Trade Credit (Buyer’s 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 Trade Credits (TC) 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 services both for buyers’ credit and supplier credit under the trade credit framework. Trade credit facilitates local importers to gain entry to cheaper foreign funds, close to LIBOR rates, which is cheaper, compared to local sources of funding.
Lenders for Suppliers’ credit: Supplier of goods located outside India.
Lenders for Buyers’ Credit: Banks, financial institutions, foreign equity holder(s) located outside India, and financial institutions in IFSCs located in India.
Note: Participation of Indian banks and non-banking financial companies (operating from IFSCs) as lenders will be subject to the prudential guidelines issued by the concerned regulatory departments of the Reserve Bank. Further, foreign branches/subsidiaries of Indian banks are permitted as recognised lenders only for FCY TC.
The salient feature of the revised trade credit framework for Buyers credit and Supplier credit:
- Limit: As per the revised guidelines of RBI (RBI/2018-2019/140A.P. (DIR Series) Circular No. 23, March 13, 2019) on Trade credit framework, import transactions 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 are permitted.
- All-in-cost ceiling per annum: Benchmark Rate plus 350 bps spread for existing TCs linked to LIBOR whose benchmarks are changed to ARR.
Benchmark rate plus 300 bps spread: For new TCs.
For Indian Rupees TC: Benchmark rate plus 250 bps spread Benchmark rate plus 250 bps spread.
- Exchange rate: In case a change of Foreign currency into Indian Rupee trade credit is 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, that 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, a 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 a letter of comfort. The buyers’ credit may be extended, either from an overseas branch of the domestic bank or an international bank in a foreign country. Bank guarantees may be given by the ADs, on behalf of the importer, in favour of an overseas lender of TC not exceeding the amount of TC. The 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 the creation of charges 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.