Over the years Indian importers have used Suppliers Credit and Buyers Credit as two different modes of Import financing. RBI had defined them as Trade Credit under Master Direction for ECB and Trade Credit.
Suppliers Credit structure was understood as financing of import usance Letter of Credit (LC) by Overseas branches / Foreign banks where as Buyers Credit was considered as financing against LOU/LOC till it was stopped by RBI.
Under new RBI Circular “Trade Credit : New Regulatory Guidelines” a confusion arose on what structure can be called Suppliers Credit ?
In this article we will compare the trade credit circular, what is the confusion, what has changed in relation to suppliers credit, Impact on Local Bank and Overseas Branches and Impact on Importers.
||Master Direction: ECB and Trade Credit updated on 22 Nov 2018
||Trade Credit – New Regulatory Framework
|Definition of Trade Credit
||Trade Credits refer to the credits extended by the overseas supplier, bank and financial institution for maturity up to five years for imports into India. Depending on the source of finance, such trade credits include Suppliers’ Credit or Buyers’ Credit.
||Trade Credits (TC) refer to the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for maturity, as prescribed in this framework, for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India.
|Definition of Suppliers Credit
||Suppliers’ credit relates to the credit for imports into India extended by the overseas supplier
||Depending on the source of finance, such Trade Credit include suppliers’ credit and buyers’ credit from recognised lenders.
|Definition of Buyers Credit
||Buyers’ credit refers to loans for payment of imports into India arranged by the importer from overseas bank or financial institution
||Depending on the source of finance, such Trade Credits include suppliers’ credit and buyers’ credit from recognised lenders.
|Recognised Lender for Suppliers Credit
||Overseas supplier, bank and financial institution
||For suppliers’ credit: Supplier of goods located outside India.
|Recognised Lender for Buyers Credit
||Overseas supplier, bank and financial institution
||Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in International Financial Services Centres located in India.
What has changed ?
- Source of finance defines whether it is suppliers credit or buyers credit.
- If an importer arranges finance against import usance LC from overseas branch, it will be classified as buyers credit.
- Supplier gives credit of 180 days on DA/usance LC etc., it will be considered as suppliers credit.
- New circular now also defines recognised lender
- Suppliers Credit: Supplier of goods is the recognized lender.
- Buyers Credit: Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in International Financial Services Centres located in India.
What is the confusion ?
Importers, Bank, and Overseas Branches over period of time started using terms Suppliers Credit for financing of import usance LC.
With Trade Credit : New Regulatory Framework, RBI defined recognised lender for suppliers credit as supplier. This created a confusion
- Whether RBI has stopped suppliers credit as market new it (import usance LC finance).
- What is suppliers credit ?
- What will import usance LC financing product be called now?
- Whether the current structures of financing import usance LC will still remain ?
- No. RBI has not stopped import usance LC finance. Now it would be know by another name.
- Suppliers Credit means financing provided by supplier. If supplier gives 180 days credit for import under DA/usance LC, it will be consider as suppliers credit. Importer will have no roles as supplier is giving finance directly or arranging for finance and also bearing the cost of it.
- Some of the alternative terminology for import usance LC can be
- Usance Payable at Sight (UPAS)
- LC Discounting LC Backed
- LC Backed Reimbursement Finance etc.
- Below two structure will not be affected by above changes which are currently active:
Impact on Local Bank and Indian Bank’s Overseas Branches
- Overseas Branches will have to change the name of the product under which they are currently sourcing the business
- Local Banks will have to change classification for reporting to RBI.
Impact on Importer
From the perspective of importer there will be no change in process which they used to follow for arranging financing against import usance LC. Only thing they will have to get acquainted with new terminology which banks will use to give financing against it.
In William Shakespeare’s words : “What’s in a name? That which we call a rose by any other word would smell as sweet”.
Terminology used for Suppliers Credit will change but underlying structure will remain the same.
- Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations: Updated on 26 Mar 2019
- RBI Circular : Trade Credit Policy – Revised framework: Dated 13 Mar 2019
- RBI Circular: New External Commercial Borrowings (ECB) framework : Dated 16 Jan 2019
- Old RBI Master Direction on ECB and Trade Credit: Updated till 22 Nov 2018
RBI has issued a new regulatory framework for Trade Credit (TC) on March 13, 2019 effective immediately. Details of the circular is given below. In next articles we will cover the major changes in the RBI circular.
Major highlights of the RBI circular are
- What be termed as Suppliers Credit ? As per the new circular Only those finance provided by Supplier of goods located outside India can be termed as suppliers credit. Some example finance provided by supplier can be DA Document or Usance LC for 180 days etc. Import Usance LC finance arrange by importer will hence forth be called UPAS, LC backed Reimbursement Finance, or LC Discounting or any other term given by local / overseas branches.
- Banks can issue Bank Guarantee for availing trade credit. Few private sector banks earlier where insisting on giving SBLC to only their overseas branches for trade credit. But with this circular understanding should be that banks can now issue guarantee / SBLC to any overseas banks / branches, FI, Foreign Equity holder and IFSC Branches.
- The directions on issuance of guarantee mentioned under this provision shall come into force from the date of publication, in the Official Gazette, of the relative Regulations issued under FEMA. As of 18-Dec-2019, above Gazette is yet to be issued.
- Changes in all-in-cost ceiling and definition.
- Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for Foreign Currency Trade Credit.
- Option for 5 year trade credit has been removed.
- Non-banking financial companies (operating from IFSCs) will now be able provide trade credit.
- Another header created in amount for which Trade Credit can be availed by oil/gas refining & marketing, airline and shipping companies. Per Transaction Maximum Amount permissible will be USD 150 Million.
- Policy to avail trade credit for Shipyard and Shipbuilder.
- New Definition of all in costing pricing (It includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR). Thus would it mean 6 Month + 250 bps would also included bank guarantee fee charged by local bank ?
- Hedging Provision.
- Change of Currency of borrowing.
- Policy and process of Trade Credit related to SEZ, FTWZ and DTA.
- Security which can been offered for Trade Credit, creation of charge and related process.
- Authorised Dealer (AD) Banks to decide on formats or manner in which Trade Credit arrangements / loan agreements are to be documented.
- Role of Local Banks in Trade Credit.
- Procedure in case of Invocation of Guarantee.
- Definition of Foreign Equity Holder as per New External Commercial Borrowings framework
- What importers will have to do henceforth to avail buyers credit / trade credit.
- What will be changes in accounting treatment for buyers credit against Bank Guarantee in importers books of account.
Continue reading RBI Circular : Trade Credit – New Regulatory Framework
In the earlier articles we have discussed about documents required under letter of credit (LC) and how to prepare and submit compliant document.
In this article we will discuss about, what is Negotiable Bill of Lading, Why endorsement is required, who should endorse and what are the endorsements required.
Continue reading How to Endorse a Negotiable Bill of Lading ?
In the earlier articles, we have discussed about LC format MT700, and how to prepare and check documents under LC. This article provides a checklist for exporter after Letter of Credit (LC) is opened before shipment of goods. This will help exporter better understand the details in LC and whether exporter will be able to comply with its terms. If not, exporter should ask to get amendment in relevant clause.
Where ever possible exporter should ask for a draft copy of LC to check terms, so as to avoid amendments after LC is opened.
Exporter should look for below terms/clauses:
- Issuing Bank
- Check name of issuing bank (swift code) and if its a trustworthy bank. How is the experience of others exporters in dealing with this issuing bank.
- In case of financing requirement, check if exporter’s bank has lines of the issuing bank.
- Check all dates in LC
- Date of Issue (31C), Date of Expiry (31D) and Latest date of Shipment (44C):
- Check if deadlines mentioned is acceptable. It is advisable to have margin in date of shipment and expiry to avoid requirement of amendment in LC.
- Verify the expiry location of the letter of credit. “Field 31D: Date and Place of Expiry” and “Field 41A: Available With … By …”. Both should be preferable in country of exporter.
- Presentation Period (48):
- As per RBI Master Direction “Export of Goods and Services”, exporters are expected to present export documents within 21 days of shipment. Thus LC should preferably mention 21 days.
- Incase of more than 21 days, banks may handle them provided they are satisfied with the reasons for the delay. It is advisable to clarify the same with exporter’s bank.
- Name and Address of Beneficiary (59) and Applicant (50) are correctly stated.
- Description of Goods & Service (45A):
- Complete description of goods
- Units and Price
- Mention of performa invoice or underlying contract should be avoided.
- Incoterms (45A):
- Incoterms and shipment mode must match each other
- If CIP or CIF incoterm is used, insurance document requirement to be mentioned in 46A.
- Insurance (46A)
- Clause to be covered.
- Where is the claim payable.
- Insurance to cover from which point to which point.
- Currency and Amount (32B) in Letter of credit should match with sales contract
- Negotiation Clause (41A): Is LC restricted or available with any bank? Based on arrangement of exporter with existing bank or negotiating bank, it will help arrange pre shipment &/or post shipment finance.
- Payment Terms:
- Is it available by sight payment, deferred payment, acceptance or negotiation. (41A)
- Is the tenor stated correctly, number of days from sight or date of invoice, transport document etc. (42C)
- Documents Required (46A):
- List of documents required
- Number of original and copy required.
- Type of transport documents required.
- Type of Insurance documents required.
- Clause requiring applicant documents : LC should avoid clauses requiring documents that are to be issued, signed or countersigned by the applicant.
- Beneficiary Certificate: Such clause can be avoided.
- Non Documentary Conditions (47A).
- All documents to require LC number can be avoided.
- Check if any clause of UCP600 has been excluded or not. If excluded, understand its impact on exporter.
- Port of Loading (44E) and Port of Discharge (44F):
- Advisable to mention Port of loading as Any Port in India (exporter country)
- Port of discharge is consistent with sales contract.
- Letter of Credit Charges (71B):
- Understand and determine which fees must be paid by the exporter according to the letter of credit conditions.
- “Courier Fee / Postage Fee”, “Advising Fee”, “Discrepancy Fee”, “Handling Fee / Negotiation Fee”, “Amendment Commission”, “Confirmation Fee”, “Reimbursing Bank Charges”.
- Partial Shipments (43P): Whether it is allowed or not and whether the same is as per sales contract
- Transhipments (43T): Preferable, it should be allowed.
- Reimbursement Instructions (53A)
- Confirmation Status (49): Is it confirmed LC or has an option for adding confirmation and who will bare the cost of the same. This field will have these three options: Confirmed, Without, May Add. If case where the LC is already confirmed where is confirming bank located.
Above is not a comprehensive list. Depending on type of goods exported and countries to which it is exported, requirement of clauses and document may differ.
If you do not understand or have any queries in any of the above clauses or terms, you can get in touch with us.
- RBI Master Direction: Export of Goods and Services
New Article: RBI Circular: Trade Credit : New Regulatory Framework
RBI revised Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 on December 17, 2018 (link in reference). Revision is made to ECB guidelines, Trade Credit, borrowing by banks outside India and others.
This articles covers changes made to Trade Credit guidelines.
Continue reading Revised Guidelines for Trade Credit
Post RBI disallowed LOU and LOC for buyers credit transactions, importers and banks are trying different structures which can assist in Import finance. Some of these structures are
- Suppliers Credit
- Buyers Credit Against SBLC (Standby Letter of Credit)
- Reimbursement Finance (Usance LC Reimbursement at Sight)
Continue reading Reimbursement Finance (Usance LC Reimbursement at Sight)
Purpose of Letter of credit (“LC”) is to give payment security to the beneficiary subject to documents presented under the LC complying with the requirements of the LC.
To check if documents are compliant, banks examine the required documents based on:
- The terms and conditions of the documentary credit.
- The applicable rules of UCP 600.
- The applicable content of ISBP 745.
Continue reading How to Prepare and Check Letter of Credit Documents
Documents under Documentary Credit (letter of credit) are broadly classified into four categories namely
Continue reading Documents Under Letter of Credit
New Article: What can be termed as 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.
Continue reading Letter of Credit Clauses Related to Suppliers Credit
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.
Continue reading Letter of Credit – MT 700 Format
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.
Continue reading Types of SWIFT Message used in Letter of Credit and Suppliers Credit
New Article: What can be termed as 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). Importer and Overseas Bank will have to follow below process
Continue reading Suppliers Credit Process Flow
Importers banking with Co operative Bank’s both AD Category and Non AD Category, face issues with arranging buyers credit because
- In case of AD Category Co operative Bank: Limited Lines in International Market or No Lines
- Non AD Category Co operative Bank: They cannot deal directly in Import or Export transaction but have to route the transaction through tie up bank.
Continue reading Buyers Credit for Co Operative Bank Customers
In earlier articles on Buyers Credit on Import of Gold and Import of Platinum, Palladium, Rhodium, Silver, as stated, Reserve Bank of India (RBI) had permitted banks to approve Suppliers and Buyers Credit (Trade Credit) including the usance period of Letters of Credit for import of rough, cut and polished diamonds, for a period not exceeding 90 days, from the date of shipment.
Continue reading Buyers Credit on Jewellery
1. LC is one of the payment mode used in the International Trade between importer and exporter to cover third-party credit risk. Meaning if the importer defaults, his bank will have to pay on his behalf. Whereas, Buyers credit is a funding mechanism used by importer to funds his transaction. Continue reading Difference between Buyers Credit and Letter of Credit (LC)