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. Although both buyers credit and supplier credit are credit facility to the importer, depending upon the sources of credit they are classified as Buyers’ credit or Suppliers’ 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.Buyers’ credit facilitates local importers gain entry to cheaper foreign funds, close to LIBOR rates, which is cheaper, compared to local sources of funding.
The amount and maturity allowed under trade credits (buyers’ credit / suppliers’ credit) under current credit policy of India are as under.
(a) AD banks are permitted to approve trade credits up to USD 20 million per transaction for the imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year from the date of shipment.
(b) For import of capital goods permissible under DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and up to five years from the date of shipment for industries of all sectors.
(c) The abinitio contract period should be 6 (six) months for all trade credits. It means buyers credit for capital goods can be taken and roll over in multiple of six months up to 5 years.
(d) No roll-over/extension will be permitted for trade credits (buyers’ credit/suppliers credit) beyond the permissible period.
(e) Banks can issue Letter of Credit (LC)/Letter of undertaking (LoU)/letter of comfort (LoC) in favour of overseas supplier, bank or financial institutions up to USD 20 million per transaction for a period of up to one year for non-capital goods and up to three years for capital goods permissible under Foreign Trade Policy. It is important to note that as per existing guidelines ‘Buyers Credit/Trade Credits’ for capital goods are allowed up to five years, but banks cannot issue LC/LoU/LoC beyond 3 years from the date of shipment.
(f) The LC/LoU/LoC has to be co-terminus with the period of credit reckoned from date of shipment and are issued by Banks subject to prudential norms issued by RBI from time to time.
Previously, the tenure allowed for import of raw material was up to 360 days which was left to the discretion of AD Bank to decide on client-wise tenure (based on presumed operating cycle). Therefore, prior to RBI circular July 13, 2013, many importers used to borrow under buyers credit for the period more than what operating cycle of a unit required. This was to take the advantage of cheap rates for trade credit. For example, operating cycle of a manufacturing unit was six months but importer wants trade credit for twelve months to enjoy use of cheap funds in foreign currency. This type of tendency of the importers used to expose them to currency risks in the situation of volatile market conditions if the currency positions held unhedged.RBI circular dated July 13, 2013 states that ‘Period of Trade Credit (Buyers credit/suppliers credit) should be linked to the operating cycle and trade transactions’. This step was taken by Reserve Bank to clear the ambiguity of trade credit tenure and rationalize credit usage pattern. The impact of the new rule is that banks have stopped allowing credit to an importer beyond operating cycle. It also stopped roll over of buyers’ credit. It also stopped importers who were using buyers’ credit for Arbitrage to earn some profit out of it.The banks while sanctioning or renewing buyers’ credit limit to the importers shall show how the bank has decided the maximum tenure for buyers’ credit on the basis of operating cycle tenure.