Category Archives: RBI Regulation & Circulars

What can be termed as Suppliers Credit?

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

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

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

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

Definition

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

What has changed ?

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

What is the confusion ?

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

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

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

Clarifications

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

Impact on Local Bank and Indian Bank’s Overseas Branches

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

Impact on Importer

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

Conclusion

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

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

Reference

  1. Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations: Updated on 26 Mar 2019
  2. RBI Circular : Trade Credit Policy – Revised framework: Dated 13 Mar 2019
  3. RBI Circular: New External Commercial Borrowings (ECB) framework : Dated 16 Jan 2019
  4. Old RBI Master Direction on ECB and Trade Credit: Updated till 22 Nov 2018

RBI FAQs on Trade Credit : Updated as on 26 Dec 2018

Below given are RBI FAQs on Trade Credit updated as on 26- Dec-2018. RBI has issued revised guidelines under” Trade Credit : New Regulatory Framework“. Will update this article as when RBI updates the FAQs with revised guidelines.

1. Does discontinuance of LoU/ LoC mean that Trade Credit has been discontinued as a means of trade finance?

No, Trade Credits, including Buyers’ Credit, can be availed as a form of clean credit apart from availing Bank Guarantee for Trade Credits, subject to extant Trade Credit guidelines and compliance with 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. Letters of Credit/ Bank Guarantee arrangements continue as a form of trade finance, as hitherto.

2. Do LoUs/ LoCs, which have been issued prior to issuance of A.P. (DIR Series) Circular No.20 dated March 13, 2018, but whose tenor is not over need to be cancelled?

No, LoUs/ LoCs issued and accepted prior to the issuance of the said circular may continue till their original validity. However, no roll-over is permitted.

3. Whether SBLC can be issued by AD Category branches on behalf of their customers for availing short term trade finance from overseas lenders in Foreign currency?

AD banks can issue SBLC on behalf of their customers for availing short term trade credit from overseas lenders in foreign currency subject to such SBLCs complying 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.

Reference

Trade Credit : Changes in All-in-Cost Ceiling

As discussed in the earlier article, RBI issued a circular related to Trade Credit – New Regulatory Framework which has provided clarity on many aspects of Trade credit  (Buyers Credit / Suppliers Credit). One of this aspect is All-in-Cost Ceiling.

This article is about All-in-Cost definition, relevant extracts of RBI circular, what has changed and what will be its impact on trade credit products offered by banks.

Continue reading Trade Credit : Changes in All-in-Cost Ceiling

Can SEZ, FTWZ and DTA units avail Buyers Credit ?

As discussed in earlier article, RBI issued a circular related to Trade Credit – New Regulatory Framework which has provided clarity on many aspects of Trade credit. One of the aspect is Trade Credit  (Buyers Credit / Suppliers Credit) availed by units based in SEZ/FTWZ/DTA.

In this article we have provided relevant extracts related to SEZ/FTWZ/DTA, definition, documentation and process to be followed by developers and units.

Continue reading Can SEZ, FTWZ and DTA units avail Buyers Credit ?

RBI Circular : Trade Credit – New Regulatory Framework

RBI has issued a new regulatory framework for Trade Credit (TC) on March 13, 2019 effective immediately. Details of the circular is given below. In next articles we will cover the major changes in the RBI circular.

Major highlights of the RBI circular are

  1. What be termed as Suppliers Credit ? As per the new circular Only those finance provided by Supplier of goods located outside India can be termed as suppliers credit. Some example finance provided by supplier can be DA Document or Usance LC for 180 days etc. Import Usance LC finance arrange by importer will hence forth  be called UPAS, LC backed Reimbursement Finance, or LC Discounting or any other term given by local / overseas branches.
  2. Banks can issue Bank Guarantee for availing trade credit. Few private sector banks earlier where insisting on giving SBLC to only their overseas branches for trade credit. But with this circular understanding should be that banks can now issue guarantee / SBLC to any overseas banks / branches, FI, Foreign Equity holder and IFSC Branches.
  3. The directions on issuance of guarantee mentioned under this provision shall come into force from the date of publication, in the Official Gazette, of the relative Regulations issued under FEMA.  As of 18-Dec-2019, above Gazette is yet to be issued.
  4. Changes in all-in-cost ceiling and definition.
  5. Foreign branches / subsidiaries of Indian banks are permitted as recognised lenders only for Foreign Currency Trade Credit.
  6. Option for 5 year trade credit has been removed.
  7. Non-banking financial companies (operating from IFSCs) will now be able provide trade credit.
  8. Another header created in amount for which Trade Credit can be availed by oil/gas refining & marketing, airline and shipping companies. Per Transaction Maximum Amount permissible will be USD 150 Million.
  9. Policy to avail trade credit for Shipyard and Shipbuilder.
  10. New Definition of all in costing pricing (It includes rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR). Thus would it mean 6 Month + 250 bps would also included bank guarantee fee charged by local bank ?
  11. Hedging Provision.
  12. Change of Currency of borrowing.
  13. Policy and process of Trade Credit related to SEZ, FTWZ and DTA.
  14. Security which can been offered for Trade Credit, creation of charge and related process.
  15. Authorised Dealer (AD) Banks to decide on formats or manner in which Trade Credit arrangements / loan agreements are to be documented.
  16. Role of Local Banks in Trade Credit.
  17. Procedure in case of Invocation of Guarantee.
  18. Definition of Foreign Equity Holder as per New External Commercial Borrowings framework
  19. What importers will have to do henceforth to avail buyers credit / trade credit.
  20. What will be changes in accounting treatment for buyers credit against Bank Guarantee in importers books of account.

Continue reading RBI Circular : Trade Credit – New Regulatory Framework

Revised Guidelines for Trade Credit

New Article: RBI Circular: Trade Credit : New Regulatory Framework

RBI revised Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 on December 17, 2018 (link in reference). Revision is made to ECB guidelines, Trade Credit, borrowing by banks outside India and others.

This articles covers changes made to Trade Credit guidelines.

Continue reading Revised Guidelines for Trade Credit

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.

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

Buyers Credit & Suppliers Credit in Rupee (INR)

RBI 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:

Continue reading Buyers Credit & Suppliers Credit in Rupee (INR)

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.

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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.

Continue reading Revised Guidelines for Merchanting / Intermediary Trade

Permitted Methods of Import Payment

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.

Continue reading Permitted Methods of Import Payment

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

Trade Credit for Import into India

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.

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

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?

Continue reading Buyers Credit on Import of Second Hand Machinery

Period of Buyers Credit Linked to Operating Cycle

In 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.

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Buyers Credit on Import of Precious and Semi Precious Stone

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.

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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:

Continue reading Bank Finance for Purchase of Gold

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.

Continue reading Review of Trade Credit All-In-Cost Ceiling

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.

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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:

Continue reading Trade Credit Extended Upto 5 Years for Infrastructure Firms

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:

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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 for Imports Under Direct Documents

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.

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Comprehensive Guidelines on Foreign Exchange Derivatives

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.

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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.

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

RBI Increase Buyers Credit All-in-Cost Ceiling

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.

Continue reading RBI Increase Buyers Credit All-in-Cost Ceiling

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:

Continue reading Infrastructure Companies – Bridge Finance before availing ECB

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. 

Continue reading Import of Platinum, Palladium, Rhodium, Silver

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.

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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

Continue reading Useful links in relation to Buyers Credit

RBI Trade Credit (Buyers/Suppliers Credit) Circular Extract

New Article: RBI Circular : Trade Credit – New Regulatory Framework

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).

Continue reading RBI Trade Credit (Buyers/Suppliers Credit) Circular Extract