Trade Credit (Buyers credit/supplier credit) can be raised by Indian importers in any freely convertible foreign currency (FCY denominated TC) or Indian Rupee (INR denominated TC), as per the framework.
Buyers’ credit finance means finance for payment of imports in India arranged by the importer (buyer) from a bank or financial institution outside India. The suppliers’ credit means credits extended for imports directly by the overseas supplier instead of a bank or financial institution. Importers bank provides similar service both for buyers’ credit and supplier credit under trade credit frame work. Trade credit facilitates local importers gain entry to cheaper foreign funds, close to LIBOR rates, which is cheaper, compared to local sources of funding.
Salient feature of the revised trade credit framework:
- Limit: As per the revised guidelines of RBI (RBI/2018-2019/140A.P. (DIR Series) Circular No. 23, March 13, 2019) on Trade credit frame work, import transaction can take place up to USD 150 million or equivalent per import transaction for oil/gas refining & marketing, airline and shipping companies. For others, transactions up to USD 50 million or equivalent per import transaction is permitted.
- All-in-cost ceiling per annum: Benchmark rate plus 250 bps spread.
- Exchange rate: In case, Change of Foreign currency into Indian Rupee trade credit required, it can be at the exchange rate prevailing on the date of the agreement between the parties concerned for such change or at an exchange rate, which is less than the rate prevailing on the date of agreement, if consented to by the Trade credit (TC) lender. The exchange rate for conversion to Rupee shall be the rate prevailing on the date of settlement.
- Hedging provision: The overseas investors are eligible to hedge their exposure in Rupee through permitted derivative products with AD Category I banks in India. The investors can also access the domestic market through branches / subsidiaries of Indian banks abroad or branches of foreign banks with Indian presence on a back to back basis. However, such entities shall have a board approved risk management policy.
- Change of currency of borrowing: Conversion of one permitted currency to another permitted currency or Indian Rupees is freely permitted .However, change of currency from INR to any freely convertible foreign currency is not permitted.
- Security for trade credit: The bank or financial institution outside India finances the importer based on a guarantee given by the importer’s bank. The guarantee, so given by the importer’s bank, is called letter of comfort. The buyers’ credit may be extended, either from an overseas branch of the domestic bank or an international bank in the foreign country. Bank guarantees may be given by the ADs, on behalf of the importer, in favour of overseas lender of TC not exceeding the amount of TC. Period of such guarantee cannot be beyond the maximum permissible period for TC. The TC may also be secured by overseas guarantee issued by foreign banks / overseas branches of Indian banks. Issuance of such guarantees i.e. guarantees by Indian banks and their branches/subsidiaries located outside India will be subject to compliance with Banking regulations on “Guarantees and Co-acceptances”, as amended from time to time. The importer may also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee for raising TC. ADs may, therefore, be allowed to permit creation of charge on security offered / accept corporate or personal guarantee subject to provisions contained in Foreign Exchange Management (Acquisition and Transfer of Immovable Property in India) Regulations, 2000 and Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 or any other relative Regulations framed under the Foreign Exchange Management Act, 1999 and should also comply with FDI/FII/SEZ policy/ rules/ guidelines.