Latest RBI Circular : RBI stops Buyers Credit. As is circular copy given below. Please refer bold section.
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.
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:
Importer 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.
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.
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.
The 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.
In 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.
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?
In the circular issued on 11th July 2013, RBI has made following two changes in relation to Trade Credit transactions:
- Period of Trade Credit (Buyers Credit / Suppliers Credit) should be linked to the operating cycle and trade transaction.
- 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.
In 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.
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:
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
- 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)
- 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.
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.
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:
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:
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.
- Maximum Cap on Interest Rate for tenure Upto 3 years : 6 Month LIBOR + 350 bps
- Applicable Upto: 30/09/2012 (Subject to review there after)
RBI 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.
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.
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.
RBI reviewing the developments in global finance markets and the fact that domestic importers are experiencing difficulties in raising Trade Credit (Buyers Credit / Suppliers Credit) within the existing all-in-cost ceiling, RBI has made below changes in the existing policy.
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:
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
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.
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.
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).