of wood and wood products, cork, straw and plaiting material 04032 Manufacturing Industry [Others] 0124
Manufacture of paper and paper products 04033 Manufacturing Industry [Paper] 0112
Publishing, printing and reproduction of recorded media 04034 Manufacturing Industry [Printing & Publishing] 0115
Manufacture of coke oven products 04035 Manufacturing Industry [Others] 0124
Manufacture of refined petroleum products 04036 Manufacturing Industry [Petroleum and Petrochemicals] 0113
Processing of nuclear fuel 04037 Manufacturing Industry [Others] 0124
Manufacture of fertilizers and nitrogen compounds 04038 Manufacturing Industry [Fertilizers, Chemicals, Paints] 0108
Manufacture of plastics in primary forms and of synthetic rubber 04039 Manufacturing Industry [Rubber] 0116
Manufacture of paints, varnishes and similar coatings 04040 Manufacturing Industry [Fertilizers, Chemicals, Paints] 0108
Manufacture of pharmaceuticals, medicinal chemicals and botanical products 04041 Manufacturing Industry [Drugs and Pharmaceuticals] 0105
Manufacture of soap and detergents 04042 Manufacturing Industry [Others] 0124
Manufacture of other chemical products 04043 Manufacturing Industry [Others] 0124
Manufacture of man-made fibers 04044 Manufacturing Industry [Others] 0124
Manufacture of rubber products 04045 Manufacturing Industry [Rubber] 0116
Manufacture of plastic products 04046 Manufacturing Industry [Others] 0124
Manufacture of glass and glass products 04047 Manufacturing Industry [Others] 0124
Manufacture of cement, lime and plaster 04048 Manufacturing Industry [Cement] 0103
Manufacture of articles of concrete, cement and plaster 04049 0103
Manufacture of Bricks 04050 Manufacturing Industry [Others] 0124
Manufacture of other clay and ceramic products 04051 Manufacturing Industry [Others] 0124
Manufacture of other non-metallic mineral products 04052 Manufacturing Industry [Others] 0124
Manufacture of pig iron, sponge iron, Direct Reduced Iron etc. 04053 Manufacturing Industry [Others] 0124
Manufacture of Ferro alloys 04054 Manufacturing Industry [Others] 0124
Manufacture of Ingots, billets, blooms and slabs etc. 04055 Manufacturing Industry [Others] 0124
Manufacture of steel products 04056 Manufacturing Industry [Steel] 0117
Manufacture of basic precious and non- ferrous metals 04057 Manufacturing Industry [Engineering goods] 0107
Manufacture of non-metallic mineral products 04058 Manufacturing Industry [Engineering goods] 0107
Casting of metals 04059 Manufacturing Industry [Engineering goods] 0107
Manufacture of fabricated metal products 04060 Manufacturing Industry [Engineering goods] 0107
Manufacture of engines and turbines 04061 Manufacturing Industry [Engineering goods] 0107
Manufacture of pumps and compressors 04062 Manufacturing Industry [Engineering goods] 0107
Manufacture of bearings and gears 04063 Manufacturing Industry [Engineering goods] 0107
Manufacture of ovens and furnaces 04064 Manufacturing Industry [Engineering goods] 0107
Manufacture of lifting and handling equipment 04065 Manufacturing Industry [Engineering goods] 0107
Manufacture of other general purpose machinery 04066 Manufacturing Industry [Engineering goods] 0107
Manufacture of agricultural and forestry machinery 04067
Manufacture of Machine Tools 04068 Manufacturing Industry [Engineering goods] 0107
Manufacture of machinery for metallurgy 04069 Manufacturing Industry [Engineering goods] 0107
Manufacture of machinery for mining, quarrying and constructions 04070 Manufacturing Industry [Engineering goods] 0107
Manufacture of machinery for processing of food and beverages 04071 Manufacturing Industry [Food Processing Units] 0110
Manufacture of machinery for leather and textile 04072
Manufacture of weapons and ammunition 04073
Manufacture of other special purpose machinery 04074 Manufacturing Industry [Engineering goods] 0107
Manufacture of domestic appliances 04075 Manufacturing Industry [Others] 0124
Manufacture of office, accounting and computing machinery 04076 Manufacturing Industry [Electronics including Computer Hardware] 0106
Manufacture of electrical machinery and apparatus 04077 Manufacturing Industry [Electronics including Computer Hardware] 0106
Manufacture of Radio, Television, communication equipment and apparatus 04078 Manufacturing Industry [Electronics including Computer Hardware] 0106
Manufacture of medical and surgical equipment 04079 Manufacturing Industry [Drugs and Pharmaceuticals] 0105
Manufacture of industrial process control equipment 04080 Manufacturing Industry [Electronics including Computer Hardware] 0106
Manufacture of instruments and appliances for measurements and navigation 04081 Manufacturing Industry [Electronics including Computer Hardware] 0106
Manufacture of optical instruments 04082 Manufacturing Industry [Electronics including Computer Hardware] 0106
Manufacture of watches and clocks 04083 Manufacturing Industry [Electronics including Computer Hardware] 0106
Manufacture of motor vehicles 04084 Manufacturing Industry [Automobile and Auto parts] 0102
Repair and maintenance of motor vehicles 09002 Trading [Others] / Service Sector [Others] 0204 / 0714
Manufacture of body of motor vehicles 04085 Manufacturing Industry [Automobile and Auto parts] 0102
Manufacture of parts & accessories of motor vehicles & engines 04086 Manufacturing Industry [Automobile and Auto parts] 0102
Building & repair of ships and boats 04087 Manufacturing Industry [Others] 0124
Manufacture of railway locomotive and rolling stocks 04088 Manufacturing Industry [Others] 0124
Manufacture of aircraft and spacecraft 04089 Manufacturing Industry [Others] 0124
Manufacture of bicycles 04090 Manufacturing Industry [Others] 0124
Manufacture of other transport equipment 04091 Manufacturing Industry [Others] 0124
Manufacture of furniture 04092 Manufacturing Industry [Others] 0124
Manufacture of jewellery 04093 Manufacturing Industry [Others] 0124
Manufacture of sports goods 04094 Manufacturing Industry [Others] 0124
Manufacture of musical instruments 04095 Manufacturing Industry [Others] 0124
Manufacture of games and toys 04096 Manufacturing Industry [Others] 0124
Other manufacturing n.e.c. 04097 Manufacturing Industry [Others] 0124
Recycling of metal waste and scrap 04098
Recycling of non- metal waste and scrap 04099
ELECTRICITY, GAS AND WATER Production, collection and distribution of electricity 05001 Manufacturing Industry [Power and energy] 0114
Manufacture and distribution of gas 05002 Manufacturing Industry [Power and energy] 0114
Collection, purification and distribution of water 05003
Other essential commodity service n.e.c 05004
CONSTRUCTION Site preparation works 06001 Contractors [Civil Contractors] 0501
Building of complete constructions or parts- civil contractors 06002 Contractors [Civil Contractors] 0501
Building installation 06003 Builders [Builders] 0401
Building completion 06004 Builders [Builders] 0401
Construction and maintenance of roads, rails, bridges, tunnels, ports, harbour, runways etc. 06005 Contractors [Civil Contractors] 0501
Construction and maintenance of power plants 06006 Manufacturing Industry [Power and energy] / 0114 /
Construction and maintenance of industrial plants 06007
Construction and maintenance of power transmission and telecommunication lines 06008 Manufacturing Industry [Power and energy] / 0114 /
Construction of water ways and water reservoirs 06009 Builders [Others] 0404
Other construction activity n.e.c. 06010 Builders [Others] 0404
REAL ESTATE AND RENTING SERVICES Purchase, sale and letting of leased buildings (residential and non-residential) 07001 Builders [Builders] / Financial Service Sector [Leasing Companies] 0401 / 0805
Operating of real estate of self-owned buildings (residential and non-residential) 07002 Builders [Estate agents] 0402
Developing and sub-dividing real estate into lots 07003 Builders [Property Developers] 0403
Real estate activities on a fee or contract basis 07004 Builders [Estate agents] 0402
Other real estate/renting services n.e.c 07005 Builders [Estate agents] 0402
RENTING OF MACHINERY Renting of land transport equipment 08001
Renting of water transport equipment 08002
Renting of air transport equipment 08003
Renting of agricultural machinery and equipment 08004
Renting of construction and civil engineering machinery 08005
Renting of office machinery and equipment 08006
Renting of other machinery and equipment n.e.c. 08007
Renting of personal and household goods n.e.c. 08008
Renting of other machinery n.e.c. 08009
WHOLESALE AND RETAIL TRADE Wholesale and retail sale of motor vehicles 09001 Trading [Wholesalers] /

Trading [Retailers]

0203 /


Sale of motor parts and accessories-wholesale and retail 09003 Trading [Wholesalers] /

Trading [Retailers]

0203 /


Retail sale of automotive fuel 09004 Trading [Retailers] 0202
General commission agents, commodity brokers and auctioneers 09005 Commission Agents [General Commission Agents 0301
Wholesale of agricultural raw material 09006 Trading [Wholesalers] 0203
Wholesale of food & beverages and tobacco 09007 0203
Wholesale of household goods 09008 0203
Wholesale of metals and metal ores 09009 0203
Wholesale of household goods 09010 0203
Wholesale of construction material 09011 0203
Wholesale of hardware and sanitary fittings 09012 0203
Wholesale of cotton and jute 09013 0203
Wholesale of raw wool and raw silk 09014


Wholesale of other textile fibres 09015


Wholesale of industrial chemicals 09016


Wholesale of fertilizers and pesticides 09017


Wholesale of electronic parts & equipment 09018


Wholesale of other machinery, equipment and supplies 09019


Wholesale of waste, scrap & materials for re-cycling 09020


Retail sale of food, beverages and tobacco in specialized stores 09021 Trading [Retailers]


Retail sale of other goods in specialized stores 09022


Retail sale in non-specialized stores 09023


Retail sale of textiles, apparel, footwear, leather goods 09024


Retail sale of other household appliances 09025


Retail sale of hardware, paint and glass 09026


Wholesale of other products n.e.c 09027 Trading [Wholesalers] 0203
Retail sale of other products n.e.c 09028 Trading [Retailers] 0202
Hotels – Star rated 10001 Service Sector [Hotels] 0708
Hotels – Non-star rated 10002 Service Sector [Hotels] 0708
Motels, Inns and Dharmshalas 10003 Service Sector [Hospitality services]


Guest houses and circuit houses 10004

Service Sector [Hospitality services]


Dormitories and hostels at educational institutions 10005

Service Sector [Hospitality services]


Short stay accommodations n.e.c. 10006

Service Sector [Hospitality services]


Restaurants – with bars 10007

Service Sector [Hospitality services]


Restaurants – without bars 10008

Service Sector [Hospitality services]


Canteens 10009

Service Sector [Hospitality services]


Independent caterers 10010

Service Sector [Hospitality services]


Casinos and other games of chance 10011 Service Sector [Others]


Other hospitality services n.e.c. 10012 Service Sector [Hospitality services]


TRANSPORT & LOGISTICS SERVICES Travel agencies and tour operators 11001 Service Sector [Travel agents, tour operators] 0713
Packers and movers 11002 Service Sector [Transporters] 0712
Passenger land transport 11003 0712
Air transport 11004 0712
Transport by urban/sub-urban railways 11005 0712
Inland water transport 11006 0712
Sea and coastal water transport 11007 0712
Freight transport by road 11008 0712
Freight transport by railways 11009 0712
Forwarding of freight 11010
Receiving and acceptance of freight 11011
Cargo handling 11012
Storage and warehousing 11013
Transport via pipelines (transport of gases, liquids, slurry and other commodities) 11014 Service Sector [Transporters]


Other Transport & Logistics services n.e.c 11015 Service Sector [Others]


POST AND TELECOMMUNICATION SERVICES Post and courier activities 12001 Service Sector [Courier Agencies] 0704
Basic telecom services 12002
Value added telecom services 12003
Maintenance of telecom network 12004
Activities of the cable operators 12005 Entertainment Industry [Cable T.V. productions] 0901
Other Post & Telecommunication services n.e.c 12006 Service Sector [Others] 0714
FINANCIAL INTERMEDIATION SERVICES Commercial banks, saving banks and discount houses 13001 Financial Service Sector [Banking Companies] 0801
Specialised institutions granting credit 13002 Financial Service Sector [Financial Institutions] 0803
Financial leasing 13003 Financial Service Sector [Leasing Companies] 0805
Hire-purchase financing 13004 Financial Service Sector [Non-Banking Financial Companies] / Financial Service Sector [Others] 0807 / 0809
Housing finance activities 13005 Financial Service Sector [Non-Banking Financial Companies] 0807
Commercial loan activities 13006 Financial Service Sector [Non-Banking Financial Companies] 0807
Credit cards 13007 Financial Service Sector [Others] 0809
Mutual funds 13008 Financial Service Sector [Others] 0809
Chit fund 13009 Financial Service Sector [Chit Funds] 0802
Investment activities 13010 Financial Service Sector [Others] 0809
Life insurance 13011 Financial Service Sector [Others] 0809
Pension funding 13012 Financial Service Sector [Others] 0809
Non-life insurance 13013 Financial Service Sector [Others] 0809
Administration of financial markets 13014 Financial Service Sector [Others] 0809
Stock brokers, sub-brokers and related activities 13015 Financial Service Sector [Share Brokers, Sub-brokers, etc.] 0808
Financial advisers, mortgage advisers and brokers 13016 Financial Service Sector [Others] 0809
Foreign exchange services 13017 Service Sector [Forex Dealers] / Financial Service Sector [Others] 0706 / 0809
Other financial intermediation services n.e.c. 13018 Financial Service Sector [Others] 0809
COMPUTER AND RELATED SERVICES Software development 14001 Service Sector [Software development agencies] 0711
Other software consultancy 14002 Service Sector [Others] 0714
Data processing 14003 Service Sector [Others] 0714
Database activities and distribution of electronic content 14004 Service Sector [Others] 0714
Other IT enabled services 14005 Service Sector [Others] 0714
BPO services 14006 Service Sector [Others] 0714
Cyber café 14007 Service Sector [Others] 0714
Maintenance and repair of office, accounting and computing machinery 14008 Service Sector [Others] 0714
Computer training and educational institutes 14009 Service Sector [Computer training/educational and coaching institutes] 0705
Other computation related services n.e.c. 14010 Service Sector [Others] 0714
RESEARCH AND DEVELOPMENT Natural sciences and engineering 15001
Social sciences and humanities 15002
Other Research & Development activities n.e.c. 15003
PROFESSIONS Legal profession 16001 Professionals [Legal professionals] 0603
Accounting, book-keeping and auditing profession 16002 Professionals [Chartered Accountants, Auditors, etc.] 0601
Tax consultancy 16003 Professionals [Chartered Accountants, Auditors, etc.] / Professionals [Others] 0601 / 0607
Architectural profession 16004 Professionals [Others] 0607
Engineering and technical consultancy 16005 Professionals [Others] 0607
Advertising 16006 Service Sector [Advertisement agencies] / Professionals [Others] 0701 / 0607
Fashion designing 16007 Professionals [Fashion designers] 0602
Interior decoration 16008 Professionals [Others] 0607
Photography 16009 Professionals [Others] 0607
Auctioneers 16010 Professionals [Others] 0607
Business brokerage 16011 Professionals [Others] 0607
Market research and public opinion polling 16012 Professionals [Others] 0607
Business and management consultancy activities 16013 Professionals [Others] 0607
Labour recruitment and provision of personnel 16014 Professionals [Others] 0607
Investigation and security services 16015 Service Sector [Security agencies] / Professionals [Others] 0710 / 0607
Building-cleaning and industrial cleaning activities 16016 Professionals [Others] 0607
Packaging activities 16017 Professionals [Others] 0607
Secretarial activities 16018 Professionals [Others] 0607
Other professional services n.e.c. 16019 Professionals [Others] 0607
Primary education 17001 Service Sector [Computer training/educational and coaching institutes] 0705
Secondary/ senior secondary education 17002 Service Sector [Computer training/educational and coaching institutes] 0705
Technical and vocational secondary/ senior secondary education 17003 Service Sector [Computer training/educational and coaching institutes] 0705
Higher education 17004 Service Sector [Computer training/educational and coaching institutes] 0705
Education by correspondence 17005 Service Sector [Computer training/educational and coaching institutes] 0705
Coaching centres and tuition’s 17006 Service Sector [Computer training/educational and coaching institutes] 0705
Other education services n.e.c. 17007 Service Sector [Others] 0714
HEALTH CARE SERVICES General hospitals 18001 Professionals [Medical professionals] 0604
Specialty and super specialty hospitals 18002 Professionals [Specialty hospitals] 0606
Nursing homes 18003 Professionals [Nursing Homes] 0605
Diagnostic centers 18004 Service Sector [Others] 0714
Pathological laboratories 18005 Service Sector [Others] 0714
Independent blood banks 18006 Service Sector [Others] 0714
Medical transcription 18007 Professionals [Medical professionals] 0604
Independent ambulance services 18008 Service Sector [Others] 0714
Medical suppliers, agencies and stores 18009 Trading [Chain stores] / [Retailers] / [Wholesalers] / [Others] 0201/ 0202/ 0203/ 0204
Medical clinics 18010 Professionals [Medical professionals] 0604
Dental practice 18011 0604
Ayurveda practice 18012 0604
Unani practice 18013 0604
Homeopathy practice 18014 0604
Nurses, physiotherapists or other para-medical practitioners 18015 0604
Veterinary hospitals and practice 18016 0604
Other healthcare services 18017 Service Sector [Others] 0714
SOCIAL AND COMMUNITY WORK Social work activities with accommodation (orphanages and old age homes) 19001
Social work activities without accommodation (Creches) 19002
Industry associations, chambers of commerce 19003
Professional organisations 19004
Trade unions 19005
Religious organizations 19006
Political organisations 19007
Other membership organisations n.e.c. (rotary clubs, book clubs and philatelic clubs) 19008
Other Social or community service n.e.c 19009
CULTURE AND SPORT Motion picture production 20001 Entertainment Industry [Motion Picture Producers] 0904
Film distribution 20002 Entertainment Industry [Film distribution] 0902
Film laboratories 20003 Entertainment Industry [Film laboratories] 0903
Television channel productions 20004 Entertainment Industry [Television Channels] 0905
Television channels broadcast 20005 Entertainment Industry [Television Channels] 0905
Video production and distribution 20006 Entertainment Industry [Others ] 0906
Sound recording studios 20007 Entertainment Industry [Others ] 0906
Radio – recording and distribution 20008 Entertainment Industry [Others ] 0906
Stage production and related activities 20009 Entertainment Industry [Others ] 0906
Individual artists excluding authors 20010 Professionals [Others] 0607
Literary activities 20011 Entertainment Industry [Others ] 0906
Other cultural activities n.e.c. 20012 Entertainment Industry [Others ] 0906
Circuses and race tracks 20013 Entertainment Industry [Others ] 0906
Video Parlours 20014 Entertainment Industry [Others ] 0906
News agency activities 20015 Entertainment Industry [Others ] 0906
Library and archives activities 20016 Entertainment Industry [Others ] 0906
Museum activities 20017 Entertainment Industry [Others ] 0906
Preservation of historical sites and buildings 20018 Entertainment Industry [Others ] 0906
Botanical and zoological gardens 20019
Operation and maintenance of sports facilities 20020
Activities of sports and game schools 20021
Organisation and operation of indoor/outdoor sports and promotion and production of sporting events 20022
Other sporting activities n.e.c. 20023
Other recreational activities n.e.c. 20024 Entertainment Industry [Others ]
OTHER SERVICES Hair dressing and other beauty treatment 21001 Service Sector [Beauty Parlours] 0702
Funeral and related activities 21002 Service Sector [Others] 0714
Marriage bureaus 21003 Service Sector [Others] 0714
Pet care services 21004 Service Sector [Others] 0714
Sauna and steam baths, massage salons etc. 21005 Service Sector [Others] 0714
Astrological and spiritualists’ activities 21006 Service Sector [Others] 0714
Private households as employers of domestic staff 21007 Service Sector [Others] 0714
Other services n.e.c. 21008 Service Sector [Others] 0714
EXTRA TERRITORIAL ORGANISATIONS AND BODIES Extra territorial organisations and bodies (IMF, World Bank, European Commission etc.) 22001

For further clarity on classification of nature of business code kindly contact us on +91 9825223809

Legal Entity Identifier (LEI) Number

What is Legal Entity Identifier (LEI) ?

The LEI is a 20-digit, alpha-numeric code that identifies legal entities participating in financial transactions. Each LEI is unique and contains reference information that enables simple and quick identification of an entity. As an international standard (based on ISO 17442), all LEI information is openly published and accessible to all.

While companies often have business registration numbers in the country they are formed in, an LEI is an international standard designed for more seamless cross-border transactions. Business registration standards will vary according the country, but the LEI format is the same across the globe.

Why LEI ?

  • Improved risk management in firms;
  • Better assessment of micro and macro prudential risks;
  • Facilitation of orderly resolution;
  • Containing market abuse and curbing financial fraud;
  • Enabling higher quality and accuracy of financial data overall

Who has created  LEI ?

After the worldwide financial crisis in 2007-09, leaders from the world’s largest economies, operating through the G-20 and Financial Stability Board (FSB), agreed to develop a coordinated solution to help overcome these impediments. This effort resulted in a public-interest initiative that is now the global LEI system..

LEI in India

Who needs an LEI?

An LEI can be requested for all parties in a financial transaction. The list of entities eligible to apply for LEI code in India are:

  • Sole Proprietorships
  • Limited Liability Partnerships
  • Partnership Firms
  • Trusts
  • Private Limited Companies
  • Public Limited Companies
  • Other entities : Government Companies, One Person Company,  Insurance Companies, Housing Finance Companies, Non-Banking Finance Companies, Non profit companies, Special Purpose Vehicles – Trusts, Special Purpose Vehicles – Companies, SPV – Partnership Firms, SPV – Co-operative Societies or Multistate Co-operative Societies Mutual Fund, Mutual Funds-Sub Scheme,  Alternative Investment Fund (AIF), AIF- Sub Scheme,  Nationalised Banks, Scheduled Urban Cooperative Bank, Banking Companies – Others, Stand Alone Primary Dealers, Public Financial Institutions, Unlimited Companies, Cooperative Societies or Multistate Cooperative Societies, Government Organizations, Companies Limited by Guarantee etc

RBI Circular on LEI

RBI has already implemented the LEI code for all market participants in Over-the-Counter (OTC) derivative products in interest rate, currency and credit markets. It was also made applicable for large corporate borrowers. Continuing with this endeavour to improve transparency in financial markets, it is proposed to implement the LEI mechanism for all financial market transactions undertaken by non-individuals, in interest rate, currency or credit markets

Schedule for OTC Market :

Phase Entities Date by which the LEI code is to be Obtained
Phase I Entities regulated by RBI / SEBI / IRDA / PFRDA and Corporates With Net Worth above Rs 10000 mn August 1, 2017
Phase II Corporates With Net Worth between Rs 2000 mn and Rs 10000 mn October 1, 2017
Phase III Corporates With Net Worth between Rs 700 mn and Rs 2000 mn December 1, 2017
Phase IV Corporates With Net Worth of Rs 700 mn and below March 31, 2018

Extension in Timeline for OTC derivatives For obtaining LEI’s for OTC derivatives contracts : Extended till April 30, 2018

Schedule for Bank Borrowers.

Schedule for implementation of LEI

Total Exposure to SCBs To be completed by
₹ 1000 crore and above Mar 31, 2018
Between ₹ 500 crore and ₹ 1000 crore Jun 30, 2018
Between ₹ 100 crore and ₹ 500 crore Mar 31, 2019
Between ₹ 50 crore and ₹ 100 crore Dec 31, 2019

RBI Circular : Introduction of Legal Entity Identifier for large corporate borrowers : 02 Nov 2017

What if companies do not comply ?

  • Entities without an LEI code would not be eligible to participate in the OTC derivative markets, after the date specified in the schedule
  • Borrowers who do not obtain LEI as per the schedule are not to be granted renewal / enhancement of credit facilities.

LEI Issuance Process in India

  1. Go to https://www.ccilindia-lei.co.in/
  2. Download the documents under Tab “Legal Doc Download“.  Select from Request type “New” (Incase of new application) and “Legal Form”.  Sample formats for Undertaking, Board Resolution and POA.
  3. Self-registration on online form: click on create account.(https://www.ccilindia-lei.co.in/USR_LOGIN_REGISTER.aspx)
  4. Fill in the information asked. Use the working email ID of an authorized person.
  5. Click on submit and you will get a mail to activate your account with username as email ID and password as chosen
  6. Please ensure that the status of the online form is “Request generated/pending documentation”
  7. Login using the details and click on LEI service. From the menu choose Register
  8. Fill in the details asked. Keep CIN number and PAN of the firm handy as they are the only mandatory details asked
  9. Once filled with details click submit. It will ask whether the Client is linked to a parent company. If yes then provide details. If no, enter non-consolidated Firm and enter submit
  10. four digit reference number will be generated which is to be used in further communication
  11. An acknowledgement mail will be received on the registered mail id. It will have a set of documents to be prepared in accordance with constitution code of the client
  12. Prepare the docs and send/hand-deliver on address as mentioned below. Do quote the four digit reference number on envelope : 
    • Address to courier documents: Legal Entity Identifier India Limited (LEIL) (The Clearing Corporation of India Ltd) CCIL bhavan, 3rd floor S.K.Bole Road, Dadar (West) Mumbai 400028
  13. Verification of online form and documents: LEIL will tally the information submitted online and documents presented. LEIL may ask for additional documents if necessary during verification process
  14. In order to carry out changes as notified by CCIL through mail, go to login-Home page-View details-Edit-Submit
  15. After successful verification, the Payment tab will be activated on the login screen. For new registration charges are Rs. 7080 (Rs. 6000 + 1080 GST). Payment details is as follows:
    • For NEFT payment:
      • Account holder name: Legal Entity Identifier India Limited
      • Account number: 05420350001234
      • Bank name: HDFC Bank Ltd
      • Branch name: Kamala Mills Compound, Lower Parel
      • IFSC code: HDFC0000542
    • For DD payment:  in favor of Legal Entity identifier India Limited. In this case, reference number must be written at the reverse side of the DD. Send the DD to the following address
      • Legal Entity Identifier India Limited, CCIL Bhavan, Third Floor,S. K. Bole Road, Dadar (West), Mumbai – 400 028
  16. Once the payment details are submitted, LEI will be generated within 2-3 working days.

LEI Validity

An LEI is valid for one year from the date of issuance/last renewal date.

LEI Issuance Charges

  • New Registration: Rs. 7080 (Rs. 6000 + 1080  GST)
  • Renewal Charges: Rs. 4130 (Rs. 3500 + 630 GST)

Search LEI Online

LEI of the company can be searched on below link.

Search our Database for LEIs

How can we help ?

Our team is well placed to assist you with the initial registration as well as provide you with further detail on the LEI.


  1. The Global Legal Entity Identifier Foundation (GLEIF)
  3. RBI Circular: Introduction of Legal Entity Identifier for OTC derivatives markets : Dated : 01 Jun 2017
  4. RBI Circular : Introduction of Legal Entity Identifier for large corporate borrowers : 02 Nov 2017 
  5. RBI First Bi-monthly Monetary Policy Statement, 2018-19
  6. User Guide for Registration Purpose
  7. FAQ related to LEI
  8. FSB Report: A Global Legal Entity Identifier for Financial Markets 
  9. The Legal Entity Identifier Regulatory Oversight Committee – LEI ROC
  10. Search our Database for LEIs

How to Resolve IGST Refund Issues for Exporters

IGST refund for Exporters – Provisions

As per Rule 96 of the CGST Rules 2017, the shipping bill filed by an exporter shall be deemed to be an application for refund of integrated tax paid on the goods exported out of India. Being so, opting LUT/NA or mentioning “0” against “IGST Paid” field, will keep away the exporter to avail refund claim even if they have paid the IGST as the exporter himself has declared the same in the Shipping Bill. However, following Circular No. 8/2018-Cus dated 23.03.2018, an option has been made available by the DG Systems in ICES for sanctioning IGST refund in respect of those cases where the exporter has erroneously declared that the shipment is without payment of IGST, although they have declared and paid the IGST in GST Returns.

IGST refund Procedure for Exporters

Once the GSTR-1 and GSTR-3B are filed “CORRECTLY”, then the data dump will match with the GST Network and it will transmit the data to ICES (Indian Customs EDI Systems).

On receipt of the data from the GST Server, an integration between Shipping Bill and data received from the GST takes place.

If no mismatch / error is found while integration, Systems tagged the Shipping Bill as “Ready” for scroll generation. PFMS (Public Financial Management System) is the portal to remit the amount to the exporter’s account against the eligible shipping bills/invoices.

“Not Ready” tag is given to the Shipping Bill in two situations, namely:

A. Either the data pertaining to the Shipping Bill/Invoice, has not been sent by the GST Network to ICES (i.e. Customs Portal).

B. Or the data has been received from the GSTN, but the same has been stuck into some error code(s) while integration.

If systems notice any mismatch between Shipping Bill data and GST data, it generates Response Codes viz. SB001, SB002, SB003, SB004, SB005 and SB006.

GST Network does not transmit the data to ICES

There may be several reasons why GST Network does not transmit the data to ICES:

  1. Either GSTR-1 or GSTR-3B or both has not been filed with GSTN.
  2. Amount of IGST is more in GSTR-1 than the IGST amount shown in the GSTR-3B. So it is important that data pertaining to domestic supplies should also be in symmetry as far as matching of GSTR-3B and GSTR-1 is concerned.
  3. Amount of IGST is to be shown in 3.1(a) instead of 3.1(b) in GSTR-3B.  In GSTR – 3B column 3.1 Details of Outward Supplies and Inward Supplies liable to reverse charge; Amount of Export Turnover is to be filed in 3.1.(b) – Outward taxable supplies (zero rated) instead of it to be entered in 3.1.(a)
  4. Invoices of that particular month are not being filled up properly in Table 6A. (like Port Code, Shipping Bill Number, Shipping Bill Date etc.).

Solution: Data in GSTR -1 can be amended using Table 9A. It is worth mentioning that only single time amendment is allowed in an invoice in Table 9A. So while correcting the GSTR-1, exporters are advised to remain cautious and maintain 100% accuracy.

As far as correction in GSTR-3B is concerned where mistakenly amount of 3.1(b) has been shown against 3.1(a), Exporters can approach designated Customs officers at ICD/Ports for verification of GSTR data. The officer will fill up the information in Annexure A email the same to DG Systems.

Data has been received from the GSTN, but the same has been stuck into some error code(s) while generating IGST refund

If systems notice any mismatch between Shipping Bill data and GST data, it generates Response Codes (IGST Refund Error Codes)  viz. SB001, SB002, SB003, SB004, SB005 and SB006.

Response Code SB001 : It is generated when Shipping Bill Number or Shipping Bill Date at ICES is not matched with what is mentioned in the GSTR-1.

Solution: Same can be corrected by using Table 9A of GSTR-1.

Response Code SB002 : It is generated when Local EGM has not been filed or filed with some errors.

Solution: Same can be corrected with the help of Container/Shipping Line Agent.

Response Code SB003 : It is generated when GSTIN number is not mentioned in the Shipping Bill or mentioned partially.

Solution: Exporter may approach Customs Officers at the Ports/ICDs from where actual export took place and get the error corrected.

Response Code SB004 : Record already received from the GSTN.

For this Error no action is required from the exporter.

Response Code SB005 : It is generated when Invoice Number or Date of Shipping Bill does not match with what is mentioned in the GSTR-1

Solution: a. Same can be corrected by using Table 9A of GSTR-1.

b. Exporter may also approach Customs formation (from where export took place) alongwith Annexure ‘A’ (Concordance Table). Officers at Customs formations have been allotted physical interface to rectify the error. Earlier this facility was available for the Shipping Bills filed upto 31.12.2017, however, it has been decided by the Board to extend the facility to those shipping bills filed till 28.02.2018. However, it should be kept in mind that no further extension would be given in this regard.

Response Code SB006 : It is generated when either EGM at Gateway has not been filed or filed with some errors.

Solution: a. Get the EGM filed

b. If EGM at Gateway is filed with some errors get it corrected with the help of Shipping Line Agent.

You might get Error Code “C” which mean mismatch of Container Number. For this, officers at Gateway port has been given physical interface (PREV_OFF) to correct this error. Apart from this Error Code “M” (Gateway Port Code in Truck Summary is different from Actual Gateway Port) and Error Code “L” (Leo Date>Sail Date) may be corrected at Local Customs Locations.


  1. Tracing Shipping Bill

Statement of Financial Transaction (SFT / Form 61A) Preliminary Response

The due date for furnishing Statement of Financial Transaction (SFT) for Financial Year 2017-18 is May 31, 2018.

Communications are being received by the Income Tax Department for furnishing Form 61, Statement of Financial Transactions (Form 61A) / Statement of Reportable Accounts (Form 61B) on the Reporting Portal. Unlike last year the same was to be submitted on e-filing portal at https://incometaxindiaefiling.gov.in

Process for Login Creation for Authorized Person already having ITDREIN:

  1. Login to Reporting Portal.  User id is PAN of principal person
  2. Password is Combination of First Five Alphabets of principal officers PAN (First alphabet in Caps and other four in small letters) followed by @Date of Birth (DDMM format). Example: Aabcd@1506 for PAN AABCD1234Z with DOB: 15/06/1997
  3. Kindly change your password after first login.
  4. Add Designated Director in Authorised Person list under Profile

Statement of Financial Transaction (SFT) Preliminary Response for FY 2017-18 can be submitted only by creating new user as “Designated Director” apart from “Principal Officer”.

Addition of Designated Director: The reporting person/entity is required to submit the details of designated director before any statement is submitted on reporting portal. The designated director will receive a confirmation e-mail with login credentials for login to reporting portal (https://report.insight.gov.in) at his/her registered email address. Only, the designated director of the reporting person/entity can digitally sign and upload the Statement of Financial Transaction (SFT) and the corresponding correction statements, if any, through his own login credentials at the reporting portal.

Process for Login Creation for new Authorized Person not having ITDREIN:

  1. Login to e-filing portal at https://incometaxindiaefiling.gov.in
  2. Under “My Account” tab select “Reporting Portal (Beta Version)”. Confirm and it will direct you to Reporting portal site
  3. Select New Registration and fill details with the Firms / Companies PAN.
  4. Enter Details of Reporting Entity details: Name, Type and Category and Regulator Name.
  5. At the bottom select “Principal Officer”.
  6. Fill details on this page with Individual PAN of Principal Officer.
  7. Again at the bottom Select ” Designated Director” and fill details with Individual PAN of Designated Director.
  8. Confirm details for ITDREIN generation.
  9. Download the registration request pdf.
  10. E-mail with login details shall be emailed to registered e-mail id after due verification.

For further assistance on chargeable basis contact us on : whatsapp number +919825223809

Reserve Bank’s decision to ban LoUs will badly Impact SME

Reserve Bank’s decision to ban LoUs is a knee-jerk reaction; can backfire badly, warn traders

Article in firstpost.com printed with permission: 

An industry-wide practice that worked well until the end of business hours on Tuesday, which allowed D Dhanasekaran’s Tiruppur-based textiles firm — Abi Tex Mills — import machinery from Oman and boost production, has now gone haywire with the Reserve Bank of India’s (RBI) decision to bar banks from issuing guarantees in the form of letters of undertaking (LoUs) and letters of comfort. “My machinery took a year to be imported and has been installed in the factory for a few months now. But now with buyer’s credit cancelled, I am focused on how to make payments instead of my production,” Dhanasekaran said.

Calling the RBI move a ‘knee jerk’ reaction, businesses said they are perplexed by the central bank’s sudden decision, which came in the wake of the nearly Rs 13,600 crore scam in state-owned Punjab National Bank (PNB), which involves jewellers Nirav Modi and Mehul Choksi, who owns Gitanjali Gems. The central bank’s move is expected to hit sectors like gems, precious metals, plastics, oil and gas, electronic goods, solar panels and metals, as they constitute the major basket of items that are imported.

Traders in gold and precious metals seemed nonchalant about the RBI’s decision. They contend that their industry is not using LoUs or letters of comfort (LoC). “It won’t impact trade at all. No one was using it besides Nirav Modi and Mehul Choski,” said Colin Shah, the vice chairman of the diamond panel at industry lobby Gems and Jewellery Export Promotion Council (GJEPC). Buyer’s credit was being availed of by only a couple of large jewellers, said K Srinivasan, Convener, GJEPC. “They can mobilise funds from elsewhere. However, expansion activities will be impacted. But again, those who are undertaking these plans with their own funds will not be affected,” Srinivas added.

The RBI’s decision to discontinue LoUs and LoCs for trade credit for imports into India will impact the jewellery trade and other businesses. But traders ask as to why their business should face the brunt of actions of some jewellers, who cocked a snook at the system. The RBI’s decision will change the course of trade finance for importers. Borrowing costs will also increase post the ban on LoCs/LoUs, as importers will have to explore alternatives that could be more expensive as compared to LoCs/LoUs, said Rachit Sharma, deputy general manager, corporate law, at Taxmann.com.

Entrepreneurs running small and midsize firms rue that the RBI is asking banks to view businessmen, seeking buyer’s credit, with a doubting eye. “Every individual looking for buyer’s credit cannot be viewed as a potential scammer. Banking is the backbone of business. What does the RBI want businesses to do to avail funds when they ban buyer’s credit overnight?” asked Brijesh Lohia, the managing director of logistics firm Global Ocean Group.

“There will be a sudden cash flow crisis and businesses who availed LOU/LOC (popularly known as buyer’s credit) against a presentation of import documents will face tremendous heat due to this sudden change.  Generally, banks provide non-fund based banking limits against collateral securities that can be used to settle import transactions. The funding can be made by issue of LOU/LOC, where import documents are placed before banks. The cost of finance is very low as it comprises of LIBOR plus one to two basis points. Due to the restriction on issue of LOU/LOC, the cost of funds will shoot up substantially at minimum bank lending rate (BLR), making it unviable to carry out trade  due to thin operating margins,” Nikunj Turakhia, President, Steel Users Federation of India (SUFI), told Firstpost.

Across India, firms prefer to use buyer’s credit instead of  letters of credit (LC) as getting the latter is a time-consuming process while the former was available in a couple of days. Also, the rate of interest paid on buyer’s credit was much lower than the existing rates, thus making it more appealing. Buyer’s credit refers to short-term credit available to an importer from an overseas lender, such as banks and other financial institution, for importing goods. The overseas bank usually lends money to the importer based on the letter of comfort, which is a bank guarantee issued by the importer’s bank. A letter of credit is a payment mode used in import-export trade to cover third-party risk. If the importer defaults, the bank that he has an account with and has issued the LC to him will pay on his behalf.

Prashant Agarwal, who runs Delhi-based Raj Polymers, said he is surprised by the short-sighed move by the RBI. “I have a buyer’s credit which is due this month. As it is, the domestic factors in the petro-chemical sector are affecting us. Couldn’t the RBI have given us a time-line of three months or more, so that we could then move to other avenues to seek business opportunities?”

The sudden decision by the RBI is causing panic in the trader community. Importers will be left with no option now, but to start applying for LCs, said Sanjay Mandavia, a Ahmedabad-based trade finance consultant. “The instrument [buyer’s credit] is blamed for taking away the focus from the systemic failure in PNB. Instead, as a solution, the industry is proposing that the RBI bring down the buyer’s credit limit from $20 million dollars per import transaction to $1 million.”

Reuters: Indian importers face funding crunch with clampdown on credit guarantees

Article in Reuters printed with permission: 


The Reserve Bank of India announced late on Tuesday it was banning banks from issuing letters of undertaking, or LoUs, a form of credit guarantee often used between Indian banks and their offshore branches.

The central bank’s latest regulatory clampdown came weeks after Punjab National Bank (PNBK.NS) uncovered a more than $2 billion scam involving the alleged fraudulent issue of such LoUs without the bank’s knowledge.

Industry insiders warn the RBI’s move will raise the cost of borrowing especially for small importers, slow the pace of imports, and likely weaken the rupee over the next three to four months, and lead to higher loan delinquencies.

Importers, already hurt by a sharp hike in import duties in February on goods ranging from iPhones to Zippo lighters and Ray-Bans to Fitbits, now face an even bigger setback, they warn.

“This kills small traders who are pledging property to get LoUs,” said Kasim Sait, managing partner of Texim International, an importer of synthetic rubber, based in Chennai in southern India.

The RBI allowed banks to continue issuing letters of credit (LCs) – a more stringent, internationally recognized instrument, but one that comes with much higher fees.

While the gems and jewelry segment was the heaviest user of LoUs, every sector including metals, pharmaceuticals, and petroleum was likely to be hit, bankers said.

All these importers used to raise dollar funds against LoUs at 2.5 percent to 3 percent offshore, but this would go up to as much as 12 percent or more as companies would be forced to borrow from local banks in India, they said.

“It will definitely increase costs of funding,” said Nikunj Turakhia, President of the Steel Users Federation of India.


Others fear the RBI decision could make Indian exports less competitive and paralyze some companies that are already tapped out on their domestic borrowing limits.

And while using LoUs, commonly known as “buyer’s credit”, was straightforward, switching to letters of credit is more complex.

“The process for an importer has gone up drastically,” said Sanjay Mandavia, a trade finance consultant based in western Indian city of Ahmedabad. “In a buyer’s credit transaction, it would have been completed in 2-3 days, in this case it could take a month.”

As letters of credit require greater involvement from both the exporter and its banks, he said this also resulted in higher courier charges, document charges, processing and interest costs.

“The impact will be seen in credit markets, corporate funding cost rising, dollar funding being substituted by rupee loans and imports coming down over the next three-four months,” said Sajal Gupta, head of forex and rates at Edelweiss Securities, adding that every month $6 billion of LoUs were issued by Indian banks.

“There will be an additional $1 billion-$1.5 billion demand in the spot currency market every month as well as a sentiment impact which will keep the rupee exchange rate under pressure.”

The rupee INR=D2 weakened up to 65.06 to the dollar on Wednesday from its previous close of 64.89, bucking a regional appreciation trend.

Reporting by Suvashree Dey Choudhury and Devidutta Tripathy; Additional reporting by Aby Jose Koilparambil in Bengaluru; Editing by Alex Richardson

Indian Banks adds Additional Control to SWIFT System

As per Government of India revert in Rajya Sabha, PNB  has taken below steps to ensure that such unauthorised activities in SWIFT systems are not repeated (other banks may have changed accordingly):

  1. Establishment of an additional tier(off-site) as a third level of re-authorisation of SWIFT messages, wherein payment messages are re-authorised by a separate team of SWIFT Centre, Mumbai only after cross-checking the authenticity of messages in CBS (Core Banking System);
  2. Defined SWIFT-user-based limits for all SWIFT users, under close monitoring;
  3. Switching off of SWIFT server (LTE) by 10:00 p.m., and restricting SWIFT operations at branches to 6:30 p.m. and centralised back office for trade finance by 7:00 p.m.;
  4. Concurrent auditors at branches advised to ensure physical reconciliation of all SWIFT messages with CBS on daily basis;
  5. Placing of auditor at SWIFT Centre, Mumbai to carry out audit of SWIFT Operation at SWIFT Centre, Mumbai for anomaly, if any; and
  6. Monitoring of SWIFT user ID creation/resetting on the recommendation of senior level functionaries.


  1. Rajya Sabha : PNB scam
  2. PNB fraud effect: Punjab National Bank puts in place 3-tier SWIFT process post Rs 12,700 cr scam

RBI Stops Buyers Credit Transactions (LOU & LOC)

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


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.


  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

Bank Audit – Buyers Credit and Nostro Account

A bank branch goes through four kinds of audits and inspection

  • Internal audit (done by bank staff) on regular basis
  • Concurrent audit (done by a third party), on monthly or quarterly basis
  • Statutory audit (done by the statutory auditor) on quarterly basis
  • Inspection by RBI (annual basis).

In relation to buyers credit transaction, below are the few audit point which are covered by above audits.

Buyers Credit Audit Points

Following documents are required to be verified by the statutory auditors during review of Buyers’ Credit Transaction and its accounting treatment in the Indian Bank’s books.

  1. (Loan) Agreement, if any, entered between the Indian importer (borrower), overseas bank (lender), the Indian bank (facilitator);
  2. Underlying documents for import of capital goods or raw materials;
  3. Maximum tenure of buyer’s credit as per guidelines of RBI;
  4. SWIFT messages originated by overseas bank specifying the terms of Buyer’s Credit;
  5. The calculation of contingent liability towards LoC/ LoU is inclusive of interest accrued on the Buyer’s Credit as on financial statement date;
  6. Documentation / Agreement between overseas bank and Indian bank, and, any further confirmatory documents exchanged between overseas bank and Indian bank;
  7. Review of documents specifying right of recovery against borrower, in case if the borrower defaults in repayment of Buyer’s Credit;
  8. Balance confirmations obtained from the overseas bank;
  9. Charge created in records of Registrar of Companies (RoC) related to the security offered for Buyer’s Credit vis-à-vis disclosure of Buyer’s Credit in the financials of borrowers as secured / unsecured loan;
  10. Acknowledgement of debt, if any, obtained from the borrower;
  11. The calculation of drawing power for working capital finance availed by the borrower is net of the Buyer’s Credit;
  12. Form 15CA / Form 15CB compliance made by the borrower.

Nostro Account Audit Points.

The auditor may consider the following aspects in respect of NOSTRO reconciliation:

  • Whether a system of periodical reconciliation is in place.
  • Whether the reconciliation process followed ensures matching of each item and not for overall matching of total amount
  • Whether logs are generated for any change made in entry and whether maker checker rule is implemented for authorising changes made in entry, if any, for reconciliation
  • Whether confirmations from the foreign banks are obtained on a periodic basis. This may be either through physical confirmations, swift messages, emails, etc.
  • Whether information to the controlling office is sent on a timely basis.
  • Whether long outstandings are taken up and reconciled.
  • Random check of the method of reconciliation.
  • Debits outstanding both in the mirror account and in the Nostro accounts are to be verified and recommend for provision wherever necessary.
  • Set off the credit against debits only at the permission of the head office for long outstanding entries

Nostro Account of Overseas Branches

Obtain a list of all NOSTRO Accounts maintained/ operated by the Branch from the branch Management.

  1. The auditor should obtain a list of all NOSTRO Accounts for the purpose of verification from the Branch Management.
    • (a) Are the NOSTRO Accounts regularly operated?
  2. The auditor should verify whether the NOSTRO Accounts are being regularly operated. If not give the list of NOSTRO Accounts with balances outstanding, which are not operated regularly, the date of last transaction, etc. The auditor should specifically comment on overdrafts in NOSTRO accounts, if any.
    • (b) Are periodic balance confirmations obtained from all concerned overseas branches/ correspondents?
  3. The auditor should verify whether the balance confirmation from all concerned overseas branches/ correspondents have been obtained on a periodic basis. He should report the names of the bank and the period wise outstanding balances, which remain unconfirmed.
    • (c) Are these accounts duly reconciled periodically? Your observations on the reconciliation may be reported.
  4. While examining the transaction in foreign exchange, the auditor should also pay attention to reconciliation of NOSTRO Accounts with the respective mirror account. The amount in the NOSTRO account is stock of foreign currency in the form of bank accounts with the overseas branches and correspondents. Unreconciled NOSTRO Accounts, on an examination, may reveal unauthorised payments from the foreign currency account, unauthorised withdrawals, and unauthorised debit to mirror account. The auditor should also evaluate the internal control with regard to inward/outward messages. The inward/outward messages should be properly authenticated and discrepancies noticed should be properly dealt with in the books of accounts. In case balance confirmation certificate have been received but the same have not been reconciled, the auditor should report, in respect of each bank, the balances as per books maintained by the branch and the balance as per the relevant balances confirmation certificate, stating in either case whether the balance is debit or credit.
    • (d) Whether the branch is following Head Office guidelines for reporting requirements under Foreign Account Tax Compliance Act (FATCA) and Common Reporting Standards (CRS).
  5. Does the Branch follow the prescribed procedures in relation to maintenance of Vostro Accounts?

The auditor should verify whether prescribed procedure in relation to inter-bank confirmation in the Vostro account is followed or not. In case balance confirmation certificate have been received but the same have not been reconciled, or where confirmation has not been received the same should be reported, in respect of each Vostro Account. The RBI has also issued the Master Directions FED Master Direction No.2 /2015-16 dated January 01, 2016 (updated on April 28, 2016) on “Opening and Maintenance of Rupee/Foreign Currency Vostro Accounts of Non-resident Exchange Houses”


  1. Concurrent Audit System in Commercial Banks – Revision of RBI’s Guidelines
  2. Guidance Note on Audit of Banks (2017 Edition)
  3. Guidance Note on Audit of Banks- 2018 Edition
  4. Long Form Audit Report (LFAR) and Tax Audit in Respect of Bank Branches
  5. Long Form Audit Report (LFAR) Format
  6. Why auditors in India must keep up with technology

Buyers Credit Secondary Market

During the PNB Fraud case, one of the Banks made a statement that:

“It is an active participant in the secondary market for buyer’s credit transactions and it has sold “all the referred transactions’’.

This article tries to throw some light on what is buyers credit secondary market, how the structure works and why banks do transaction in secondary market.

What is Buyers Credit Secondary Market

Secondary market is a market between banks where assets are exchanged based on consideration. In case of buyers credit, overseas branches enters into agreement with various bank / branches and asset exchanged is buyers credit outstanding.

In layman’s term, Bank A sells buyers credit outstanding to Bank B for X amount over and above principal  plus interest of buyers credit.

Structure of Buyers Credit Secondary Market.

  1. Bank A’s overseas branch enters into a master agreement with Bank B’s overseas branch. Master agreement has details like products which can be purchased and sold, terms like: with recourse or without recourse, jurisdiction etc.. Bank A’s Overseas branch enters into such agreement with multiple banks to create secondary market.
  2. Bank A’s overseas branches generates buyers credit business (other product can be Letter of Credit, syndication loans etc) against LOU issued by Indian banks.  For example Bank A generates buyers credit of $1 Million at 6 Month Libor + 40 basis points (bps).
  3. Bank B in order to build up it books wants assets where as Bank A has additional assets which it is ready to part away with.  After adding margin it offers the asset to Bank B.
    • Cost of Buyers Credit to Bank A was : 6 Month L + 40 bps
    • Selling price : 6 Month L + 50 bps (10 bps margin added by Bank A. Margin varies from case to case)
    • Bank B accepts the offer of Bank A
  4. Referring master agreement, another agreement is entered into between Bank A and Bank B via SWIFT . MT799 is sent from Bank A to Bank B for transfer of assets and Bank B transfer funds.
  5. On maturity there can be two options:
    • Bank A on sale of assets send swift to LOU issuing bank informing about the sale of asset and assignment of maturity payment to Bank B directly. On maturity LOU issuing bank makes payment directly to Bank B with interest.
    • Incase where first option is not possible, Bank A collects the funds from LOU issuing bank and transfers the funds to Bank B.
  6. This assets can be with recourse and without recourse. Without recourse means Bank A has no liability in case LOU issuing bank does not make payment for the buyers credit on due date. With Recourse means if LOU issuing bank does not make payment, Bank B can claim funds from Bank A.

Why Secondary Market

  1. Income for Bank A overseas branch without deployment of capital.
  2. Free up capital for Bank A which can be deployed for new requirement.
  3. Bank B wants to increase Asset size in its books.


  1. In secondary market each buyers credit transactions is sold individually.
  2. Period and consideration of sale will be based on outstanding period.
    • Bank A Buyers Credit Period (Origination) :  180 days
    • Bank A offer Buyers Credit Outstanding after : 91st day
    • Bank B acquires buyers credit for remaining 90 days and pays accordingly.
  3. Such transaction is not done for small transactions. Normally amount involved in such secondary market is transactions around $1 million and above.


RBI 2016 Circular : Frauds Related to Trade Finance Transactions – Misuse of SWIFT

RBI in its 2016 Circular to banks had mentioned problem in relation to process followed for issue and reconciliation of SWIFT messages related to Trade finance products and corrective actions banks should take to prevent any fraud. Worth a read.

Cyber Security Controls — frauds related to trade finance transactions — misuse of SWIFT

It has been reported that certain transactions involving fraudulent Letters of Credit / Comfort were transmitted using the SWIFT messaging system. In this connection, attention is invited to our circular DBS.CO/CSITE/BC.4/33.01.01/2016-17 dated August 3, 2016 on Cyber Security Controls — SWIFT, wherein indicative list of best practices to strengthen the security environment for SWIFT usage had been provided. Banks had also been advised to introduce additional checks, as required, for addressing specific issues inherent to their business environment. Banks may also refer to our letter DBS.CO.CFMC.No1379/23.08.003/2016-17 dated August 10, 2016 and accompanying Caution Advice No. 4094 on Fraud — Letter of Comfort — Buyers Credit — Misuse of SWIFT messaging system.

2.  With the objective of analysing certain operational procedures in respect of trade finance transactions, a questionnaire on practices followed by banks while using SWIFT infrastructure was forwarded to select banks. Based on the responses submitted by the banks, several common deficiencies were discernible, which are listed below:

(a) Several banks followed a decentralised setup for SWIFT operations, which entailed multiple SWIFT nodes at various branches and significantly high number of users (in some cases, number of users was in excess of one thousand). The existence of such high number of user IDs increased the probability of compromise of credentials, which in turn exposed the bank to heightened risk of fraudulent activities as well as potential malware attacks.

(b) Several banks did not have robust oversight on SWIFT operations, even under decentralised setup. There was no/little audit oversight on the SWIFT framework, despite significant financial ramifications. Although administration of SWIFT was
delegated to junior level officers and the financial powers exercised by such officials was much above those delegated to similar level officials at branches or in other operational areas, commensurate oversight was lacking.

(c) In several banks, excessive dependence on vendors for all matters related to SWIFT was observed. Reliance on the vendor was observed even for simple activities such as generation of list of authorised SWIFT users.

(d) Most of the banks did not have straight through processing from CBS for trade finance transactions such as Letters of  Credit/Comfort etc. This ability to initiate LC messages without reflection of transaction in the CBS posed serious inherent risk. Despite having a decentralised set-up for SWIFT operations, there was no mechanism to verify whether every outward trade finance related SWIFT message had a corresponding underlying LC and thereby identifying fraudulent LC related SWIFT messages, if any.

3. Banks had not attempted to reconcile SWIFT messages issued for trade finance with the outstanding for payment on due date, thus missing out any anomalies arising out of fraudulent transactions.

4. In view of the aforementioned concerns, banks are advised to initiate, with the approval of their respective Boards, the following steps as applicable to their respective business model:

(a) To verify all SWIFT messages pertaining to documentary credit/trade finance (particularly LCs), say from January 1, 2015 onwards, to ensure that all such transactions are captured in the books of accounts and are supported by genuine underlying transactions. Banks may complete this exercise by February 28, 2017 and report the results to CSITE Cell, DBS, CO by March 15, 2017.

(b) To institute appropriate control framework to ensure that SWIFT messages pertaining to documentary credit/ trade finance are transmitted only after accounting for the transactions in their books / CBS / accounting software.

(c) To strengthen the control framework in respect of all outward SWIFT messages pertaining to documentary credit/trade finance by introducing reconciliation of such messages through concurrent audit.

(d) Banks with decentralised setups could examine whether centralising the approval of SWIFT messages at HO could be a practical solution for creating anadditional layer of security as such a step would immediately create functional separation between maker and approver. Banks could also consider centralising all messages, which are created directly in SWIFT systems both for generation and approval.

(e) To explore Straight Through Processing between CBS and SWIFT messaging system so as to avoid potential fraudulent messages.

5. It may be added that the suggestions made above are illustrative only and further safeguards may need to be implemented  appropriately on the use of SWIFT framework, workflow design and business profile of the bank.


  1. Cyber Security Controls — frauds related to trade finance transactions — misuse of SWIFT
  2. Information Technology & Cyber Risk in Banking Sector – The Emerging Fault lines – S. S. Mundra
  3. Concurrent Audit System in Commercial Banks – Revision of RBI’s Guidelines
  4. Guidance Note on Audit of Banks (2017 Edition)

Implication on Buyers Credit because of PNB Fraud

Latest Articles:

  1. RBI Stops Buyers Credit Transactions (LOU & LOC)
  2. Indian Banks adds Additional Control to SWIFT System
  3. Bank Audit – Buyers Credit and Nostro Account

This article gives layman summary of the PNB fraud case and its impact on buyers credit product and various stake holders like Indian Bank Overseas Branches, Local Banks in India and Importers.

Summary of Case:

Letter of Credit (LC) and Buyers Credit transactions were done without funded base or non fund based  limits and underlying security (Fixed Deposit or Assets ) in place. This was done by issuing LC and Letter of Undertaking (LOU) to overseas branches using SWIFT message without making entries in Core Banking System (CBS).  As per regulator requirement, even in case of 100% cash backed (FD) margin, bank has to create limits stating security as FD and then only any transaction is allowed.

Missed Internal Control 

  1. Swift systems not connected to Core Banking System (CBS). Branch staff was able to send LOU swift without routing transaction through CBS. RBI in its 2016 Circular to banks had mentioned problem in relation to process followed for issue and reconciliation of SWIFT messages related to Trade finance products and corrective actions banks should take to prevent any fraud.
  2. When LOU / LC is sent, bank charges LOU charges from importers account. Either this charges where not debited to importers account, which means loss in revenue for bank side or charges were debit from importers bank account then there was  trail of transactions which was missed during audit.
  3. Nostro reconciliation. All credit and debit entries goes to Nostro Mirror Account maintained in CBS. All funding for buyers credit would have reflected in Nostro and reconciled. Only in case where overseas branches funded directly to supplier (as per instruction in LOU), credit entry will not be reflected but still debit entry for repayment of principal and interest will always be there.
  4. Audit of swift messages.

Impact on Overseas Indian Bank Branches

  1. Overseas Indian Bank branches are verifying each and every buyers credit outstanding in their books with LOU issuing bank and asking for confirmations.
  2. Few banks have cancelled offer letter already issued against which funding is pending.
  3. Overseas branches are avoiding buyers credit transaction of Punjab National Bank.
  4. Few overseas branches, have temporary stopped doing buyers credit.
  5. Few overseas branches  have amended or in process of amending the LOU formats to include more details of underlying import transaction and adding additional clause to protect their interest.
  6. Increased documentation. Some banks are asking for copy of Invoice and BL copy with every transaction before funding. Some are asking invoice and BL even before issuing quote.
  7. Insisting on funding the transaction in Nostro account of LOU issuing bank only. Earlier there were banks which  had an option of funding nostro of Supplier’s Bank directly and providing a confirmation swift to LOU issuing bank.

Impact on Local Bank

  1. Updating or link system between SWIFT and CBS
  2. Centralizing SWIFT systems instead of branch based systems.
  3. Temporary local bank have or may stop issuing LOU.
  4. Few banks are insisting that whole leg of transaction is routed through them. Example: For importer enjoying limits with SBI branch, will have to approach only local SBI branch for quote. In turn, local SBI Branches will only take quote  from SBI Overseas branches.
  5. Before this incident, LOU issued for buyers credit transaction were consider under lesser risk  and thus required lesser provisioning under Basel III norms issued by RBI. There may be a change in this provision. RBI is yet to clarify on the same.

Impact on Importer

  1. As number to branches quoting have come down, fresh quote for overseas branches are hard to come by.
  2. Buyers Credit pricing have gone up and thus increasing overall costing of transaction.
  3. Operating time of getting a transaction through has gone up. Earlier which used to take 2 – 3 days to complete the whole transaction not taken 10 – 15 days.
  4. Few bank have cancelled all the existing offer letter for which funding is pending. For those importers where banks have cancelled existing offer letter, will have to get fresh offer letter from new bank; which is currently difficult to come by.
  5. Few banks are insisting that whole leg of transaction is routed through them. Example: For importer enjoying limits with SBI branch, will have to approach only SBI branch for quote. And SBI Branches will only take quote  from SBI Overseas branches.
    • Increase time of transaction processing time.
    • Branch staff is not equipped with process.
    • Branch staff overload and least priority thing for them.
    • Costing will go up as importer will not have option to negotiate on price.
  6. Importer whose import is under process and incase is not able to arrange buyers credit, will have to go to Cash Credit or Term loan depending on goods. Thus will increase overall cost.

RBI Statement on the case:

The fraud in PNB is a case of operational risk arising on account of delinquent behaviour by one or more employees of the bank and failure of internal controls. 

Regulatory Updates

  1. The Reserve Bank has set an April 30 deadline for all banks to link the Society for Worldwide Interbank Financial Telecommunications (SWIFT) with their core banking solution (CBS)
  2. RBI initiates special audit of PSBs with focus on trade finance
  3. Government: Public Sector Banks (PSBs) to consolidate 35 overseas operations without affecting international presence of PSBs in these countries; 69 ops identified for further examination. Move towards cost efficiencies and synergies in overseas market.
  4. ICAI Launches Investigation Into PNB Fraud
  5. Cabinet To Notify Audit Regulator NFRA, Approves Draft Rules 



  1. Will keep updating this article as and when further information is available.
  2. Information related to PNB case used are based on information available in public domain.


  1. RBI Statement
  2. RBI Appoints Expert Committee headed by Mr. Y M Malegam
  3. Cyber Security Controls — frauds related to trade finance transactions — misuse of SWIFT
  4. Information Technology & Cyber Risk in Banking Sector – The Emerging Fault lines – S. S. Mundra
  5. Concurrent Audit System in Commercial Banks – Revision of RBI’s Guidelines
  6. Guidance Note on Audit of Banks (2017 Edition)
  7. Guidance Note onAudit of Banks- 2018 Edition
  8. The Anatomy of the PNB fraud.
  9. PNB Fraud: Hong Kong regulator seeks status report from Indian banks 
  10. PNB fraud case: Axis Bank says ‘sold down’ LoU transactions
  11. PNB scam: Is RBI going back on its rules on letters of credits? 
  12. PNB fraud case: Officials of other banks under scanner
  13. How did everyone miss the PNB scam? An accountant explains what could have gone wrong 
  14. Nirav Modi case: Bank officials may have made close to Rs 823 crore in PNB fraud
  15. To counter PNB stand, banks likely to cite 180-day rule
  16. India Ratings Places Firestar International on RWN
  17. https://www.indiaratings.co.in/Search?searchKey=firestar
  18. Banks relied on India Ratings’ A- outlook to lend to this Nirav Modi firm
  19. The gaping holes in Nostro account monitoring and the SWIFT messaging system: thewire.in
  20. PNB scandal: Glossed over, auditors flagged loan default, forex violations
  21. Nimo fallout on imports
  22. Corporate banks in a world of pain 
  23. Why auditors in India must keep up with technology
  24. Loose ends and unanswered questions of the PNB scam

Suppliers Credit Process Flow

  1. Importer enter into contract with supplier for import.
  2. With transaction details importer approaches arranger to get suppliers credit for the transaction
  3. Arranger get an indicative pricing from overseas bank, which importer confirms.
  4. Importer approach his bank and get LC issued, restricted to overseas bank counters with other required clauses
  5. Overseas Bank confirms the LC and advise LC to Supplier’s Bank. Suppliers Bank provides the copy of the LC to Supplier.
  6. Supplier ships the goods and submits documents at his bank counter.
  7. Supplier’s Bank sends the documents to Overseas Bank.
  8. Overseas Bank post checking documents for discrepancies (As per UCP 600) sends the document to importer’s bank for acceptance:
    • If documents are as per order, the same is discounted and transferred to supplier’s bank.
    • Incase of discrepant documents, documents are sent on acceptance basis. On receipt of Importer bank acceptance, the same is discounted and transferred to supplier’s bank.
  9. Supplier receives the payment for the LC. Depending on who is bearing the interest cost:
    • If importer is bearing interest cost, supplier receives full payment.
    • If Suppliers is bearing interest cost, supplier will receive LC amount – Interest.
  10. Importer’s Bank receives the documents. Importer’s bank and Importer accept documents. Importer’s Bank provides acceptance to Overseas Bank, guaranteeing payment on due date.
  11.  Overseas Bank (Negotiating Bank) advices the Interest and maturity amount to LC issuing Bank to be paid on Due date.
  12. On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank


  • Some overseas bank insist on LC to be advised through their counter and some are ok with LC been advised directly to supplier’s bank.
  • Reason for not insisting lc advising through their own counter can be
    1. No Relationship Management Application (RMA) between suppliers bank and overseas bank.
    2. Reduce one leg to transaction to smoothen the process.

EU list of Non-Cooperative Jurisdictions : No Impact of Buyers Credit

On 5 December 2017, European Union (EU) Council approved and published a list of non-cooperative jurisdictions. Criteria used were:

  • Tax Transparency
  • Fair Taxation
  • Implementation of Anti – BEPS (Base Erosion and Profit Shifting) standards

List of non-cooperative jurisdiction (17 Countries)

Screenshot from 2017-12-06 10-22-59

American Samoa, Bahrain, Barbados, Grenada, Guam, Korea (Republic of), Macao SAR, Marshall Islands, Mongolia, Namibia, Palau, Panama, Saint Lucia, Samoa, Trinidad and Tobago, Tunisia, and United Arab Emirates

There are other 43 countries which are currently not part of Non Co operative list. These countries are at various level of implementation.  Incase if they are not able to implement Transparency, Fair Taxation or Anti-BEPS Measures, EU Council can move them to Non Cooperative Jurisdiction List in future.

Defensive Measures Implemented for Non Co operative Jurisdictions

Conclusion : No Impact of Trade Finance or Buyers Credit

As seem in above article, none of the defense measure put in place are related to Trade Finance. Thus in the current form, above non cooperative country list will not impact Trade Finance products.

Overseas Banks (Including based in EU) will be able to provide Trade finance product and Buyers Credit for good with country of origin or shipment from above countries.


  1. Taxation: Council publishes an EU list of non-cooperative jurisdictions 
  2. European Fund for Sustainable Development (EFSD), the EFSD Guarantee and the EFSD Guarantee Fund
  3. EU list of non-cooperative jurisdictions for tax purposes

Applicability of AS 11 in Buyers Credit on Capital Goods

As per Accounting Standard 11 – The effects of Changes in Foreign Exchange Rates on Import of Capital Goods / Fixed Assets are

  1. Fixed Assets are to be treated as non monetary item. It may be recorded at historical cost or net realisable value as per accounting method followed by the firm on the capitalisation date. However as on the Balance sheet date all fixed assets should be reported at closing rate (i.e. 31.03.2017)
  2. In case, the capital good procured is a Non Integral Foreign operation then unrealised foreign exchange gain / loss should be transferred to Foreign Currency Translation Reserve a/c. The same would be disclosed under Share holder’s fund (both opening and closing balance should be provided)
  3. In case, the capital good procured is an Integral Foreign operation then unrealised foreign exchange gain / loss should be transferred to Profit ans Loss a/c.
  4. In case where the importer has availed buyers credit on capital goods in foreign currency, the value of capital good / fixed asset is to be revised every time there is a forex gain/loss until the final payment is made to the funding bank.
  5. The value of the capital good  / fixed assets is also to be revised as on Balance Sheet date and reported at closing rate.

Importer Query

Can you guide us on accounting and tax treatment as on 31st March 2017 for the unrealized forex gain/loss due to exchange rate fluctuation ?

In our case, the Buyer’s Credit in Japanese Yen 10 Million is taken for acquiring capital assets (fixed assets) and was capitalized on 01 Feb 2017. The capitalization was done in INR at conversion rate  0.6105 (JPY INR) on Buyer’s Credit funding date 01 June 2016. On 31 March 2017 conversion rate was 0.58 resulting to forex gain.

Above Buyers Credit got due on 26 May 2017 and was rollover for further 1 year getting due date on 20 May 2018.

Particular Date Yen Rate
Buyers Credit Availed 1 Jun 2016 0.6105
Capitalized ** 1 Feb 2017 0.6105
Financial Year End 31 Mar 2017 0.58
Buyers Credit Expiry & Rollover 26 May 2017  
Rollover Expiry 20 May 2018  

** Capitalisation Date: The Date on which the fixed asset is capitalised in the books of accounts and put to use.

Questions ???

Do we have to capitalize our assets in INR based on forex as on 01 Feb 2017 or 01 June 2016?

Revert: Capital assets is to be capitalised on  01 Feb 2017.

Do we have to restate our fixed assets every time there is forex gain/loss until the final payment is made ?

Revert: Yes, the Fixed assets value is to be revised every time there is forex gain/loss until the final payment is made. (Also on all B/S dates)

Are we supposed to pass the accounting entry for the Forex gain/loss and give effect to P&L (although the Buyer’s Credit was for capital asset acquisition) ?

Revert: Capital goods was procured as non integral foreign operation, hence unrealised foreign exchange gain / loss should be transferred to Foreign Currency Translation Reserve a/c. No effect will come in Profit and Loss A/c.

We are finalizing Balance Sheet for 31 March 2017 and there is forex gain. What will be Income Tax treatment ?

Revert: For finalizing Balance Sheet for 31 March 2017 all Fixed Assets should be reported at closing rate (‘Closing rate’ as the exchange rate at the balance sheet date. i.e. 31 March 2017)

Note:  For companies for whom IND AS (16 & 21) is applicable, treatment will be different and will be answered in separate article.
  1. The Effects of Changes in Foreign Exchange Rates 
  2. Buyers Credit Accounting Entries

Interest Payment to Mauritius: 7.5% Withholding Tax

In earlier article “WHT (Withholding Tax) on Interest on Buyers Credit” we had discussed that if buyers credit is arranged from Mauritius based bank / branches, there was no withholding tax on interest payment as per Double Taxation Avoidance Agreements (DTAA).

India-Mauritius Tax Treaty was amended on 10 May 2016 and got effective from 01 April 2017. In this article, only amendment related to Interest Payment  (Article 11) is covered.

The Protocol provides for a shifting of taxing rights to India on interest income earned by Mauritius-resident banks from debt-claims and loans made as from 1 April 2017. Currently, such interest income is exempted from tax in India. However, the withholding tax is limited to 7.5% of such interest income.

In addition, interest income of Mauritius-resident banks on debt claims or loans existing as at 31 March 2017 shall remain tax exempt in India, irrespective of the maturity date of such instruments.

In simple terms

  1. All buyers credit funded post 31 March 2017, 7.5% WHT will be applicable if funds are arranged from Mauritian Resident Bank.
  2. Provision is for Resident Bank. Thus, Indian Bank branches in Mauritius shall not be covered.

Which Banks will be Impacted

  1. All Mauritius based bank.
  2. Indian Bank Subsidiary
  • SBI (Mauritius) Ltd: 7.5% WHT applicable
  • BOB Mauritius (Branch): Not Applicable
  • Afraisia Bank: 7.5% WHT applicable
  • State Bank of Mauritius Ltd : 7.5% WHT applicable
  • HSBC Bank(Mauritius) Limited: 7.5% WHT applicable
  • The Hongkong and Shanghai Banking Corporation Limited:  ??? (need to check)
  • Standard Chartered Bank (Mauritius) Ltd : 7.5% WHT Applicable.


Henceforth if Buyers Credit is arranged from Mauritius based Bank, Importers will have to deduct Withholding Tax (WHT) as per above provision.


  1. India – Mauritius DDTA and Amendments.
  2. Updates on India’s Tax Treaties With Mauritius and Its Impact on the India-Singapore Tax Treaty
  3. India-Mauritius Tax Treaty: An end and a New Beginning
  4. Protocol to the India-Mauritius Double Tax Treaty

Post Libor World – Impact on Buyers Credit

In earlier article we have discussed about various aspect of Libor and its Impact on buyers credit transaction.

In brief, Libor attempts to answer a fundamental question: What is the  cost of money? It does this for a range of currencies (dollars, euros,  pounds, etc.) and for a range of maturities.

Since 2011 when news of Libor scandal had appeared, there has been many changes in Libor. Taking this further on 27th July 2017 current FCA Chief Andrew Bairley announced further changes.

One of the major change was by End of 2021 FCA will stop regulating Libor. Thus there is a good possibility that  it may stop getting published after that. Above speech gives reason why this step was taken and how market should move on to alternative benchmark.

Alternative Benchmarks

Alternatives which may replace Libor are given below. Some of these them are new or proposed. Between now and 2021 regulators and banks will have to stream line these benchmarks.

  1. UK: SONIA. Latest Rates
  2. USA: Treasury Repo Rate (Yet to be published).
  3. Europe: EONIA
  4. Swiss: SARON
  5. Japan: TONAR

Impact of Buyers Credit Market

  1. New benchmark: In current scenario, buyers credit arranged from bank based in any country but quote is linked to Libor rates and thus easier to compare. In future, if so happens instead of Libor every country financial institutions starts using another benchmark, then importer will have to keep track of each benchmark to figure out which quote is cheaper.
  2. Financing Currency may also differ based on country from which financing is been taken.
  3. The market will need guidance as to what a replacement could be and this will lead to increased volatility and possibly reduced liquidity in the near term.


There are still if’s and buts on Libor existence post end of 2021. In the same speech door has been kept open.

An obvious question is what happens to LIBOR after end-2021.

The answer to the question would be up to the benchmark’s administrator – IBA – and the panel banks. They could of course continue to produce LIBOR on its current basis if they wanted to, and were able to do so. But, under this plan, the benchmark would no longer be sustained through the mechanism of the FCA persuading or obliging panel banks to stay. The survival of LIBOR on the current basis, as a dynamic benchmark based on daily submissions and updates, could not and would not be guaranteed.

One will have to keep a track on how overall market and buyers credit market adjust to this new possibility. My view is market will move to new benchmarks and it may be sooner than 2021

There are few articles listed below which would  help in throwing some more light into the subject as it is still a developing story.


  1. Future of Libor : Speech by Andrew Bailey, Chief Executive of the FCA, at Bloomberg London : Dated: 27 July 2017
  2. The Death of Libor – A Bank Loan Perspective
  3. Libor Funeral Set for 2021 as FCA Abandons Scandal – Tarred Rate
  4. Monkeying with Libor
  5. New Treasuries ‘repo’ rate to replace Libor
  6. Alternative Reference Rate Committee: FAQ
  7. Reforming Major Interest Rate Benchmarks: Progress report on implementation of July 2014 FSB recommendations
  8. The Wheathley Review of Libor : Final Report : Dated 28-09-2012
  9. HM Treasury : The Wheatley Review
  10. Speech by Martin Wheatley – Managing Director, FSA, and CEO Designate, FCA at the Wheatley Review of LIBORDated 28-09-2012
  11. A Post Libor World: Impact and Analysis

Earlier Article of Libor:

Replacing Import Documents after Buyers Credit Funding

Recently a query from importer came in after buyers credit transaction was funded for replacing the underlying import document  with another document.


  • Delay in receipt of goods as ship got stuck at overseas port.

Incase of Documents under LC

Importer / LC issuing bank has to make payment in stipulated time period if documents are in order.  In such cases where buyers credit is already taken, importer will not be able to replace documents.

Incase of DA / DP / Direct Document

As buyers credit transaction is already funded, importer has three options

  1. Let the existing buyers credit continue without change. LOU Issuing bank charges are already paid and interest on buyers credit has started but importer is yet to receive goods thus his cycle has got stuck.
  2. Prepayment of existing buyers credit and taking fresh buyers credit for new document. Though possible but it will be costly for importer as lou charges are already paid and many funding bank will ask for full tenure interest in case of prepayment.
  3. Amendment in existing buyers credit

Importer should choose either first or third options. First option where delay period is short or importer does not have any other fresh import document to replace. And third option incase of longer delay period.

For amending the existing buyers credit, below process will have to be followed by importer, LOU issuing bank and buyers credit funding bank.

Value of New Import Document

New import documents value will have below three scenario

  • Same value as existing buyers credit transaction.
  • Higher value then existing buyers credit transaction: In this case difference amount is to be adjusted from cash credit (cc) account.
  • Lower Value: Not workable as this would require LOU issuing bank to refund part of the amount back to funding bank.


  • Importer informs LOU issuing bank reason for replacing the documents.
  • LOU issuing bank informs funding bank by way of amendment with new import document details and reason for replacing the existing document.
  • Funding Bank updates their records and provides a confirmation swift that the same is acceptable to them.

Audit Respective

From audit perspective, both LOU issuing bank and funding bank has to keep record of documents against which buyers credit is taken. Thus it has to be brought on record by following the above process.

Stronger Rupee Impact on Buyers Credit

Currency fluctuation is one of the factor effecting  Buyers Credit.

Chart: www.xe.com

From 62 Level starting 2015, USD INR moved to 68 levels and since then has come back to 64 levels in 2017. This article explores impact of stronger rupee on importers who have availed buyers credit.

Impact on Existing Buyers Credit Transaction

  1. Where Buyers Credit position is already Hedged: No Impact
  2. Where Buyers Credit position is Un-hedged and falling due : Positive Impact. Instead of making payment of 68 level now payment will happen at 64 levels.
  3. Prepayment of Buyers Credit: Incase of availability of funds, importer can choose to go ahead and make prepayment of buyers credit. Thus resulting in cost saving.
  4. Hedge open Buyers Credit position with  reduced forward rates.

Impact on Fresh Buyers Credit Transaction

1. Increase in buyers credit transaction value. As given in below example, importer can avail buyers credit for an additional amount of $10000 using existing limit.

10000000 68.5 145985
10000000 64.5 155039

2. Less margin money requirement for same value of transaction.

Nostro Account and Buyers Credit

What is Nostro Account ?nostro-account

  1. In simple terms, Nostro Account is an account of Indian Bank with an another bank in foreign country.
  2. These account are opened in foreign country with foreign bank and in the currency of that country.
    • For Example: HDFC Bank having a Nostro Account with J P Morgan Chase Bank in US and in USD currency. Source: HDFC Bank
  3. Bank can more then one Nostro account for a particular currency based on its requirement.
    • For Example: HDFC Bank for USD has nostro account with JPMorgan Chase Bank, Bank of New York, Bank of America, Wells Fargo Bank N.A, and Standard Chartered Bank. Source: HDFC Bank
  4. Currency to currency, there will different account either with same bank or different Bank.
    • For Example: HDFC Bank for Eur has Nostro Account with JPMorgan Chase Bank, Barclays Bank PLC, Societe Generale, and Standard Chartered Bank. Source: HDFC Bank
  5. Nostro accounts are commonly used for currency settlement and Foreign Trades.

Nostro Account Relevance in Buyers Credit

Funding bank will transfer fund to Nostro account of LOU issuing bank on receipt of LOU.

What details are provided by LOU issuing bank to Funding Bank for Buyers Credit.

  1. Foreign Bank Name and Swift Address: For Example: J P Morgan & Chases Bank
  2. Local Bank Name and Swift Address : For Example : HDFC Bank
  3. Local Bank Account number with Foreign Bank (IBAN Number in case of EUR Nostro)
  4. Reference Number which Funding bank will have to quote at time of transferring fund to LOU issuing Bank
  5. Currency and Amount
  6. Value Date

Funding Bank Queries in relation to Nosto Account to LOU issuing Bank

  1. Nostro account details not mentioned
  2. Incomplete Nostro Account details provided
  3. Nostro account details provide of USD whereas transaction to be funded is in EUR/GBP etc.
  4. Nostro Account details of supplier provided whereas funding bank provides funding only to LOU issuing Bank

LOU Issuing Bank Queries in relation to Nosto Account during Buyers Credit Transaction.

  1. Funds not reflecting in Nostro
  2. Funds reflecting short in Nostro


  1. Nostro reconciliation: how it works in a bank

Moratorium Period Impact on Buyers Credit

As per RBI Master Direction on External Commercial Borrowing and Trade Credit banks are allowed to sanction buyers credit on import of capital goods for  3 years with Letter of Undertaking.

In order to avail above buyers credit, Importer will have to get term loan sanctioned with buyers credit as sub-limit with his bank. As seen in earlier article “Buyers Credit on Capital Goods“, moratorium period is one of the factor which importer needs to take care at time of sanctioning of term loan. This article explains

  • What is moratorium period ?
  • What types of situation may arise for importer at the time of sanctioning term loan which may impact buyers credit transaction?

What is Moratorium Period ?

moratorium-periodRepayment of a loan begins once loan is disbursed or post moratorium period. A moratorium period is a time during the loan period when the borrower is not required to make any repayment.

Borrower is provided with this cushion period so that project can be commissioned and the repayment begins only after project  starts generating cash flows.

Bank decides moratorium period based on the project and which is acceptable to importer.

  • Bank prefers shorter moratorium stating
    • Once project is commissioned, project would start generating cash flow, which can be used for repayment.
    • Also shorter period avoid diversion of funds.
  • Importer prefers longer moratorium period stating
    • It would give much need liquidity to get project going.
    • Importer can use funding structure like buyers credit or suppliers credit which would help him to bring his cost down.

scenario-newBelow are the few scenarios which may arise for importers during sanction process:

Situation 1: Bank Agrees for 3 years Moratorium Period.

Importer takes buyers credit for 3 years and post which convert it into Term Loan.

Cash outflow (Assuming Term loan is for 6 years)

  • First 3 years: Interest and LOU charges
  • Next 3 years: EMI of Rs. 200 for 3 years
  • Incase of no moratorium period : EMI of Rs. 100 for 6 years

Situation 2: Bank Agrees for 3 years Moratorium Period with condition of placing Fixed Deposit.

In this structure, importer will have to place a FD (under lien) every month for amount equal to monthly EMI. Thus importer will be able to enjoy buyers credit for whole tenure and after 3 years FD amount will be used to make repayment of buyers credit and rest amount will be converted to Term Loan.

Cash outflow

  • First 3 years: Interest and LOU charges
  • First 3 years: Month EMI amount of Rs. 100 kept as FD in Bank under lien.
  • After 3 years: EMI of Rs. 100 every month.

Banks may allow placing of FD after say 1 or 2 year depending on how it has been structured.

Situation 3: Bank Agrees for Moratorium period less than 3 years (Say  for example : 1 year) 

A. Import as a percentage of Total Project Cost : Less than 100%

After completion of 1 year of moratorium period, bank can start repayment  of term loan adjusting it towards locally procured machinery. Thus importer will still be able to take buyers credit for 3 years for imported machinery.

For example: Total Project cost is Rs. 1 Cr, out of which imported machinery is of Rs. 50 lakhs and locally procured machinery / land / building cost is of Rs. 50 lakhs. After one year of moratorium period, EMI amount is adjusted toward the locally procured capital asset and thus importer will be able to take buyers credit on imported amount.

Cash outflow

  • First 3 years: Interest and LOU charges
  • After 1 year: Monthly EMI amount of Rs. 100
  • After 3 years: EMI of Rs. 100 every month.

B. Import as a percentage of Total Project Cost : 100%

After completion of 1 year of moratorium period, equivalent of 6 months EMI is reduced and fresh buyers credit is taken for remaining amount.

For Example: Say initially buyers credit was taken for $100000 and next month EMI amount works out to $10000 equivalent, fresh buyers credit  is availed for balance $90000.

Cash outflow

  • First 3 years: Interest and LOU charges
  • After 1 years: Month EMI amount of Rs. 100
  • After 3 years: EMI of Rs. 100 every month.


Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016

Rising Libor Rates and Its Impact on Buyers Credit

Buyers Credit transactions are funded on Libor rates. Thus any change in Libor directly impact overall costing of the transaction.

Libor rates started rising in 2015 and pace of which got picked up since beginning of 2017. Below 3 Month Libor and 6 Month Libor charts shows the trend. There are two charts for two range.

  • First shows last 6 years trend
  • Second shows trend since 1990.

3 Month Libor Trends

This slideshow requires JavaScript.

Source: www.macrotrends.net

  • Lowest rate in Last 10 Years was on 28 Apr 2015: 0.22%
  • Highest rate in Last 10 Years was on 10 Sep 2007: 5.65%
  • Latest rate: 09 Feb 2018: 1.79989%

6 Month Libor Trends

This slideshow requires JavaScript.

Source: www.macrotrends.net

  • Lowest rate  in last 10 years was on 13 Oct 2015: 0.32 %
  • Highest rate in last 10 years was on 03 Jul 2006 : 5.63%
  • Latest rate on 09 Feb 2018: 2.00438%

Reason for Increase in Libor Rates

US Federal Reserve Bank started increasing rate of interest in US beginning 2016 because of which USD Libor rates started going up.

US Fed is expected to further increase the rates and below chart shows forecast of rates over the years. It is expected to reach 3% by 2018 from 0.25% at the beginning of 2016.Fed Rate Increase

Source: Financial Times 

Impact on Buyers Credit and Indian Importers

  • Between 2015 and 2018, assuming margin (Libor + Margin) remaining same, overall costing of buyers credit has gone up by 1.60% as Libor for respective tenure has gone up.
  • Forward premium during this period have come down from 8.5% to about 4.5%.

What Should an Importer Do ?

  • Continuous evaluate Libor rates for funding tenure and overall costing of Buyers Credit.
  • Lock long term buyers credit transaction (Capital Goods import) with 12 Month Libor reset instead of 6 Month Reset.
  • If workable, look at EUR or JPY currency for underlying import transaction instead of USD. Libor for both these currency are currently in Negative or in Zero territory. Before doing the same one need to consider currency risk coming along with it.
  • Comparing overall Libor based funding cost with Indian Financing Rates.


Link Between Libor Periods & Buyers Credit Tenure

Interest-rateTrigger for this topic is a question that a reader asked:

Can I take buyer credit quote of 12M+LIBOR for capital goods import. Is there any specified guidelines that we have to take 6M+LIBOR / 3M+LIBOR only.

With given information, question can be looked though below angels :-
  1. As tenure goes up Libor rates also goes up. As of today 3 Month USD Libor: 0.63060, 6 Month Libor: 0.89720 and 12 Month Libor: 1.21160. An importer would prefer using lower tenure Libor rates.
  2. Overseas Bank would prefer to link Libor tenure with respective transaction tenure. Say if buyers credit is taken for 180 days then 6 Month Libor is applicable and if buyers credit is taken for 1 year then 12 Month Libor. This allows bank to link funds with respective tenure of loans and thus reduce interest rate risk .
  3. There are few banks which give an option to link buyers credit transaction with different tenure Libor rates in case of large value deals. For example, if the importer is taking Buyers Credit for 1 year tenure but pricing is linked to 6 Month Libor reset. Importer has to two aspects in such scenario:
    • If Libor goes up after six month his costing will go up and same is true other way round.
    • Every 6 Month importer will have to make payment of interest, where as  if the transaction was taken with 12 Month Libor, he would have to make payment of interest only after 12 Months.
  4. Last Aspect is on regulation perspective:
    • Buyers Credit Upto 3 Years: Buyers credit can be taken for any tenure linked with any Libor tenure till the time it remains within maximum cap of 6 Month Libor + 350 bps.
    • Buyers Credit Upto 5 Years: Minimum tenure for buyers credit has to be 6 Month or above from the beginning. But here also there is no restriction on Libor. Thus for a 6 month tenure if a bank is ready to provide buyers credit with 3 Month Libor Reset, the same can be taken. Again here also interest rates should remain within the cap of 6 Month Libor + 350 bps.

Reference Article.

  1. Buyers Credit
  2. Libor Rates

Form 15CA and Form 15CB for Buyers Credit Repayments

imagesForm 15CA and Form 15CB Certificate may be applicable in few cases of Buyers Credit Repayment. Over the period of time there has been many changes to regulation and latest one issued on 16th December 2015 and got implemented from April 1, 2016.

At the time of Repayment of Buyers Credit Loan

A. Repayments made to Indian Bank Overseas Branches 

Form 15CA :  As per our interpretation Form 15CA is not applicable in case of Indian Bank Overseas Branches as its status is Resident

Further details of the same can be found in article ” Form 15CA & Form 15CB not applicable on Interest Payment to Indian Bank Branches

Incase the bank is still adamant on submission of Form 15CA, then the same can be submitted under Part D. But its has an issues of selecting Nature of Remittance, as there is no relevant head.

B. Repayments made to Foreign Bank or Indian Bank Subsidiaries

  1. Form 15CA: Part C
    • Nature of Remittance :  Income
    • Purpose Code: S1403: Remittance towards Interest on Loans from Non Residence (Short Term / Medium Term / Long Term Loans)
  2. Form 15CB (Issued by Chartered Accountant)


  1. CBDT Notification No. 93/2015: Dated 16-Dec-2015
  2. Revised Form 15CA
  3. Revised Form 15CB

Form 15CA and Form 15CB not Required for Import Payment

imageAs seen in earlier article “Form 15CA & Form 15CB applicable on all payment“, except the exempted list, Form 15CA and Form 15CB was required for all type of payment. This resulted into lot of paper work for importers during regular import transactions.

In revised notification issued by CDBT on 16th December 2015, effective 01’st April 2016, import payment has been made part of exempted list. Hence forth Form 15CA and Form 15CB will not required for the same during import transactions.

Addition to exempted List

Purpose Code Nature of Payment
S0101 Advance Payment against Imports
S0102 Payment towards Imports – Settlement of Invoice
S0103 Imports by Diplomatic Missions
S0104 Intermediary Trade
S0190 Imports below ₹ 5,00,000­(For use by ECD offices)


  1. CBDT Notification No. 93/2015: Dated 16-Dec-2015   
  2. Revised Form 15CA
  3. Revised Form 15CB

Subsidy under CLCSS Cannot be Claimed Where Buyers Credit is Availed

Trigger for this topic is a question that a reader asked:

“MSME manufacturing  unit doing expansion of machinery by purchasing machinery from abroad   get credit linked capital subsidy scheme (CLCSS) from Central Government.

MSME unit avails buyers credit for payment to overseas buyer and sanctioned term loan is not utilised . Can the unit be eligible for subsidy? ”

SubsidyBelow article gives basic details about Credit Linked Capital Subsidy Scheme and revert to above query.

Central Government and State Government runs various subsidy schemes for Indian Manufacturer for setting up new plant or expanding the existing plant. One of these subsidy scheme is Credit Linked Capital Subsidy Scheme (CLCSS).  This scheme was launched in October-2000 and has been revised over the years.

Summary and Benefit of the Scheme

  1. Eligible for new as well as existing units
  2. Ceiling on the loan amount under the scheme is Rs. 1 Crore.
  3. 15% Capital subsidy on loan amount or Rs. 15 lacs whichever is minimum.
  4. Scheme is for purchase of plant and machinery
  5. Calculation of admissible subsidy will be done with reference to the purchase price of plant and machinery instead of term loan disbursed to the beneficiary unit
  6. Replacement of existing equipment/technology with the same equipment/technology will not qualify for subsidy under this scheme, nor would the scheme be applicable to units upgrading with second hand machinery.

In the case of imported machinery, the following shall be included while calculating the value of plant & machinery, namely :-

  1. Import duty (excluding miscellaneous expenses as transportation from the port to the site of the factory, demurrage paid at the port);
  2. Shipping charges;
  3. Custom clearance charges; and
  4. Sales Tax.

Process to be Followed

  1. Bank sanctions term loan to SSI Unit
  2. Bank will enter into General Agreement (GA) with concerned SSI  unit on behalf of Government of India.
  3. SSI Unit submits application for assistance under the CLCSS as per required format.
  4. Bank (Nodal Agency) approves CLCSS subsidy for SSI unit as per CLCSS regulation.
  5. Bank release the subsidy amount with each installment of loan in a manner proportionate to the amount of term loan disbursed (on pro- rata basis), subject to the ceiling of the term loan/ subsidy amount as per applicable guidelines of the CLCSS.
  6. Subsidy amount once issued, is kept in Fixed Deposit for 3 years. The beneficiary unit shall remain in commercial production for at least three years after installation of eligible plant & machinery on which subsidy under CLCSS has been availed. If the unit fulfills the condition, the FD will be transferred to unit’s account after three years.

Documents Required

  1. Copy of SSI Registration Certificate
  2. Copy of Term Loan Sanction Letter
  3. Copy of Bank Term Loan Statement of account showing release dates.
  4. Copy of machinery invoice(s) with the bill of entry (imports).
  5. Audited Balance Sheet for the last 3 years prior to loan sanctions, or copy of project report submitted to bank
  6. Company letter head  – 6 Number
  7. Stamp Paper – Rs. 200/- in the name of the unit.
  8. Owner’s Details: Name of proprietor / partner / Directors of Company. Their age, father’s / spouse’s name, residential address. Date of installation of each machine and date of put to commercial use. Increase in Capacity after installation of Machinery – Monthly – Profit and Loss, Sales etc.

For further details CLCSS, please refer article in reference section.

Revert to Above Question: Whether Both Buyers Credit and CLCSS can be used by Importer

In CLCSS,  disbursal of Term Loan is one of the condition.  As seen in earlier articles Buyers Credit on Capital goods,  incase of buyers credit term loan is not immediately disbursed and depending on the requirement of importer, it can either disbursed at end of 3 years or before.

Incase of buyers credit, as term loan is not disbursed, Importer will not be able to claim subsidy under CLCSS.

Importer will have to choose between either one of them.


  1. Credit Link Capital Subsidy Scheme for Technology Upgradation
  2. List of Machines Covered in CLCSS
  3. SIDBI : Credit Linked Capital Subsidy Scheme
  4. FAQ on CLCSS
  5. Sample Agreement for Financial Assistance under Credit Linked Capital Subsidy Scheme for Technology Upgradation of the Small Scale Industries
  6. Application Form for CLCSS
  7. RBI Master Circular: Lending to Micro, Small & Medium Enterprise (MSME) Sector)

Buyers Credit & Suppliers Credit in Rupee (INR)

RupeeDollarRBI issued a circular on 10 Sep 2015, revising the policy on Trade Credit (Buyers Credit & Suppliers Credit). Summary of the same is given below:

As per revised guidelines, RBI has allowed resident importer to raise trade credit in Rupees (INR) within below framework after entering into a loan agreement with the overseas lender:

  1. Trade credit can be raised for import of all items (except gold) permissible under the extant Foreign Trade Policy.
  2. Trade credit period for import of non-capital goods can be upto one year from the date of shipment or upto the operating cycle whichever is lower
  3. Trade credit period for import of capital goods can be upto five years from the date of shipment
  4. No roll-over / extension can be permitted by bank beyond the permissible period
  5. Banks can permit trade credit upto USD 20 million equivalent per import transaction
  6. Banks are permitted to give guarantee, Letter of Undertaking or Letter of Comfort in respect of trade credit for a maximum period of three years from the date of shipment
  7. The all-in-cost of such Rupee (INR) denominated trade credit should be commensurate with prevailing market conditions
  8. All other guidelines for trade credit will be applicable for such Rupee (INR) denominated trade credits

Overseas lenders of Rupee (INR) denominated trade credits will be eligible to hedge their exposure in Rupees through permitted derivative products in the on-shore market with a bank in India. 

Modes Operandi for Importer, Importers Bank  and Indian Bank Overseas Branches (Probable)

  1. Importer imports goods in USD / EUR / Or any other freely convertible foreign currency
  2. Importer will ask Importers Bank to book conversion rate for making payment on due date of bill and provide equivalent INR details for arranging buyers credit quote.
  3. Importers arranges quote through buyers credit consultant in INR
  4. Indian Bank sends lou in INR to Indian Bank Overseas Branch
  5. Indian Bank Overseas Bank transfers INR to Importers Bank
  6. Importers Banks receives INR, converts the same in USD / Eur and makes payment to Supplier.
  7. On due date importer pay Principal + Interest in INR to Importers Banks
  8. Importers Bank makes payment in INR to Indian Bank Overseas Branch.

**As Indian Bank overseas bank borrows in USD / EUR in international market and if they lend in INR, they will have to do hedging.

Benefits to Importer

  1. As funding will be in INR, no hedging requirement.
  2. Margin requirement will be reduced / stabilize. Every time because of dollar movement, Importer had to bring in extra margin. If trade credit lending is in INR, once margin is given to bank, it will remain fixed. Thus importer will be able to better plan his fund requirement.
  3. Nullify expected interest hike by Federal Service System (FED) of USA, as lending will be in INR. Libor rates have already gone up by 20 basis points (bps) in last 6 months and are still expected to go up if FED increased rate of interest.

Few Question ???

  1. In current process of Trade Credit, there was no requirement of loan agreement, but above policy has used wording of Loan Agreement. Whether Letter of Undertaking (LOU / LOC) will be considered as loan agreement or not is a question which will get raised.  Clarification from RBI would be required on same.
  2. How many banks would be interested in taking up Trade Credit in INR ?
  3. What will be the lending rates in case of INR based funding ?


Impact of Negative Euribor on Buyers Credit

Eur INREuropean Central Bank (ECB) started Quantitative Easing (QE) program last year for European Banks which has resulted into

  • Weakening of Euro Currency
  • Negative Inter Bank Rates (EURIBOR)

Till September 2014 Euribor was in positive territory post which Euribor has turned negative for period of 1 Month, 2 Months and 3 Months (Refer below chart).

imagesIn earlier article “Buyers Credit Interest Rate (Libor +  Margin)” we have discussed on how overseas banks quote interest rate on buyers credit. One such example is given below;

For a 3 Month Transaction Quote:

3 Month Euribor + 75 bps pa

0.10 + 0.75 = 0.85% pa.

With EURIBOR in negative territory post September 2014, for same buyers credit in Euribor for 3 Months at the same pricing cost has come down.

For a 3 Month Transaction Quote:

3 Month Euribor + 75 bps.

– 0.143 + 0.75 = 0.607 bps.

Impact on Importer : Reduction in Buyers Credit Cost

Impact on Buyers Credit Banks: 

  1. Reduction in Margin.
  2. You might have noticed, many Indian bank overseas branches outside Euro Zone have stopped doing buyers credit transactions in Euro Currency.
  3. Recent Update: Buyers Credit Bank are charging Min 0.01% Euribor  or is charging 12M Euribor for all transaction as its still in positive territory. 12 Month Euribor : 0.048%

Latest EURIBOR Rate Chart

 Euribor maturity / rate 01-19-2016 01-18-2016 01-15-2016 01-14-2016
1 month -0.222 % -0.222 % -0.221 % -0.221 %
2 months -0.182 % -0.181 % -0.179 % -0.181 %
3 months -0.143 % -0.142 % -0.142 % -0.143 %
6 months -0.056 % -0.054 % -0.054 % -0.053 %
9 months -0.011 % -0.009 % -0.010 % -0.009 %
12 months 0.048 % 0.049 % 0.049 % 0.048 %


Form 15CA & Form 15CB applicable on All Payment

ConfusionPost below article CBDT has revised rules for form 15CA and Form 15CB effective from April 01, 2016. Refer article: Form 15CA and Form 15CB not Required for Import Payments

In revised notification issued by CDBT on 16th December 2015, effective 01’st April 2016, import payment has been made part of exempted list. Hence forth Form 15CA and Form 15CB will not required for the same during import transactions.

Addition to exempted List

Purpose Code Nature of Payment
S0101 Advance Payment against Imports
S0102 Payment towards Imports – Settlement of Invoice
S0103 Imports by Diplomatic Missions
S0104 Intermediary Trade
S0190 Imports below  5,00,000 ­(For use by ECD offices)

Old Article

In earlier article “Revised Form (15CA, 15CB) and Rules for Payment to Non Resident“, we had discussed that Form 15CA and Form 15CB is applicable only on those payment which were chargeable to tax.

In Finance Bill 2015,  a new sub-section 6 has been added to Section 195

In section 195 of the Income-tax Act, for sub-section (6), the following sub-section shall be substituted with effect from the 1st day of June, 2015, namely:— “(6) The person responsible for paying to a non-resident, (not being a company), or to a foreign company, any sum, whether or not chargeable under the provisions of this Act, shall furnish the information relating to payment of such sum, in such form and manner, as may be prescribed.”.
* Details in relation to above Form is provided in rule 37BB and Form Nos. 15CA & 15CB
After section 271H of the Income-tax Act, the following section shall be inserted with effect from the 1st day of June, 2015, namely:— “271-I. If a person, who is required to furnish information under sub-section (6) of section 195, fails to furnish such information, or furnishes inaccurate information, the Assessing Officer may direct that such person shall pay, by way of penalty, a sum of one lakh rupees.”.
Which means from June 1, 2015 on all payments made to non resident or foreign company Form 15CA and Form 15CB is applicable; except for payments under specified list (given below).
From Buyers Credit respective, as per our interpretation, Form 15CA and Form 15CB will still not be applicable to payments made to Indian Bank Overseas Branches as parent of the same is resident and above clarification hold true only for non-resident, (not being a company), or to a foreign company. Further details on the same can be found in article ” Form 15CA & Form 15CB not Applicable on Interest Payment to Indian Bank Overseas Branches
Specified List
Sl.No. Purpose code as per RBI Nature of payment
(1) (2) (3)
1 S0001 Indian investment abroad -in equity capital (shares)
2 S0002 Indian investment abroad -in debt securities
3 S0003 Indian investment abroad -in branches and wholly owned subsidiaries
4 S0004 Indian investment abroad -in subsidiaries and associates
5 S0005 Indian investment abroad -in real estate
6 S0011 Loans extended to Non-Residents
7 S0202 Payment- for operating expenses of Indian shipping companies operating abroad.
8 S0208 Operating expenses of Indian Airlines companies operating abroad
9 S0212 Booking of passages abroad -Airlines companies
10 S0301 Remittance towards business travel.
11 S0302 Travel under basic travel quota (BTQ)
12 S0303 Travel for pilgrimage
13 S0304 Travel for medical treatment
14 S0305 Travel for education (including fees, hostel expenses etc.)
15 S0401 Postal services
16 S0501 Construction of projects abroad by Indian companies including import of goods at project site
17 S0602 Freight insurance – relating to import and export of goods
18 S1011 Payments for maintenance of offices abroad
19 S1201 Maintenance of Indian embassies abroad
20 S1 202 Remittances by foreign embassies in India
21 S1301 Remittance by non-residents towards family maintenance and-savings
22 S1302 Remittance towards personal gifts and donations
23 S1303 Remittance towards donations to religious and charitable institutions abroad
24 S1304 Remittance towards grants and donations to other Governments and charitable institutions established by the Governments
25 S1305 Contributions or donations by the Government to international institutions
26 S1306 Remittance towards payment or refund of taxes.
27 S1501 Refunds or rebates or reduction in invoice value on account of exports
28 S1503 Payments by residents for international bidding


Steps followed by Overseas Branches during Buyers Credit

Loan ProcessIndian Bank Overseas Branches / Foreign Bank has to  carry out many processes pre and post disbursement of buyers credit. Below are the steps from end to end.

  1. Receipt of BC Request by  Buyers Credit Consultant / Indian bank  giving transaction details of import into India & offering Indicative pricing .
  2. On acceptance of quote, offer letter is issued by generating a reference number (for future tracking) or email sent by Overseas Bank is treated as offer letter.
  3. Maintaining Buyers credit Offer Letter reference number in excel, both company wise and source wise. This is done for funding planning and to avoid companies or consultants who take offer letters but do not use it.
  4. Receipt of MT 799 LOU from Indian bank. In most bank’s OFAC sanction check is done during this process on automated basis. Incase transaction is related to OFAC, transaction is moved to point number 6.
  5. Checking all details in LOU like Currency, Amount, Drawdown date, Rate of Interest, Name & Address of Importer & Exporter, Shipment details (BL number, BL date, vessel name, voyage number, port of loading, port of discharge), description & nature of underlying commodity, nostro details, terms and conditions of LOU etc.
  6. In case of any discrepancy  or OFAC query, send a swift message to Indian Bank for amendment / clarification. In case of no discrepancy move to point no. 7.
  7. Maintaining drawdown wise details of buyers credit transactions in excel for better control.
  8. On finding all information in place, all buyers credit loan request information are entered in various fields and Verification of account opening is done in Banking Software.
  9. Drawdown details of buyers credit loan amount in Banking Software & its verification.
  10. Effecting payment (MT202) of buyers credit.
  11. Relaying MT799 (with interest and maturity details) to LOU issuing banks.
  12. Taking print out of payment copy & MT 799 maturity schedule & enclosing with buyers credit loan document, filing of buyers credit  loan documents as per maturity.
  13. On maturity, reverse buyers credit loan by debiting respective currency nostro account. This process may also be automated.
  14. On due date Transaction Reconciliation is done with Nostro statement and reminders are sent for non-repaid buyers credit with overdue interest amount.
  15. Buyers credit loan account is closed using Banking Software.

Note: In general the above process is followed. However the sequence of steps followed might vary as per bank’s internal process.

Revised Mandatory Documents for Import & Export

Directorate General of Foreign Trade (DGFT) on March 12, 2015 reduced mandatory documents for Import and Export of goods to below 3 documents:

a) Mandatory documents required for export of goods from India:

  1. Bill of Lading/Airway Bill
  2. Commercial Invoice cum Packing List
  3. Shipping Bill/Bill of Export

(b) Mandatory documents required for import of goods into India

  1. Bill of Lading/Airway Bill
  2. Commercial Invoice cum Packing List*
  3. Bill of Entry

* Separate Commercial Invoice and Packing List would also be accepted

Further, RBI has removed below documents

  1. SDF Form (For Export)
  2. A 1 Forms (For Import)


  1. DGFT Circular: Specifying documents required for Export and Import
  2. Ministry of Commerce: Mandatory Documents Required For Export And Import Reduced To Three Each

Can Exporter Retain EEFC A/c Balance for Buyers Credit Repayment

Trigger for this topic is a question that a reader asked:

“Can Exporter retain dollar in EEFC A/c for buyers credit repayment ?”

Below article gives basic details about EEFC account and revert to above query.

What is EEFC Account ?

Exchange Earners’ Foreign Currency Account (EEFC) is an account maintained in foreign currency with  a bank dealing in foreign exchange.

Features of EEFC Account

  • A person resident of India may open EEFC Account
  • Non-Interest bearing current account
  • No credit facilities, either fund based or non fund based is allowed against security of balance held in EEFC account
  • Foreign Exchange Earners (like exporters) are allowed to credit 100% of their foreign exchange in EEFC Account
  • All accrual in the account during a month should be converted into Rupees on or before the last day of the next month after adjusting for utilization of the balances for approved purposes or forward commitments. 

Note: Other features and details can be found in below reference circulars

Revert on the Query:

RBI made changes in EEFC Account Retention Policy on May 2012 and July 2012. As per revised guidelines, all amount in EEFC Account to be converted next month after adjusting balances for approved purposes or forward commitments. 

Circulars does not specify approved purposes and forward commitments. Thus it is left on interpretation.

Buyers credit is taken towards import payment for tenure upto 360 days for raw material import and 3 years for capital goods import. Repayment of buyers credit:

  • Does not becomes due in the same month in which export proceeds are received.
  • Multiple export proceeds are required for equivalent amount required for Buyers credit repayment and other such reason.

As per interpretation of circular, buyers credit repayment result in forward commitment and thus it should be permissible to maintain equivalent amount in EEFC for more than one month.

A clarification was sort from RBI on the above query, on which RBI gave the below  revert. Copy of RBI letter is attached in reference section for benefit of the readers.

We confirm that the remittance in EEFC account for repayment of the buyers’ credit at a future date may be retained provided the said buyers’ credit commitment is already in place.

Thus exporters / foreign currency earner who are also importers can retain balance in EEFC account for tenure more than 1 month towards future buyers credit payments.


  1. RBI Master Direction –  Import of Goods and Services: Dated: 31-03-2016
  2. Exchange Earner’s Foreign Currency (EEFC) Account: FAQ
  3. RBI Circular: Exchange Earner’s Foreign Currency (EEFC) Account, Diamond Dollar Account (DDA) & Resident Foreign Currency (RFC) Account – Review of Guidelines : Dated: 31 July 2012
  4. RBI Clarification Letter copy (Note: Company has been blanked out to keep customer confidentiality. Given clarification applies to all such cases)

A1 Form Not Required for Import Payment

old-newImporter has to submit a list of documents for making import payments. One such documents was A1 Form except for import payment less than $ 5000. RBI with its circular dated 12 February 2015, has removed this requirement.

Impact on Importer

Hence forth, for import payments, importer giving request on his letter head with complete details will be acceptable to Bank.

In practise each banks in order to maintain standardization will come up with its own format in which details will be required to be submitted by the importer. Thus, Importer will have to keep a track for this format for each bank where he is banking with.

Extract from RBI Circular

To further liberalise and simplify the procedure, it has been decided to dispense with the requirement of submitting request in Form A-1 to the AD Category –I Banks for making payments towards imports into India. AD Category –I may however, need to obtain all the requisite details from the importers and satisfy itself about the bonafides of the transactions before effecting the remittance.


RBI Circular: Foreign Exchange Management Act, 1999 – Import of Goods into India: Dated: 12 February 2015

Clubbing Import bills for Single Buyers Credit Transaction

Club DealsImporter regularly gets multiple bills from same supplier and from multiple suppliers. Clubbing these multiple import bills to a single Buyers Credit transaction will reduce overseas bank interest cost.

For Example

  • Two Buyers Credit transactions of $50K each for 180 days will cost at 6 Month Libor + 100 bps
  • Single Buyers Credit transaction of $ 1 lacs will cost at 6 Month Libor + 65 bps


  1. Importer receives multiple Import bills (same or multiple supplier)
  2. Importer takes single quote through Buyers Credit Consultant. by providing details of all bills.
  3. LOU issuing bank sends single lou with details of multiple bills.
  4. Overseas bank does single funding to LOU issuing Bank.
  5. On receipt of funds by LOU issuing bank, debits it’s Nostro Account equivalent to each bill amount and pay to suppliers respectively.

Prior Checks

  1. Whether LOU issuing bank will allow clubbing single suppliers transaction or multiple supplier transactions or both. Regulatory there are no issue but at times banker in willing to support such transactions because of lack of knowledge or system issues.
  2. Tenure of buyers credit will be based on earliest Bill of Lading (BL) date. Say BL 1 is dated : 10/01/2015 and BL 2 is dated: 20/01/2015, than first BL date is considered for purpose of calculating buyers credit tenure from date of shipment and as per operating cycle.
  3. Arriving at single funding date. Because transaction under different payment modes will have different due dates.


Even after doing all the above correctly, Incase LOU issuing bank sends separate LOU (because of any reason), overseas bank will hold the funding of transaction, as pricing was provided for single payment. This might result in delay in payment to suppliers, delay in release of documents etc.

Should Importer accept Buyers Credit Quote including LOU charges

In earlier article we have discussed about costing of buyers credit, list of which is given below.

Quote for buyers credit are arranged by consultants or LOU issuing banks for importers.

Off late few LOU issuing banks have started a practise of giving quote to importer including LOU Charges (L+Margin+LOU Charges). Example: L + 300 bps including LOU Charges

Question is “Should Importers prefer it ?”

Answer is NO

Of above two cost, LOU charges is fixed cost whereas Overseas Bank  interest is variable cost and both are charged by separate entity. By showing both these charges together, LOU issuing bank convert LOU charges to variable cost. And whenever Overseas Bank cost are down, instead of passing the benefit to importer, they would increase LOU charges.

Example:  Transaction Details: $50000, 90 Days, LOU: XYZ Bank

Buyers Credit Quote including LOU Charges: 3 Months Libor + 350 bps

Where both  cost are charged separately:

  • LOU Charges: 2.00% ,
  • Overseas Bank Quote: 3 Months Libor + 100 bps.
  • Total Cost: 3 Months Libor+300 bps

Thus instead of 2.00%, lou issuing bank increased lou charges to 2.50% because of non existing of break up. At times, instead of LOU charges it may also be adjusted towards arrangement fee.

What should importer do ?

In order to avoid such instance,

  • Importer should negotiate LOU charges separately at the time of sanction of limits.
  • Case where quote is arranged by LOU issuing bank, importer should insist on getting copy of offer letter provided by overseas bank.

With above details, importer will be able arrive at actual transaction cost.

Note: This will hold true in most cases when such clubbing of charges are done by LOU issuing bank but there can be exceptions too.

Difference Between Letter of Comfort and Letter of Undertaking

Latest Article:

Letter of Undertaking in simple terms is bank guarantee issued by Indian bank against which overseas bank provide finance on Libor rates. Libor linked finance used by importers are Buyers Credit, Suppliers Credit, ECB etc. Libor linked finance used by exporters is PCFC (Packing Credit in foreign currency)

In earlier articles, terms Letter of Undertaking (LOU) and Letter of Comfort are used regularly. Below article gives difference between both these terms from perspective of buyers credit.

Difference between LOU and LOC

Particular Letter Of Comfort Letter Of Undertaking
Definition LoC in the banking parlance is referred to a document which is provided by a person, typically an affiliate (such as the holding / parent company) of the borrower (“LoC Provider”) assuring the financial soundness of the borrower to repay its debt(s). A contract to perform the promise, or discharge the liability, of a third person in case of his default
Use Between Branches or Partner Subsidiary Inter-Bank
Basel III Low Provisioning High Provisioning
Charges to Customer ** Low High


If SBI India’s client takes buyers credit from SBI’s overseas branches, SBI India will give Letter of Comfort, whereas if the funding  is arranged from say Bank of India overseas branches, SBI India will give LOU.

** On the point charges to customer. There are examples where if funds are arranged from overseas branches of same bank, Indian banks are charging  differential pricing.


Is Service Tax Applicable on Buyers Credit ?

The trigger for this topic is a question that a reader asked:

Difference between“I would like to know whether service tax is applicable under Section 66A of the erstwhile Act on availing Buyer’s credit? It is not only the interest which is paid but a number of other fees like the management fees, arrangement fees, hedging cost etc which is paid to banks by the importer”

Buyer’s Credit is a loan in foreign currency extended by Indian Banks Overseas branches or Subsidiaries or Foreign Banks, where in consideration is paid by way of interest.

To answer the above question one needs the understanding of Service  Tax Act applicability on various cost heads of buyers credit transaction and paid to whom.

Applicable Regulations of Service Tax Act to be kept in mind for deciding taxability (with effect from 01 July 2012)

(n) services by way of-

(i) extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;

Our Opinion

Service tax is not applicable on the Overseas Bank Interest Cost and Withholding Tax / TDS as the same is mentioned in the Negative list of Services.

Rest all other services will be liable to Service Tax as not mentioned either in Negative List or Mega Exemption Notification (25 / 2012 – ST 20.06.2012) (as amended).  Further, there is no specific exemption to the said services by issuance of any other notification.

All the other services / costs will be taxable under various heads of Services like “Banking & Financial Services“, “Management Consultant Services” or “Foreign Exchange Broker Service“, “Business Auxiliary Service” or “Business Support Service” depending upon the Nature of Service, Service Recipient and Service Provider.

Importers are advised to go through the above cited rules and sections for better clarity and refer to Service Tax Consultants as the taxability might vary on case to case basis.


Taxation of Services: An Education Guide

Buyers Credit on Import of Non Capital Goods

The trigger for this topic is a question that a reader asked:

We have a processing facility of granite. Can we use buyers credit for consumables (our banker refusing for consumables). As per them only raw material is allowed for buyer credit

To answer the above question one needs to understand both RBI Policy and Foreign Trade Policy.

As per RBI Master Circular: External Commercial Borrowing and Trade Credit 2015

AD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment).

AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, platinum, Rodium, silver etc.)

As its is clear from the above extract that RBI has allowed buyers credit on import of all non-capital goods permissible under Foreign Trade Policy upto 1 year. Non Capital goods are like Raw Material, Consumables, Accessories, Spares, Components, Parts etc.

Foreign Trade Policy (FTP)

Above circular also states ” imports permissible under the current Foreign Trade Policy of the DGFT”. Refer below extracts from FTP:

Chapter 2 of FTP

2.1 Exports and Imports shall be free, except where regulated by FTP or any other law in force. The item wise export and import policy shall be, as specified in ITC (HS) notified by DGFT, as amended from time to time

2.16 Capital goods, raw materials, intermediates, components, consumables, spares, parts, accessories, instruments and other goods, which are importable without any restriction, may be imported by any person.

Definition: “Consumables” means any item, which participates in or is required for a manufacturing process, but does not necessarily form part of end-product. Items, which are substantially or totally consumed during a manufacturing process, will be deemed to be consumables.

It is clear from above extracts that Consumables are permissible for import as per FTP.


RBI has classified imports into Capital goods and Non Capital goods for Trade Credit perspective. Buyers Credit can be taken against import of Consumable as it falls under Non Capital goods import and import of same is allowed as per FTP. This conclusion also stands true for all non capital goods import.


  1. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
  2. Definition of Consumable in Foreign Trade Policy
  3. FTP Chapter 2: General Provisions Regarding Imports and Exports

Credit Rating and Buyers Credit

What is Credit Rating ?

A credit rating represents the rating agency’s opinion on the likelihood of a rated debt obligation being repaid in full and on time. Usually alphanumeric symbols are used to convey a credit rating. Credit rating can be Internal Rating (Banks rate customers internally) or External Rating by external agencies like CRISIL, ICRA and others.

Relevance of Credit Rating in case of Buyers Credit Funding Bank

Buyers Credit Funding Banks ask for Internal and / or External Credit rating  in the Letter of Undertaking format (LOU).  Purpose for the same are

  1. As per country regulations in which Indian bank branches operating, they have agreed and informed regulator that they would funds only those transaction which are above an X rating. Recently came accross a transaction where LOU was issued by local branch but overseas bank branch refused funding of the transaction post checking the rating of the client in LOU. Thus importer will now also have to keep this criteria in mind. For academic perspective, credit rating should not matter to buyers credit funding bank till the time they are receiving LOU from Indian bank as per their format. Reason being, buyers credit are funded on bank lines (taking risk on banks) and not on customer lines.
  2.  Second purpose of taking rating details in LOU is to help classify the portfolio. In the region in which these branches are operating, there are regulatory compliances which these branches have to follow, based on which their loan policy and trade policy is formulated.
  3. Rating are also required to determine provisioning on buyers credit transaction as per Basel II / Basel III norms.

Relevance of Credit Rating in case of Importers Bank & Importer 

From buyers credit perspective, some  importers bank provide preferential pricing to importer for LOU charges based on their rating

For Example: Bank of Baroda (BOB)Letter of Comfort Charges for availing Buyer’s Credit, varies based on rating. Please refer below chart:

2.4 (d) Letter of Comfort issued for availing Buyer’s Credit
Rating Upto One year
Raw Material &Capital Goods
Above One Year
( Capital Goods)
AAA 1.00 p.a 1.50 p.a
AA 1.00 p.a 1.50 p.a
A 1.50 p.a 2.00 p.a
BBB 2.25 p.a 2.50 p.a
Below BBB & Unrated 2.50 p.a 3.00 p.a

* Source: www.bankofbaroda.com

Relevance of Operating Cycle in Buyers Credit Transaction

Incase of raw material imports, RBI had delegated approving powers to Authorised Dealers (Banks) for Trade Credit (Buyers Credit / Suppliers Credit) for a tenure upto 1 year from the date of shipment. Bank’s based on internal policies decided customerwise tenure. Because of variation in policies between banks,  few importers used buyers credit for arbitrage.

RBI Master Direction – External Commercial Borrowing and Trade Credit

On 11th July 2013, RBI revised the policy by linking Trade Credit to Operating Cycle.

Maturity prescriptions for trade credit on the non-capital goods, the maturity period is up to one year from the date of shipment or the operating cycle whichever is less.

Operating CycleWhat is Operating Cycle ?

In simple terms operating cycle is period for which funds are blocked in business. Every business transaction passes through a Operating Cycle– from initial cash – to Credit Purchase of raw material – to Manufacturing Process – to Credit Sales to Customer – to Realisation of Book Debts – to payment to creditors- and again in Cash

Business owner fill this gap by using their own funds and banks funds by way of Fund Based and Non Fund based limits.

How to Calculate Operating Cycle (Net Operating Cycle)

Net Operating Cycle = Days Stock Held (1) + Days Sales Outstanding (2) – Days Payable Outstanding (3)

(1)  Days Stock Held = (Average Stock * 365) / Cost of Goods Sold

      A. Average Stock =  (Opening Stock + Closing Stock) / 2

     B. Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

(2) Days Sales Outstanding = (Debtors * 365) / Sales

(3) Days Payables Outstanding = (Creditors * 365) / Cost of Goods Sold

How will Bank Implement

At the time of sanctioning of fresh limits or renewal of existing limits, banks will have to define Operating Cycle of every importer and based on sanction tenure, importer will be able to take buyers credit.

Impact of the Policy

  1. Buyers Credit beyond Operating Cycle has stopped.
  2. Rollover of Buyers Credit beyond Operating Cycle has stopped. This is having negative impact of genuine imports whose operating cycle has gone up because of economic downturn.
  3. Few importers who were using Buyers Credit for Arbitrage has stopped.


Difference Between Sec 195 and Sec 194LC

Difference between sec 195 and sec 194lcIn earlier article 5% WHT as per Sec 194LC not applicable to Buyers Credit we had discussed on Sec 194LC. This article gives difference Between Sec 195 & Sec 194LC


Particular Sec 195 Sec 194LC
From Since Inception of Act July 2012
Upto June 2015
Applicable on Any payment business Money borrowed under Loan Agreement; or By way of Issue of Long term Infrastructure bonds
Rate of TDS with availability of PAN Card As DTAA agreement. Incase of non DTAA 20%. Further details refer this link 5% and 3% Education Cess there on ( 2% Surcharge wherever applicable)
Who is responsible for tax deduction Resident or Non resident An Indian Company
Applicable If income is chargeable to tax in India in the hands of recipient If Interest is paid at approved rate

Revised Guidelines for Merchanting / Intermediary Trade

Further to article published below, RBI received suggestion from merchanting traders and trade bodies, based on which guidelines on merchanting trade transactions have been further reviewed on 28th March 2014 and with effect from 17th January 2014. Summary of the changes are given below.

  1. For atradeto be classified as merchanting trade followingconditionsshould be satisfied.
    1. Goods acquired should not enter the Domestic Tariff Area and
    2. The state of the goods should not undergo any transformation
  2. Goods involved in the merchanting trade transactions would be the ones that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively ;
  3. AD bank should be satisfied with the bonafides of the transactions. Further, KYC and AML guidelines should be observed by the AD bank while handling such transactions ;
  4. Both the legs of a merchanting trade transaction are routed through the same AD bank. The bank should verify the documents like invoice, packing list, transport documents and insurance documents (if originals are not available, Non-negotiable copies duly authenticated by the bank handling documents may be taken) and satisfy itself about the genuineness of the trade ;
  5. The entire merchanting trade transactions should be completed within an overall period of nine months and there should not be any outlay of foreign exchange beyond four months ;
  6. The commencement of merchanting trade would be the date of shipment / export leg receipt or import leg payment, whichever is first. The completion date would be the date of shipment / export leg receipt or import leg payment, whichever is the last ;
  7. Short-term credit either by way of suppliers’ credit or buyers’ credit will be available for merchanting trade transactions, to the extent not backed by advance remittance for the export lag, including the discounting of export leg LC by an AD bank, as in the case of import transactions ;
  8. In case advance against the export leg is received by the merchanting trader, AD bank should ensure that the same is earmarked for making payment for the respective import leg. However, AD bank may allow short-term deployment of such funds for the intervening period in an interest bearing account ;
  9. Merchanting traders may be allowed to make advance payment for the import leg on demand made by the overseas seller. In case where inward remittance from the overseas buyer is not received before the outward remittance to the overseas supplier, AD bank may handle such transactions by providing facility based on commercial judgement. It may, however, be ensured that any such advance payment for the import leg beyond USD 200,000/- per transaction, the same should be paid against bank guarantee / LC from an international bank of repute except in cases and to the extent where payment for export leg has been received in advance ;
  10. Letter of credit to the supplier is permitted against confirmed export order keeping in view the outlay and completion of the transaction within nine months ;
  11. Payment for import leg may also be allowed to be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the merchant trader ;
  12. AD bank should ensure one-to-one matching in case of each merchanting trade transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI, on half yearly basis in the format as annexed, within 15 days from the close of each half year, i.e. June and December ;
  13. The names of defaulting merchanting traders, where outstandings reach 5% of their annual export earnings, would be caution-listed.
  14. The merchanting traders have to be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. AD banks should satisfy themselves about the capabilities of the merchanting trader to perform the obligations under the order. The overall merchanting trade should result in reasonable profits to the merchanting trader.
  15. It is clarified that the contents of this circular would come into effect in respect of merchanting trade transactions initiated after January 17, 2014.


As per RBI Circular Dated 17th January 2013

In earlier article “Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade” we had discussed the guidelines for Merchanting Trade. RBI had set a committee under the Chairmanship of G Padmanabhan to examine the gaps / inadequacies / lacunae in the financial system / procedure. Based on the recommendations of the committee, RBI has revised the guidelines for Merchanting Trade and Intermediary Trade.

Take aways from revised guidelines

  1. Merchant tradeTrade Credit product like Buyers Credit, Suppliers Credit and LC discounting for export leg is now allowed.
  2. Overall tenure increased from 6 months to 9 months. Foreign exchange outlay from 3 months to 4 months
  3. Both Legs of the transaction to be routed through same AD bank.
  4. Commencement Date (whichever is first of the below) and Completion Date (whichever is last of the below) for calculating tenure of 9 months.
    1. Date of Shipment
    2. Export Leg Receipt
    3. Import Leg Payment
  5. One to One Matching of transaction to be done by bank and incase of default to be reported to RBI. Incase of repeated defaults (3 or more cases in a year), Bank should restrain trader from entering into any further transaction.
  6. The inward remittance from the overseas buyer should preferably be received first and the outward remittance to the overseas supplier will be made subsequently. Alternatively, an irrevocable Letter of Credit (LC) should be opened by the buyer in favour of the merchant. On the strength of such LC the merchant in turn may open a LC in favour of the overseas supplier. The terms of payment under both the LCs should be such that payment for import LC is required to be made after receipt of payment under export LC. The export LC should be issued in the name of original merchanting trader in India and import LC should be favouring the original supplier. In case export leg payment is received in advance, AD banks need not insist on opening of export LC.
  7. In case advance against the export leg is received by the merchanting trader, the advance payment may be held in a separate deposit / current account in foreign currency or Indian Rupees. The amount required for import leg should be earmarked till the payment of import and should not be made available to the merchanting trader for use, other than for import payment or short-term deployment of fund limited to the import payable, with the same AD for the intervening period.
  8. Advance for import leg should be paid against bank guarantee from an international bank of repute.
  9. Trade instrument like Back to Back LC and Transferable LC will be used more actively by Merchant Traders.

Gray Area / Open to Interpretation

  1. Transaction should result in reasonable profit.
  2. Defining words like Genuine Trader, Financial Intermediaries, Reasonable Profit & Original Suppliers.
  3. Capability of Merchanting Trader to perform the obligation under the order.


  1. RBI Circular: Merchanting Trade Transactions – Revised GuidelinesDated : 28-03-2014
  2. RBI Circular: Merchanting Trade Transactions: Dated : 17-01-2014
  3. RBI Master Direction –  Import of Goods and Services: Dated: 31-03-2016
  4. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
  5. Report of the Technical Committee on Services / Facilities to Exporters: Refer Chapter 4:  Dated: 29-04-2013
  6. Old Article: Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade
  7. RBI Circular : Merchanting Trade to Nepal and Bhutan: Dated: 30-042015

Permitted Methods of Import Payment

Payment_methodsThe trigger for this topic is a question that a reader asked:

Since Foreign Trade Policy allows imports in INR (Indian Rupees) also, what are the regulations related to buyer’s credit in respect of an import invoice which is in INR ?

Above question is more of an academic question as INR denominated import transaction are very limited but it will help in throwing light on concept of permitted methods of import payment.


RBI Circular on Import of Goods and Services talks about permitted methods of payment of import, which is further defined in Notification No.FEMA14/2000-RB dated 3rd May 2000. They are:

Group Permitted methods
(i) All countries other than those listed under (ii) below (a) Payment in rupees to the account of a resident of any country in this Group
(b) Payment in any permitted currency*
(ii) Member countries in the Asian Clearing Union (expect Nepal) (a) Payment for all eligible current transactions by debit to the ACU (Asian Clearing Union) dollar account in India of a bank of the participating country in which is resident or by credit to the ACU dollar account of the authorised dealer maintained with the correspondent bank in the other participating country.
(b) Payment in any permitted currency in other cases

* The expression ‘permitted currency’ is used in the Manual to indicate a foreign currency which is freely convertible i.e. a currency which is permitted by the rules and regulations of the country concerned to be converted into major reserve currencies like U.S. Dollar, Pound Sterling and for which a fairly active market exists for dealings against the major currencies.

Answer to Question

RBI has allowed making import payment in INR but Buyers Credit as a concept is to raise funds from overseas market in the currency of payment resulting in interest arbitrage and hence cost saving.


  • Transaction Value of $ 100000: Approx 10% (including overseas bank interest cost, lou charges, forward booking and arrangement fee)
  • Transaction Value of INR 6200000 (Approx INR equivalent) : INR Cash Credit Interest: Approx 13.50%
  • Resulting cost saving of 3.5% (approx)

If the import is in INR, funding arranged in INR will be at same cost and thus no cost saving. One more question which arise is, whether buyers credit in cross currency  is allowed for such transaction. According to me it is a gray area.


  1. Notification No.FEMA14/2000-RB dated 3rd May 2000
  2. Exchange Control Manual: Permitted Currencies and Method of payment
  3. Buyers Credit Cost Calculation Sheet

Buyers Credit Tenure Extended to 5 years for Import of Capital Goods

Trade Credit for Import into India

5 YearsIn earlier article “Trade Credit Extended Upto 5 Years for Infrastructure Firms” we had seen that RBI had allowed buyers credit to infrastructure firms till 5 years subject to conditions.

RBI has reviewed the policy as below

  • Tenure of Trade Credit (buyers credit / suppliers credit) for import of capital goods has been extended from 3 years to 5 years for companies in  all sectors.
  • Minimum tenure of buyers credit has been relaxed from 15 months to 6 Months. Which means trade credit can be taken and rollover in multiple of 6 months or more
  • But banks cannot issue Letter of Credit / Letter of Undertaking /Comfort beyond 3 years (from the date of shipment) 
  • Amended Trade Credit Policy will come to force with immediate effect
  • Policy cover both existing buyers credit as well as fresh buyers credit against capital goods. (As per RBI Master Circular : External Commercial Borrowing (ECB) and Trade Credit.


  1. Further clarity is required from RBI on “Banks cannot issue lou for period beyond 3 years“. As it seems that only large corporates will be able to take benefit of this extended tenure as overseas bank will not be keen on providing funds to SME without LOU / LOC issued by Indian Banks.
  2. Overseas Branches of Indian Bank and Foreign Banks will have to come out with a structure to take benefit of the extended tenure without LC /Letter of Undertaking / Letter of Comfort.


  1. RBI Circular :  Trade Credit for Import India: Dated: 24 September 2013
  2. Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
  3. Revised Guidelines: Trade Credit for Import into IndiaDated: 11-09-2012
  4. Buyers Credit Cost Calculation Sheet

Buyers Credit on Import of Second Hand Machinery

The trigger for this topic is a question that a reader asked:

Question : What are the RBI guidelines for availing Letter of credit facility and/or buyers credit facility for the import of second hand capital goods? Is it possible for a company to avail these facilities for second hand machinery?

RBI Master Direction: “Import of Goods and Services” & “External Commercial Borrowing and Trade Credit” are silent on the above subject.

Reference is found in Exchange Control Manual in relation to second hand machinery, extract of the same is given below:

In terms of Export-Import Policy presently in force, second hand capital goods are allowed to be imported freely subject to certain conditions. Such imports sometimes involve payment against delivery of second hand plant and machinery abroad on ‘as is where is basis’. In the absence of shipping documents, it will not be possible for authorised dealers to open letters of credit or make remittances against such imports. Applications for opening of Letters of Credit or for making remittances in regard to imports with such payment conditions should, therefore, be referred to Reserve Bank for prior approval with full details

Based on the understanding of above, buyers credit can be taken on the second hand goods without RBI Approval subject

  1. Machine delivery is not taken abroad on ‘as is where is basis’
  2. Import of the given category of second hand machinery is allowed in current Foreign Trade Policy.


Meaning, Process, Procedure, RBI Regulation & More

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