RBI Eases Trade Credit Norms

The Reserve Bank of India increased the cap on trade credits that Indian importers can raise through the automatic route from overseas suppliers, banks and other financial institutions.

Large oil and gas refining and distribution, airline and shipping companies can raise up to $150 million or equivalent through the automatic route via trade credits, according to a circular on the RBI’s website. Other companies can raise up to $50 million or equivalent per import transaction. The earlier limit was $20 million for all the companies.

An Indian importer or exporter of goods and services can avail such buyers’ and suppliers’ credit either in foreign currencies or rupees. Companies that import capital goods can raise funds through this facility up to three years. In case of non-capital goods, the period is capped at one year or less depending on the requirement.

The changed policy comes into effect immediately, according to the RBI, and is part of the central bank’s ongoing rationalising of regulations for external commercial borrowings.

Under the revised framework, the “all-in-cost” per annum has been pegged at the benchmark rate-plus-250-basis-point spread—a reduction of 100 basis points.

Trade credits can also be raised by units or developers in a Special Economic Zone, including Free Trade Warehousing Zones. An entity within a Domestic Tariff Area can also raise such a credit for buying capital or non-capital goods from a unit or developer in an SEZ of FTWZ. In that case, as there is no bill of entry for sales between the units, the inter-unit receipt will be treated as an import document.

Other Highlights

• Bank guarantees may be given by banks on behalf of the importer so long as they don’t exceed the amount of the credit itself and the term of the guarantee cannot be longer then the permissible period.
• Importers can also use moveable and immoveable assets, corporate and personal guarantees to raise trade credits and lenders can create a “charge” on the security.
• Banks have to give the RBI quarterly data on the issuance of bank guarantees for trade credits by all their branches and also monthly reports on all such withdrawals, utilisation and repayments.
• Recipients of the trade credit facility can convert the instrument from one foreign currency denomination to another at any point of time, but they can’t change the currency from Indian rupee to any foreign currency.
• Domestic entities can hedge their trade credit exposure following the guidelines set by sectoral regulators
• Overseas investors can hedge their exposure in rupees through derivative products offered by licensed banks.