Category Archives: RBI Regulation & Circulars

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

Circular

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.

Reference

  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
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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.

Reference

  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)

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 ?

Reference

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.

Reference

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

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.

Conclusion

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.

Reference

  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

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.

Reference

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.

References

  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.

Background

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.

Example

  • 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.

Reference

  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.

Observations

  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.

Reference

  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.

Reference

Period of Buyers Credit Linked to Operating Cycle

Operating CycleIn the circular issued on 11th July 2013, RBI has made following two changes in relation to Trade Credit transactions:

  1. Period of Trade Credit (Buyers Credit / Suppliers Credit) should be linked to the operating cycle and trade transaction. 
  2. All in cost ceiling of 6 Month L+ 350 bps will continue to be applicable till September 30, 2013 and is subject to review thereafter.

This circular has removed the ambiguity on tenure for which buyers credit (Trade Credit) can be availed. Earlier RBI circular was open ended stating tenure allowed for raw material import was upto 360 days and decision was left on the banks (AD) to decide on clientwise tenure based on their internal criteria.

Above changes in the circular will have impact on…

  • Buyers Credit rollover transaction will not be possible for tenure more than mentioned in sanction limits.
  • Those clients who were using buyers credit for arbitrage purpose earlier, this window has closed.

Reference

Buyers Credit on Import of Precious and Semi Precious Stone

semiprecious-stones1In earlier articles, we had seen that, banks are permitted by RBI to approve Suppliers’ and Buyers’ Credit (Trade Credit) including the usance period of Letters of Credit opened for  Import of gold in any form including jewelery made of gold/ precious metal and or studded with diamonds /semi precious /precious stone not exceeding 90 days from the date of shipment.

RBI has further clarified with circular dated 20-02-2013, that Suppliers’ and Buyers’ Credit (Trade Credit) including the usance period of Letters of Credit opened for import of even precious stones and semi-precious stones should not exceed 90 days from the date of shipment. The revised directions will come into force with immediate effect.

Reasons for the above step taken by RBI

  • Reduce Current Account Deficit.
  • Discouraging importers using the above products solely for arbitrage.

Reference

  1. RBI Circular: Import of Precious Stones and Semi Precious Stones – RBI Clarification: Dated: 20-02-2013
  2. RBI Circular : Fema 1999 – Import of Gold in any form including Jewellery – ClarificationDated: 24-09-2012
  3. RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014
  4. RBI Master Circular on  Import of Goods and Services: Dated: 01-07-2014
  5. RBI Circular for Buyers Credit and Suppliers related to of import of Rough, Cut and Polished diamondDated: 06-05-2011
  6. RBI Circular for Import of Platinum, Palladium, rhodium, and SilverDated: 28-01-2008

Bank Finance for Purchase of Gold

The earlier article on Buyers Credit on Gold Import, specified rules and process under which buyers credit can be taken against gold import. RBI has recently come out with a circular which resulted in changes in financing of gold; which in turn would also affect buyers credit on gold import. This article gives extract of the circular and its impact on various stake holders:

Extract of RBI Circular Dated 19/11/2012: Bank Finance for Purchase of Gold

In terms of extant guidelines issued vide circular DBOD.No.Leg.BC.74/C.124(P)-78 dated June 1, 1978, no advances should be granted by banks against gold bullion to dealers/traders in gold if, in their assessment, such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion. In this context, the significant rise in imports of gold in recent years is a cause for concern as direct bank financing for purchase of gold in any form viz., bullion/primary gold/jewellery/gold coin etc. could lead to fuelling of demand for gold. Accordingly, it is advised that no advances should be granted by banks for purchase of gold in any form, including primary gold, gold bullion, gold jewellery, gold coins, units of gold Exchange Traded Funds (ETF) and units of gold Mutual Funds. However, banks can provide finance for genuine working capital requirements of jewellers. The scheme of Gold (Metal) Loan detailed vide our circular DBOD.No.IBS.BC/1519/23.67.001/1998-99 dated December 31, 1998, as amended from time to time, will continue to be in force.

Impact of the above circular on various Stake Holders and Buyers Credit product:

  1. Importers:
    1. Getting fund based and non fund based limit will become extremely difficulty irrespective it is 100% backed by Cash Collateral for bullion traders in gold (Fixed Deposits etc). Thus buyers credit on import of gold reduce drastically.
    2. Importers who were trying to use Bullion Import for arbitrage will move to other precious metals (Diamonds, Diamonds Jewellery etc). As this circular specifically talks about finance on Gold Bullion only.
  2. Bankers: For many small private sector banks, bullion funding is a big source of business. Banks will not be able to grant advances against gold bullion to dealers/traders in gold if, in the banks assessment is that such advances are likely to be utilised for purposes of financing gold purchase at auctions and/or speculative holding of stocks and bullion.
  3. Trade Credit: Buyers Credit / Suppliers Credit on Bullion Import would come to a halt, which was high volume game for many Indian banks overseas branches.
  4. RBI: Purpose of above circular is to stop speculation and reduce import of such products. But this circular will have a limiting effect as it covers only Gold, allowing  importers to move to other products for speculation.

Reference

RBI Circular : Bank Finance on Gold Purchase

Review of Trade Credit All-In-Cost Ceiling

After the expiry of deadline of 30-09-2012, there was a prolonged uncertainty for last 9 days on what is the all in cost ceiling for Trade Credit  (Buyers Credit / Suppliers Credit). Reserve Bank of India (RBI) issued a clarification or revised circular today clarifying the same. Summary of the same is given below

  1. Maximum Interest cap for Upto 5 Years : 6 Month Libor + 350 bps. This rate has been referred in it circular 11-09-2012 (Link given below)
  2. Until further review, the rate remains same. Thus, this time there is no deadline set for the review of the above rate to avoid any slippage like above.

Reference

  1. RBI Latest Circular: Trade Credit for Imports into India – Review of all-in-cost ceiling: Dated 09-10-2012
  2. Trade Credit for Import Into India: Dated 11-09-2012
  3. RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling:Dated: 30-03-2012
  4. RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling:Dated 15-11-2011
  5. RBI Master Direction –  Import of Goods and Services: Dated: 31-03-2016
  6. 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

Buyers Credit on Jewellery

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.

But there still remained an ambiguity on maximum tenure allowed on imported jewellery as circulars were silent on the same. Because of this ambiguity, few LOU Issuing banks were issuing lou / loc (Letter of Undertaking / Letter of Comfort)  for 360 days tenure and thus importers were enjoying buyers credit  upto 360 days tenure.

RBI issued a clarification circular on the above matter. RBI has clarified that Suppliers’ and Buyers’ credit (Trade Credit) including the usance period of Letters of Credit opened for import of gold in any form including jewellery made of gold/precious metals or/ and studded with diamonds/ semi precious / precious stones should not exceed 90 days, from the date of shipment.

Reference

  1. RBI Circular : Fema 1999 – Import of Gold in any form including Jewellery – Clarification: Dated: 24-09-2012
  2. RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014
  3. RBI Master Circular on  Import of Goods and Services: Dated: 01-07-2014
  4. RBI Circular for Buyers Credit and Suppliers related to of import of Rough, Cut and Polished diamondDated: 06-05-2011
  5. RBI Circular for Import of Platinum, Palladium, rhodium, and SilverDated: 28-01-2008

Trade Credit Extended Upto 5 Years for Infrastructure Firms

Reserve Bank of India (RBI) issued a fresh circular on September 11, 2012 in relation to Trade Credit for Import into India. Please find below summary of changes made into existing policy:

  1. Maximum tenure under Buyers Credit for import of capital goods has been extended from 3 years to 5 years for company classified as Infrastructure as defined in guidelines on External Commercial Borrowings (ECB). Infrastructure sectoris defined as under:
    1. Power
    2. Telecommunication
    3. Railways
    4. Roads including Bridges
    5. Sea Port and Airport
    6. Industrial Parks
    7. Urban Infrastructure (water supply, sanitation and sewage projects)
    8. Mining
    9. Exploration and Refining
    10. Cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat.
  2. Trade Credit must be availed for Minimum fifteen months at one go and should not be in the nature of short-term roll overs.
  3. For Existing Trade Credit transactions availed on or before 14th December 2012, abinitio (from beginning) buyers credit would be for min tenure of 6 months.
  4. Banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years.
  5. All-in-cost ceiling for upto 5 years is 6 Month Libor + 350 bps. The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.
  6. All other policy of trade credit remains unchanged and needs to be complied with.
  7. Starts from : Immediately
  8. Ends on: Subject to review based on the experience gained in this regard by RBI
  9. RBI has allowed refinancing of such bridge finance (if in the nature of buyers’/suppliers’ credit) availed of, with an ECB under the automatic route subject to conditions.

Reference:

Banks Insisting of Forward Booking for Buyers Credit Exposure

Of late few banks have started asking their clients to compulsorily book forwards against  their buyers credit exposure (existing as well new transactions). This change is because of earlier and current directives given by Reserve Bank of India (RBI). Summary of which is given below:

1. Second Quarter Review of Monetary Policy 2011-12 – Unhedged Foreign Currency Exposure of Corporate: Dated: 02-02-2012

Recent events relating to derivative trades have shown that excessive risk taking by corporates could lead to severe distress to them and large potential credit loss to their bankers in the event of sharp adverse movements in currencies. In view of the importance of prudent management of foreign exchange risk, it has been decided that banks, while extending fund based and non-fund based credit facilities to corporates, should rigorously evaluate the risks arising out of unhedged foreign currency exposure of the corporates and price them in the credit risk premium. Further, banks may also consider stipulating a limit on unhedged position of corporates on the basis of bank’s Board approved policy

2. Unhedged foreign exchange exposure of clients – Monitoring by banks (10th December 2008)

RBI Via December 2003 Circular, advised bank that they should have a policy which explicitly recognizes and takes into account risks arising on account of unhedged foreign exchange exposures of their clients. Banks were also advised that foreign currency loans above US $ 10 million, or such lower limits as may be deemed appropriate vis-a-vis the banks’ portfolios of such exposures, can be extended by banks only on the basis of a well laid out policy of their Boards with regard to hedging of such foreign currency loans.

Board policy of banks should cover unhedged foreign exchange exposure of all their clients including Small and Medium Enterprises (SMEs). Further, for arriving at the aggregate unhedged foreign exchange exposure of clients, their exposure from all sources including foreign currency borrowings and External Commercial Borrowings should be taken into account.

Reference

Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade

Post below articles, guidelines have been revised. Please refer article “Revised Guidelines for Merchanting / Intermediary Trade

What is Merchanting Trade?

Merchant tradeThe supplier of goods will be resident in one foreign country. The buyer of goods will be resident in another foreign country. The merchant or the intermediary will be resident in India. He will book the order from the buyer, place the order with the supplier, supervise and coordinate the shipment of goods from the supplier’s country and deliver the same to buyer’s country. He will be receiving payment from the overseas buyer and making payment to the overseas supplier through an authorised dealer in foreign exchange in India. The difference between the inward remittance and the outward remittance will be the profit for the merchant. Some times goods may be imported by a buyer in India from a seller in one country and exported to a buyer in another country. Such imports are kept in bond and then exported. It is also possible that repacking may be done under customs supervision and then exported. This is basically to avoid the foreign buyer to know the source from where goods are being bought and supplied to them. Such transactions are known as Merchanting Trade as per the Indian Foreign Exchange Management Regulations.

RBI Regulations

RBI under Master Circular of Import of Goods and Services, has given norms to be followed in case of all Merchanting Transactions.  Extract of the relevant section is given below.

C.17. Merchanting Trade

AD Category – I bank may take necessary precautions in handling bonafides merchanting trade transactions or intermediary trade transactions to ensure that:

  1. Goods involved in the transactions are permitted to be imported into India and all the rules, regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with for the export leg and import leg, respectively.
  2. The entire merchant trade transaction is completed within a period of 6 months.
  3. The transactions do not involve foreign exchange outlay for a period exceeding three months.
  4. Payment is received in time for the export leg.
  5. Where the payment for export leg of the transaction precedes the payment for import leg, AD Category – I banks should ensure that the terms of payment are such that the liability for the import leg of the transaction is extinguished by the payment received for the export leg of the transaction, without any delay. 

AD Category – I banks may note that short-term credit either by way of suppliers’ credit or buyers’ credit is not available for merchanting trade or intermediary trade transactions

Review of all-in-cost ceiling – Trade Credit

In its circular dated 30/03/2012, RBI has decided to continue with the enhanced all-in-cost ceiling for Trade Credit for further period of six months.

  1. Maximum Cap on Interest Rate for tenure Upto 3 years : 6 Month LIBOR + 350 bps
  2. Applicable Upto: 30/09/2012 (Subject to review there after) 

RBI Circular Copy

Buyers Credit All-In-Cost Ceiling may move back to L+200bps from 01/04/2012

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

In its Circular dated 15/11/2011, RBI had increased the all-in-cost ceiling for Buyers Credit  from 6 Month L+ 200 bps to 6 Month L + 350 bps subject to condition that is only upto 31/03/2012 and after subject to review there after.

As of yesterday evening, there is no fresh circular from RBI on Trade Credit. If this situation remains, effective from 01/04/2012

  1. Maximum Cap will come down to 6 Month Libor + 200 bps
  2. Internationally price for < $100000 is already above 6 Month Libor + 200 bps. Thus, for SME it will get difficult to arrange funds.

RBI Circular on Trade Credit Dated 15/11/2012

Buyers Credit for Imports Under Direct Documents

trade creditRBI Circular of External Commercial Borrowing and Trade Credit gives information about buyers credit. But with specific type of transaction, inference has to taken from other related circulars. For example, for Buyers Credit in case of import against direct documents received by importers, RBI Circular on Import of Goods and Services has to be referred along with Trade Credit Circular. RBI has put in various criteria under which such transactions are allowed.

Receipt of documents directly by importers are bifurcated into two parts:

A. Receipt of Import documents by the importer directly from Overseas Suppliers

Import bills and documents should be received from the banker of the supplier by the banker of the importer in India. AD Category – I bank should not, therefore, make remittances where import bills have been received directly by the importers from the overseas supplier, except in the following cases:

  1. Where the value of import bill does not exceed USD 300,000.
  2. Import bills received by wholly-owned Indian subsidiaries of foreign companies from their principals.
  3. Import bills received by Status Holder Exporters as defined in the Foreign Trade Policy, 100% Export Oriented Units / Units in Special Economic Zones, Public Sector Undertakings and Limited Companies.
  4. Import bills received by all limited companies viz. public limited, deemed public limited and private limited companies.

B. Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors

Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors. As a sector specific measure, banks are permitted to allow remittance for imports up to USD 300,000 where the importer of rough diamonds, rough precious and semi-precious stones have received the import bills / documents directly from the overseas supplier and the documentary evidence for import is submitted by the importer at the time of remittance. Banks may undertake such transactions subject to the following conditions:

  1. The import would be subject to the prevailing Foreign Trade Policy.
  2. The transactions are based on their commercial judgment and they are satisfied of the bonafides of the transactions.
  3. Banks should do the KYC and due diligence exercise and should be fully satisfied about the financial standing / status and track record of the importer customer.
  4. Before extending the facility, they should also obtain a report on each individual overseas supplier from the overseas banker or reputed overseas credit rating agency.

Based on the above information, check with your bank, under which criteria an import transaction is getting classified and whether given criteria are getting  fulfilled. Based on  this the amount permitted for buyers credit for import against direct documents can be derived.

Also, for cases falling under category B, please refer (ii) carefully. Even if all conditions are getting satisfied, banks should be satisfied about the bonafides of the transaction. Thus banks have discretion under that point. In such cases, it is advised to provide all information and documents related to transaction, to make the bank comfortable about the transaction.

Along with the above provision, provision of Evidence of Imports are also to be considered.

Evidence of Import Physical Imports

  1. Import on Documents AgainstPayment (DP): In case of all imports, where value of foreign exchange remitted/ paid for import into India exceeds USD 100,000 or its equivalent, it is obligatory on the part of the bank through whom the relativeremittancewas made,toensure that the importer submits :-
    1. The Exchange Control copy of the Bill of Entry for home consumption, or
    2. The Exchange Control copy of the Bill of Entry for warehousing, in case of 100% Export Oriented Units, or
    3. Customs Assessment Certificate or Postal Appraisal Form, as declared by the importer to the Customs Authorities, where import has been made by post, as evidence that the goods for which the payment was made have actually been imported into India.
  2. In respect of imports on D/A basis,  Bank should insist on production of evidence of import at the time of effecting remittance of import bill. However, if importers fail to produce documentary evidence due to genuine reasons such as non-arrival of consignment, delay in delivery/ customs clearance of consignment, etc., bank may, if satisfied with the genuineness of request, allow reasonable time, not exceeding three months from the date of remittance, to the importer to submit the evidence of import.

Evidence of import in lieu of Bill of Entry

  1. Bank may accept, in lieu of Exchange Control copy of Bill of Entry for home consumption, a certificate from the Chief Executive Officer (CEO) or auditor of the company that the goods for whichremittancewas made have actually been imported into India provided :-
    1. the amount of foreign exchange remitted is less than USD 1,000,000 or its equivalent,
    2. the importer is a company listed on a stock exchange in India and whose net worth is not less than Rs.100 crore as on the date of its last audited balance sheet, or, the importer is a public sector company or an undertaking of the Government of India or its departments.
  2. The above facility may also be extended to autonomous bodies, including scientific bodies/academic institutions, such as Indian Institute of Science / Indian Institute of Technology, etc. whose accounts are audited by the Comptroller and Auditor General of India (CAG). AD Category – I bank may insist on a declaration from the auditor/CEO of such institutions that their accounts are audited by CAG. 

Reference

Comprehensive Guidelines on Foreign Exchange Derivatives

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

RBI via circular dated 28/12/2010 revised the extant guidelines on OTC (Over the Counter) Foreign  Exchange Derivatives and which became effective from 1st February 2011. Below is the extract of the guidelines related to importers and exporters.

Facilities to Persons resident in India are detailed in following three sub heads

1) Contracted Exposures

AD Category I banks have to evidence the underlying documents so that the existence of underlying foreign currency exposure can be clearly established. AD Category I banks, through verification of documentary evidence, should be satisfied about the genuineness of the underlying exposure, irrespective of the transaction being a current or a capital account. Full particulars of the contracts should be marked on the original documents under proper authentication and retained for verification. However, in cases where the submission of original documents is not possible, a copy of the original documents, duly certified by an authorized official of the user, may be obtained. In either of the cases, before offering the contract, the AD Category I banks should obtain an undertaking from
the customer and also quarterly certificates from the statutory auditor (for details refer section B para II (b) for General Instructions). While details of the underlying have to be recorded at the time of booking the contract, in the view of logistic issues, a maximum period of 15 days may be allowed for production of the documents. If the documents are not submitted by the customer within 15 days, the contract may be cancelled, and the exchange gain, if any, should not be passed on to the customer. In the event of non-submission of the documents by the customer within 15 days on more than three occasions in a financial year, booking of permissible derivative contracts in future may be allowed only against production of the underlying documents, at the time of booking the contract.

The products available under this facility are as follows:

i) Forward Foreign Exchange Contracts Participants

Market-makers – AD Category I banks
Users – Persons resident in India

Purpose
a) To hedge exchange rate risk in respect of transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999, or in terms of the rules/ regulations/directions/orders made or issued there under.
b) To hedge exchange rate risk in respect of the market value of overseas direct investments (in equity and loan).

i) Contracts covering overseas direct investment (ODI) can be cancelled or rolled over on due dates. However, AD Category I banks may permit rebooking only to the extent of 50 per cent of the cancelled contracts.
ii) If a hedge becomes naked in part or full owing to contraction ( due to price movement/impairment) of the market value of the ODI, the hedge may be allowed to continue until maturity, if the customer so desires. Rollovers on due date shall be permitted up to the extent of the market value as on that date.

c) To hedge exchange rate risk of transactions denominated in foreign currency but settled in INR, including hedging the economic (currency indexed) exposure of importers in respect of customs duty payable on imports.

i) Forward foreign exchange contracts covering such transactions will be settled in cash on maturity.
ii) These contracts once cancelled, are not eligible to be rebooked.
iii) In the event of any change in the rate(s) of customs duties, due to Government notifications subsequent to the date of the forward contracts, importers may be allowed to cancel and/or rebook the contracts before maturity.

Operational Guidelines, Terms and Conditions

General principles to be observed for forward foreign exchange contracts.

a) The maturity of the hedge should not exceed the maturity of the underlying transaction. The currency of hedge and tenor, subject to the above restrictions, are left to the customer. Where the currency of hedge is differentfrom the currency of the underlying exposure, the risk management policy of the corporate, approved by the Board of the Directors, should permit such type of hedging.
b) Where the exact amount of the underlying transaction is not ascertainable, the contract may be booked on the basis of reasonable estimates. However, there should be periodical review of the estimates.
c) Foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank, where such approval is necessary or Loan Registration Number is allotted by the Reserve Bank.
d) Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) will be eligible for hedge only after the issue price has been finalized.
e) Balances in the Exchange Earner’s Foreign Currency (EEFC) accounts sold forward by the account holders shall remain earmarked for delivery and such contracts shall not be cancelled. They are, however, eligible for rollover, on maturity.
f) All non-INR forward contracts can be rebooked on cancellation subject to condition (h) below. Forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, may be allowed to be cancelled and rebooked subject to condition (h) below. This relaxation of cancellation and rebooking will not be available to forward contracts booked on past performance basis without documents as also forward contracts booked to hedge transactions denominated (or indexed) in foreign currency but settled in INR.
g) The facility of cancellation and rebooking is not permitted for forward contracts, involving Rupee as one of the currencies, booked by residents to hedge capital account transactions for tenor greater than one year. These forward contract(s) if cancelled with one AD Category I bank can be rebooked with another AD Category I bank, subject to the following conditions:

(i) the switch is warranted by competitive rates on offer, termination of banking relationship with the AD Category I bank with whom the contract was originally booked;
(ii) the cancellation and rebooking are done simultaneously on the maturity date of the contract; and
(iii) the responsibility of ensuring that the original contract has been cancelled rests with the AD Category I bank who undertakes rebooking of the contract.

h) The facility of rebooking should not be permitted unless the corporate has submitted the exposure information as prescribed in Appendix B.
i) Substitution of contracts for hedging trade transactions may be permitted by an AD Category I bank on being satisfied with the circumstances under which such substitution has become necessary. The AD Category I bank may also verify the amount and tenor of the underlying substituted.

ii) Cross Currency Options (not involving Rupee) Participants

Market-makers – AD Category I banks as approved for this purpose by the RBI
Users – Persons resident in India

Purpose

a) To hedge exchange rate risk arising out of trade transactions.
b) To hedge the contingent foreign exchange exposure arising out of submission of a tender bid in foreign exchange.

Operational Guidelines, Terms and Conditions

a) AD Category I banks can only offer plain vanilla European options (A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time)
b) Customers can buy call or put options.
c) These transactions may be freely booked and/ or cancelled subject to verification of the underlying.
d) All guidelines applicable for cross currency forward contracts are applicable to cross currency option contracts also.
e) Cross currency options should be written by AD Category I banks on a fully covered back-to-back basis. The cover transaction may be undertaken with a bank outside India, an Off-shore Banking Unit situated in a Special Economic Zone or an internationally recognized option exchange or another AD Category I bank in India. AD Category I banks desirous of writing options, should obtain a one-time approval from the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building 5th Floor, Mumbai, 400001, before undertaking the business.

iii) Foreign Currency – INR Options

Participants

Market-makers – AD Category I banks, as approved for this purpose by the RBI.
Users – Persons resident in India

Purpose

a) To hedge foreign currency exposures in accordance with Schedule I of Notification No. FEMA 25/2000-RB dated May 3, 2000, as amended from time to time.
b) To hedge the contingent foreign exchange exposure arising out of submission
of a tender bid in foreign exchange.

Operational Guidelines, Terms and Conditions

a) AD Category I banks having a minimum CRAR of 9 per cent, can offer foreign currency– INR options on a back-to-back basis.
b) For the present, AD category I banks can offer only plain vanilla European options.
c) Customers can buy call or put options.
d) All guidelines applicable for foreign currency-INR foreign exchange forward contracts are applicable to foreign currency-INR option contracts also.
e) AD Category I banks having adequate internal control, risk monitoring/management systems, mark to market mechanism, etc. are permitted to run a foreign currency– INR options book on prior approval from the Reserve Bank, subject to conditions. AD Category I banks desirous of running a foreign currency-INR options book and fulfilling minimum eligibility criteria listed below, may apply to the Reserve Bank with copies of approval from the competent authority (Board/ Risk Committee/ ALCO), detailed memorandum in this regard, specific approval of the Board for the type of option writing and permissible limits. The memorandum put up to the Board should clearly mention the downside risks, among other matters.

Minimum Eligibility Criteria:
i. Net worth not less than Rs 300 crore
ii. CRAR of 10 per cent
iii. Net NPAs not exceeding 3 per cent of the net advances
iv. Continuous profitability for at least three years

The Reserve Bank will consider the application and accord a one-time approval at its discretion. AD Category I banks are expected to manage the  option portfolio within the Reserve Bank approved risk management limits.

f) AD banks may quote the option premium in Rupees or as a percentage of the Rupee/foreign currency notional.
g) Option contracts may be settled on maturity either by delivery on spot basis or by net cash settlement in Rupees on spot basis as specified in the contract. In case of unwinding of a transaction prior to the maturity, the contract may be cash settled based on market value of an identical off-setting option.
h) Market makers are allowed to hedge the ‘Delta’ of their option portfolio by accessing the spot and forward markets. Other ‘Greeks’ may be hedged by entering into option transactions in the inter-bank market.
i) The ‘Delta’ of the option contract would form part of the overnight open position.
j) The ‘Delta’ equivalent as at the end of each maturity shall be taken into account for the purpose of AGL. The residual maturity (life) of each outstanding option contract can be taken as the basis for the purpose of grouping under various maturity buckets
k) AD banks running an option book are permitted to initiate plain vanilla cross currency option positions to cover risks arising out of market making in foreign currency-INR options.
l) Banks should put in place necessary systems for marking to market the portfolio on a daily basis. FEDAI will publish daily a matrix of polled implied volatility estimates, which market participants can use for marking to market their portfolio.
m) The accounting framework for option contracts will be as per FEDAI circular No.SPL-24/FC-Rupee Options/2003 dated May 29, 2003.

iv) Foreign Currency-INR Swaps

Participants

Market-makers – AD Category I banks in India.

Users

i. Residents having a foreign currency liability and undertaking a foreign currency-INR swap to move from a foreign currency liability to a Rupee liability.
ii. Incorporated resident entities having a rupee liability and undertaking a INR –foreign currency swap to move from rupee liability to a foreign currency liability, subject to certain minimum prudential requirements, such as risk management systems and natural hedges or economic exposures. In the absence of natural hedges or economic exposures, the INR-foreign currency swap (to move from rupee liability to a foreign currency liability) may be restricted to listed companies or unlisted companies with a minimum net worth of Rs 200 crore. Further, the AD Category I bank is required to examine the suitability and appropriateness of the swap and be satisfied about the financial soundness of the corporate.

Purpose

To hedge exchange rate and/or interest rate risk exposure for those having long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability.

Operational Guidelines, Terms and Conditions

a) No swap transactions involving upfront payment of Rupees or its equivalent in any form shall be undertaken.
b) The term “long-term exposure” means exposures with residual maturity of one year or more.
c) Swap transactions may be undertaken by AD Category I banks as intermediaries by matching the requirements of corporate counterparties. While no limits are placed on the AD Category I banks for undertaking swaps to facilitate customers to hedge their foreign exchange exposures, a limit of USD 100 million is placed for net supply of foreign exchange in the market on account of swaps which facilitate customers to assume foreign currency liability. Positions arising out of cancellation of foreign currency-INR swaps by customers need not be reckoned within this cap.
d) With reference to the specified limits for swap transactions facilitating customers to assume a foreign currency liability, the limit will be reinstated on account of cancellation/ maturity of the swap and on amortization, up to the amounts amortized.
e) The swap transactions, once cancelled, shall not be rebooked or re-entered, by whichever mechanism or by whatever name called.
f) AD Category I banks should not offer leveraged swap structures. Typically, in leveraged swap structures, a multiplicative factor other than unity is attached to the benchmark rate(s), which alters the payables or receivables vis-à-vis the situation in the absence of such a factor.
g) The notional principal amount of the swap should not exceed the outstanding amount of the underlying loan.
h) The maturity of the swap should not exceed the remaining maturity of the underlying loan.

v) Cost Reduction Structures i.e. cross currency option cost reduction structures
and foreign currency –INR option cost reduction structures.

Participants

Market-makers – AD Category I banks

Users – Listed companies or unlisted companies with a minimum net worth of
Rs. 100 crore ( subsidiaries or affiliates of listed companies which follow AS 30/32, having common treasuries and consolidate the accounts with parent companies are exempted from the minimum net worth criteria), which are complying with the following:
• Adoption of Accounting Standards 30 and 32. Companies which are not complying fully with AS 30 and 32 should follow the accounting treatment and disclosure  standards on derivative contracts, as envisaged under AS 30/32.
• Having a risk management policy and a specific clause in the policy that allows using the type/s of cost reduction structures.

Purpose
To hedge exchange rate risk arising out of trade transactions and External Commercial Borrowings (ECBs).

Operational Guidelines, Terms and Conditions
a) Writing of options by the users, on a standalone basis, is not permitted.
b) Users can enter into option strategies of simultaneous buy and sell of plain vanilla European options, provided there is no net receipt of premium.
c) Leveraged structures, digital options, barrier options, range accruals and any other exotic products are not permitted.
d) The portion of the structure with the largest notional, computed over the tenor of the structure, should be reckoned for the purpose of underlying.
e) The delta of the options should be explicitly indicated in the term sheet.
f) AD Category I banks may, stipulate additional safeguards, such as, continuous profitability, higher net worth, turnover, etc depending on the scale of forex operations and risk profile of the users.
g) The maturity of the hedge should not exceed the maturity of the underlying transaction and subject to the same the users may choose the tenor of the hedge. In case of trade transactions being the underlying, the tenor of the structure shall not exceed two years.
h) The MTM position should be intimated to the users on a periodical basis.

vi) Hedging of Borrowings in foreign exchange, which are in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.

Products – Interest rate swap, Cross currency swap, Coupon swap, Cross currency option, Interest rate cap or collar (purchases), Forward rate agreement(FRA)

Participants

Market-makers
a) AD Category I banks in India
b) Branch outside India of an Indian bank authorized to deal in foreign exchange in India
c) Offshore banking unit in a SEZ in India.

Users
Persons resident in India who have borrowed foreign exchange in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000

Purpose
For hedging interest rate risk and currency risk on loan exposure and unwinding  from such hedges Operational Guidelines, Terms and Conditions
a) The products, as detailed above should not involve the rupee under any  circumstances.
b) Final approval has been accorded or Loan Registration Number allotted by the Reserve Bank for borrowing in foreign currency.
c) The notional principal amount of the product should not exceed the outstanding amount of the foreign currency loan.
d) The maturity of the product should not exceed the unexpired maturity of the underlying loan.
e) The contracts may be cancelled and rebooked freely.

2) Probable exposures based on past performance

Participants
Market-makers – AD Category I banks in India.
Users – Importers and exporters of goods and services

Purpose
To hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Probable exposure based on past performance can be hedged only in respect of trades in merchandise goods as well as services.

Products
Forward foreign exchange contracts, cross currency options (not involving the rupee), foreign currency-INR options and cost reduction structures [as mentioned in section B para I 1(v)].

Operational Guidelines, Terms and Conditions
a) Corporates having a minimum net worth of Rs 200 crores and an annual export and import turnover exceeding Rs 1000 crores and satisfying all other conditions as  stipulated in section B para I 1(v) may be allowed to use cost reduction structures.
b) The contracts booked during the current financial year (April-March) and the outstanding contracts at any point of time should not exceed the eligible limit i.e. the average of the previous three financial years’ actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher.
c) Contracts booked in excess of 75 per cent of the eligible limit will be on deliverable basis and cannot be cancelled.
d) These limits shall be computed separately for import/export transactions.
e) Higher limits will be permitted on a case-by-case basis on application to the Foreign Exchange Department, Central Office, Reserve Bank of India. The additional limits, if sanctioned, shall be on a deliverable basis.
f) Any contract booked without producing documentary evidence will be marked off against this limit. These contracts once cancelled, are not eligible to be rebooked.  Rollovers are also not permitted.
g) AD banks should permit their clients to use the past performance facility only after satisfying themselves that the following conditions are complied with:

i. An undertaking may be taken from the customer that supporting documentary evidence will be produced before the maturity of all the contracts booked.
ii. Importers and exporters should furnish a quarterly declaration to the AD Category I banks, duly certified by the Statutory Auditor, regarding amounts booked with other AD Category I banks under this facility, as per Appendix M.
iii. For an exporter customer to be eligible for this facility, the aggregate of  overdue bills shall not exceed 10 per cent of the turnover.
iv. Aggregate outstanding contracts in excess of 50 per cent of the eligible limit may be permitted by the AD Category I bank on being satisfied about the genuine requirements of their customers after examination of the following documents:

• A certificate from the Statutory Auditor of the customer that all guidelines have been adhered to while utilizing this facility.
• A certificate of import/export turnover of the customer during the past three years duly certified by their Statutory Auditor in the format given in Appendix K.

h) The past performance limits once utilised are not to be reinstated either on cancellation or on maturity of the contracts.
i) AD Category I banks must arrive at the past performance limits at the beginning of every financial year. The drawing up of the audited figures (previous year) may require some time at the commencement of the financial year. However, if the statements are not submitted within three months from the last date of the financial year, the facility should not be provided until submission of the audited figures.
j) AD Category I banks must institute appropriate systems for validating the past performance limits at pre-deal stage. In addition to the customer declarations, AD Category I banks should also assess the past transactions with the customers, turnover, etc.
k) AD Category I banks are required to submit a monthly report (as on the last Friday of every month) on the limits granted and utilised by their constituents under this facility as prescribed in Appendix J.

3) Special Dispensation

i) Small and Medium Enterprises (SMEs)

Participants
Market-makers – AD Category I.
Users – Small and Medium Enterprises (SMEs) 3

Purpose
To hedge direct and / or indirect exposures of SMEs to foreign exchange risk

Product
Forward foreign exchange contracts

Operational Guidelines: Small and Medium Enterprises (SMEs) having direct and /or  indirect exposures to foreign exchange risk are permitted to book / cancel / rebook/ roll over forward contracts without production of underlying documents to manage their exposures effectively, subject to the following conditions:

a) Such contracts may be booked through AD Category I banks with whom the SMEs have credit facilities and the total forward contracts booked should be in alignment with the credit facilities availed by them for their foreign exchange requirements or  their working capital requirements or capital expenditure.
b) AD Category I bank should carry out due diligence regarding “user  appropriateness” and “suitability” of the forward contracts to the SME customers as  per Para 8.3 of ‘Comprehensive Guidelines on Derivatives’ issued vide   DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007.
c) The SMEs availing this facility should furnish a declaration to the AD Category I bank regarding the amounts of forward contracts already booked, if any, with other AD Category I banks under this facility.

ii) Resident Individuals

Participants
Market-makers – AD Category I banks
Users: Resident Individuals

Purpose
To hedge their foreign exchange exposures arising out of actual or anticipated remittances, both inward and outward, can book forward contracts, without production of underlying documents, up to a limit of USD 100,000, based on self declaration.

Product
Forward foreign exchange contracts

Operational Guidelines, Terms and Conditions

a) The contracts booked under this facility would normally be on a deliverable basis. However, in case of mismatches in cash flows or other exigencies, the contracts booked under this facility may be allowed to be cancelled and re- booked. The notional value of the outstanding contracts should not exceedUSD 100,000 at any time.
b) The contracts may be permitted to be booked up to tenors of one year only.
c) Such contracts may be booked through AD Category I banks with whom the resident individual has banking relationship, on the basis of an application- cum-declaration in the format given in Appendix G. The AD Category I banks should satisfy themselves that the resident individuals understand the nature of risk inherent in booking of forward contracts and should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to such customer.

B II. General Instructions for forex derivative contracts entered by Residents in India

While the guidelines indicated above govern specific foreign exchange derivatives, certain general principles and safeguards for prudential considerations that are applicable across the OTC foreign exchange derivatives, are detailed below. In addition to the guidelines under the specific foreign exchange derivative product, the general instructions should be followed scrupulously by the users (residents in India other than AD Category I banks) and the market makers (AD Category I banks).

a) In case of all forex derivative transactions [except INR- foreign currency swaps i.e. moving from INR liability to foreign currency liability as in section B para I(1)(iv)] is undertaken, AD Category I banks must take a declaration from the clients that the exposure is unhedged and has not been hedged with another AD Category I bank. The corporates should provide an annual certificate to the AD Category I bank certifying that the derivative transactions are authorized and that the Board (or the equivalent forum in case of partnership or proprietary firms) is aware of the same.
b) In the case of contracted exposure, AD Category I banks must obtain:

i) An undertaking from the customer that the same underlying exposure has not been covered with any other AD Category I bank/s. Where hedging of the same exposure is undertaken in parts, with more than one AD Category I bank, the details of amounts already booked with other AD Category I bank/s should be clearly indicated in the declaration. This undertaking can also be obtained as a part of the deal confirmation.
ii) Quarterly certificates from the statutory auditors of the users, that the contracts outstanding at any point of time with all AD Category I banks during the quarter did not exceed the value of the underlying exposures.

c) Derived foreign exchange exposures are not permitted to be hedged. However, in case of INR- foreign currency swaps, at the inception, the user can enter into one time plain vanilla cross currency option (not involving Rupee) to cap the currency risk.
d) In any derivative contract, the notional amount should not exceed the actual underlying exposure at any point in time. Similarly, the tenor of the derivative contracts should not exceed the tenor of the underlying exposure. The notional amount for the entire transaction over its complete tenor must be calculated and the underlying exposure being hedged must be commensurate with the notional amount of the derivative contract.
e) Only one hedge transaction can be booked against a particular exposure/ part thereof for a given time period.
f) The term sheet for the derivative transactions (except forward contracts) should also necessarily and clearly mention the following:

i) the purpose for the transaction detailing how the product and each of its components help the client in hedging;
ii) the spot rate prevailing at the time of executing the transaction; and
iii) quantified maximum loss/ worst downside in various scenarios.

g) AD Category I banks can offer only those products that they can price independently. This is also applicable to the products offered even on back to back basis. The pricing of all forex derivative products should be locally demonstrable at all times.
h) The market-makers should carry out proper due diligence regarding ‘user appropriateness’ and ‘suitability’ of products before offering derivative products (except forward contracts) to users as detailed in DBOD.No.BP.BC.86/21.04.157/2006-07 dated April 20, 2007.
i) AD Category I may share with the user the various scenario analysis encompassing both the possible upside as well as the downsides and sensitivity analysis identifying the various market parameters that affect the product.
j) The provisions of comprehensive guidelines on Derivatives issued vide DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007 and as amended from time to time are also applicable to forex derivatives.
k) Sharing of information on derivatives between banks is mandatory and as detailed
vide circular DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD.No. BP. BC. 94/ 08.12.001/ 2008-09 dated December 8, 2008.

Relevant RBI Circulars in Relation to Forward Contract

Recent Changes to India’s Currency Forward Contract Norms for Hedging

RBI via circular dated 15/12/2011 made changes in Foreign Exchange Derivative Contacts with immediate effect until further review. Below is the extract of the same related to importers and exporters.

1). Under contracted exposures, forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, were allowed to be cancelled and rebooked.

It has now been decided to withdraw the above facility. Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked.

2). Under probable exposures based on past performance residents were allowed to hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Further, contracts booked in excess of 75 per cent of the eligible limit were to be on deliverable basis and could not be cancelled.

It has now been decided that

A. For importers availing of the above past performance facility, the facility stands reduced to 25 percent of the limit as computed above, i.e., 25 percent of the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. In case of importers who have already utilised in excess of the revised / reduced limit, no further bookings may be allowed under this facility.

B. All forward contracts booked under this facility by both exporters and importers hence forth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, should not be passed on to the customer.

3). All cash/tom/spot transactions by the Authorised Dealers on behalf of clients will be undertaken for actual remittances / delivery only and cannot be cancelled / cash settled.

RBI Circular

Infrastructure Companies – Bridge Finance before availing ECB

Considering the specific needs of the Infrastructure sector, RBI under its circular External Commercial Borrowing (ECB) – Bridge Finance for Infrastructure Dated 23-09-2011, reviewed the ECB policy. An amendment was made in this policy on 21-09-2012. Brief summary is given below:

Conditions in case of ECB under Approval Route

Allowed Indian companies which are in infrastructure sector to import capital goods by availing of short-term credit (including buyer’s credit and supplier’s credit) in the nature of “Bridge Finance” under the approval route,subject to following conditions

  • The bridge finance shall be replaced with a long-term ECB
  • The long-term ECB shall comply with all the extant ECB norms
  • Prior approval shall be sought from Reserve Bank for replacing the bridge finance with a long-term ECB

Conditions in case of ECB under Automatic Route

Allowed Indian companies which are in infrastructure sector to import capital goods by availing of short-term credit (including buyer’s credit and supplier’s credit) in the nature of “Bridge Finance” under the ECB automatic route, subject to following conditions

  • the buyers’/suppliers’ credit is refinanced through an ECB before the maximum permissible period of trade credit;
  • the AD evidences the import of capital goods by verifying the Bill of Entry;
  • the buyers’/suppliers’ credit availed of is compliant with the extant guidelines on trade credit and the goods imported conform to the DGFT policy on imports; and
  • the proposed ECB is compliant with all the other extant guidelines relating to availment of ECB.

2. The borrowers will, therefore, approach the Reserve Bank under the approval route only at the time of availing of bridge finance which will be examined subject to conditions

  • the bridge finance shall be replaced with a long term ECB;
  • the long term ECB shall comply with all the extant ECB norms;

Common Conditions in both the cases

The designated AD – Category I bank shall monitor the end-use of funds and banks in India will not be permitted to provide any form of guarantees. The designated AD – Category I bank shall evidence the import of capital goods by verifying the Bill of Entry. All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged and should be complied with.

Note: As per RBI Circular on External Commercial Borrowing (ECB) and Trade Credit Dated 01-07-2011, Infrastructure sector is defined as

  1. Power
  2. Telecommunication
  3. Railways
  4. Roads including bridges
  5. Sea port and Airport
  6. Industrial parks
  7. Urban infrastructure (water supply, sanitation and sewage projects)
  8. Mining, exploration and refining
  9. Cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat

Reference

Buyers Credit on Gold Import

English: A picture from the gold vault of the ...
English: A picture from the gold vault of the Federal Reserve Bank of New York (Photo credit: Wikipedia)

As per RBI Circular, Bank can open Letters of Credit and allow remittances on behalf of EOUs, units in SEZs in the Gem & Jewellery sector and the nominated agencies / banks, for direct import of gold, subject to the following

  1. The import of gold should be strictly in accordance with the Foreign Trade Policy.
  2. Suppliers’ and Buyers’ Credit, including the usance period of LCs opened for direct import of gold, should not exceed 90 days.
  3. Banker’s prudence should be strictly exercised for all transactions pertaining to import of gold. Bank would ensure that due diligence is undertaken and all Know Your Customer (KYC) norms and the Anti-Money-Laundering guidelines, issued by Reserve Bank from time to time are  adhered to while undertaking such transactions. Bank would closely monitor such transactions. Any large or abnormal increase in the volume of business of the importer should be closely examined to ensure that the transactions are bonafide trade transactions.
  4. In addition to carrying out the normal due diligence exercise, the credentials of the supplier should also be ascertained before opening the LCs. The financial standing, line of business and the net worth of the importer customer should be commensurate with the volume of business turnover. Apart from the above, in case of such transactions banks should also make discreet enquiries from other banks to assess the actual position. Further, in order to establish audit trail of import/export transactions, all documents pertaining to such transactions must be preserved for at least five years.
  5. Bank would follow-up for submission of the Bill of Entry by the importers as stipulated.

In a clarification circular issued by RBI, even on jewellery, tenure for buyers credit has been restricted to tenure of 90 days.

Reference 

  1. RBI Circular : Fema 1999 – Import of Gold in any form including Jewellery – ClarificationDated: 24-09-2012
  2. RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014
  3. RBI Master Circular on  Import of Goods and Services: Dated: 01-07-2014

Import of Platinum, Palladium, Rhodium, Silver

Reserve Bank of India (RBI) in its circular dated 28-08-2008 had revised guidelines for Import of Platinum, Palladium, Rhodium and Silver. Extracts of the circular are given below.

Suppliers’ and Buyers’ credit, including the usance period of Letters of Credit opened for import of Platinum, Palladium, Rhodium and Silver should not exceed 90 days from the date of shipment. The revised directions will come into force with immediate effect. 

Banks are being advised to ensure that due diligence is undertaken and Know-Your-Customer (KYC) norms and Anti-Money Laundering (AML) guidelines, issued by the Reserve Bank are adhered to while undertaking import of these metals. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bonafide and are not intended for interest / currency arbitrage.  All other instructions relating to import of these metals shall continue.

Since the above circular, there is no change notification till date on the same.

RBI Circular

Buyer’s / Supplier’s Credit on Rough, Cut and Polished Diamonds

Reserve Bank of India (RBI) in its circular dated 06-05-2011 has revised guidelines for import of Rough, Cut and Polished Diamonds. Extracts are given below.

Supplier’s Credit and Buyer’s Credit (Trade Credit) including the usance period of Letter of Credit (LC) opened for import of rough, cut and polished diamonds has been restricted to 90 days from the date of shipment from immediate effect.

Banks have been also advised to ensure that due diligence is undertaken and Know-Your-Customer (KYC) norms and Anti-Money Laundering (AML) standards, issued by RBI are adhered to while undertaking the import transactions. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bona fide and not intended for interest / currency arbitrage. All other instructions relating to import of rough, cut and polished diamonds shall continue.

The earlier instruction issued for import of gold, import of platinum / palladium / rhodium / silver and advance remittance for import of rough diamonds shall remain unchanged.

In a clarification circular issued by RBI, even on jewellery, tenure for buyers credit has been restricted to tenure of 90 days.

Reference

  1. RBI Circular : Fema 1999 – Import of Gold in any form including Jewellery – ClarificationDated: 24-09-2012
  2. RBI Master Circular on External Commercial Borrowing (ECB) and Trade CreditDated: 01-07-2013
  3. RBI Master Circular on  Import of Goods and Services: Dated: 01-07-2013
  4. RBI Circular for Buyers Credit and Suppliers related to of import of Rough, Cut and Polished diamondDated: 06-05-2011
  5. RBI Circular for Import of Platinum, Palladium, rhodium, and SilverDated: 28-01-2008

Useful links in relation to Buyers Credit

1. ECB Form (Application Form for Buyers Credit /Supplier Credit)

2. Buyers Credit Cost Calculation Sheet

3. Current Exchange Rate

4. Future / Forward Rates of USD, EURO, GBP, JPY

Relevant RBI Circulars in Relation to Forward Contract

5. DTAA, Withholding Tax, Income Tax Notification in Relation to Form 15CA, Form 15CB, Challan 281, Form 27Q and Filling Links / Format

6. Relevant RBI Circulars in relation to Trade Credit

7. LIBOR Currencies

8. LIBOR Maturities (Below link gives USD Rate for different tenures. For other currencies, click on the above link)

9.    Country-wise Holiday List

RBI Trade Credit (Buyers/Suppliers Credit) Circular Extract

Updated on 19 October 2016

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. Suppliers’ credit relates to the credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from overseas bank or financial institution. Imports should be as permissible under the extant Foreign Trade Policy of the Director General of Foreign Trade (DGFT).

A. Routes and Amount of Trade Credit

Automatic Route: ADs are permitted to approve trade credit for import of non- capital and capital goods up to USD 20 million or equivalent per import transaction.

Approval Route: The proposals involving trade credit for import of non-capital and capital goods beyond USD 20 million or equivalent per import transaction are considered by the RBI.

B. Maturity

  • Maximum Maturity in case of import of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc): upto 1 year from the date of shipment or operating Cycle whichever is less.
  • Maximum Maturity in case of import of capital goods : upto 5 years from the date of shipment (Beyond 3 years banks are not allowed to provide Letter of Undertaking / comfort)
  • Incase of Capital Goods, the ab-initio (from beginning) contract period should be 6 (six) months for all trade credits.
  • No Rollover / Extension will be permitted beyond permissible limits

C. All-in-cost Ceilings: 6 Month Libor (respective currency of credit) + 350 bps

D. Guarantee

  1. Up to USD 20 million per import transaction
  2. For a maximum period up to one year in case of import of non-capital goods (except gold, palladium, platinum, rhodium, silver, etc).
  3. For import of capital goods, the period of guarantee/ Letters of Credit/ Letters of Undertaking by AD can be for a maximum period up to three years.
  4. The period is reckoned from the date of shipment and the guarantee period should be co-terminus with the period of credit.
  5. Further, issuance of guarantees will be subject to prudential guidelines issued by the RBI from time to time.

Reference