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.

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.

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.

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.

Buyers Credit Against Standby Letter of Credit (SBLC) / Bank Guarantee

Post RBI disallowed LOU and LOC for buyers credit transactions, importers and banks are trying different structures which can assist in  Import finance. Some of these structures are

1. Suppliers Credit
2. Buyers Credit Against SBLC (Standby Letter of Credit) / Bank Guarantee
3. Reimbursement Finance (Usance LC Reimbursement at Sight)

This article is about Buyers Credit Against Standby Letter of Credit (SBLC), its meaning, process flow, documents required, costing, applicable rules, issues with the current structure and what should importer do to avail it.

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.

Buyers Credit Outstanding Down by $25 Billion

Since RBI Stopped Buyers Credit Transactions against LOU and LOC, few questions kept on coming up regularly

1. What was the outstanding amount of buyers credit in overseas branches of Indian Bank as RBI data did not provide bifurcation products wise ?
2. What is the run down in books of these bank since 13 March 2018 RBI Circular ?
3. What is its impact on Libor based finance available to Indian importers ?

In this article we have provided the data and analysis which will answer the first two questions.

LoU/ LoC should be restored with proper safeguards: Standing Committee Report

Department Related Parliamentary Standing Committee on Commerce Chaired by Shri Naresh Gujral, presented it report on 06 August 2018 on “Impact of Banking Misappropriation on Trade and Industry“

The report extensively covers  RBI Ban on LOU / LOC and its impact on the Industry and committee’s recommendations. In summary,  Committee  has recommends that LoU/ LoC should be restored at the earliest albeit with proper safeguards.”

Reuters: Indian importers face funding crunch with clampdown on credit guarantees

Article in Reuters printed with permission: 

MUMBAI (Reuters) – The Indian central bank’s move to cut off a key form of trade finance in the aftermath of a multi-billion dollar fraud could both dent the rupee and sharply raise costs for many importers, bankers and traders said.

Indian Banks adds Additional Control to SWIFT System

As per Government of India revert in Rajya Sabha, PNB  has taken below steps to ensure that such unauthorised activities in SWIFT systems are not repeated (other banks may have changed accordingly):

RBI Stops Buyers Credit Transactions (LOU & LOC)

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

Latest RBI Circular : RBI stops Buyers Credit. As is circular copy given below. Please refer bold section. 

Bank Audit – Buyers Credit and Nostro Account

A bank branch goes through four kinds of audits and inspection

• Internal audit (done by bank staff) on regular basis
• Concurrent audit (done by a third party), on monthly or quarterly basis
• Statutory audit (done by the statutory auditor) on quarterly basis
• Inspection by RBI (annual basis).

In relation to buyers credit transaction, below are the few audit point which are covered by above audits.

Buyers Credit Secondary Market

During the PNB Fraud case, one of the Banks made a statement that:

“It is an active participant in the secondary market for buyer’s credit transactions and it has sold “all the referred transactions’’.

This article tries to throw some light on what is buyers credit secondary market, how the structure works and why banks do transaction in secondary market.

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.

Implication on Buyers Credit because of PNB Fraud

Latest Articles:

1. RBI Stops Buyers Credit Transactions (LOU & LOC)
2. Indian Banks adds Additional Control to SWIFT System
3. Bank Audit – Buyers Credit and Nostro Account

This article gives layman summary of the PNB fraud case and its impact on buyers credit product and various stake holders like Indian Bank Overseas Branches, Local Banks in India and Importers.

EU list of Non-Cooperative Jurisdictions : No Impact on Buyers Credit

On 5 December 2017, European Union (EU) Council approved and published a list of non-cooperative jurisdictions. Criteria used were:

• Tax Transparency
• Fair Taxation
• Implementation of Anti – BEPS (Base Erosion and Profit Shifting) standards

Post Libor World – Impact on Buyers Credit

In earlier article we have discussed about various aspect of Libor and its Impact on buyers credit transaction.

In brief, Libor attempts to answer a fundamental question: What is the  cost of money? It does this for a range of currencies (dollars, euros,  pounds, etc.) and for a range of maturities.

Replacing Import Documents after Buyers Credit Funding

Recently a query from importer came in after buyers credit transaction was funded for replacing the underlying import document  with another document.

Stronger Rupee Impact on Buyers Credit

Currency fluctuation is one of the factor effecting  Buyers Credit.

Chart: www.xe.com

From 62 Level starting 2015, USD INR moved to 68 levels and since then has come back to 64 levels in 2017. This article explores impact of stronger rupee on importers who have availed buyers credit.

Nostro Account and Buyers Credit

What is Nostro Account ?

Moratorium Period Impact on Buyers Credit

As per RBI Master Direction on External Commercial Borrowing and Trade Credit banks are allowed to sanction buyers credit on import of capital goods for  3 years with Letter of Undertaking.

In order to avail above buyers credit, Importer will have to get term loan sanctioned with buyers credit as sub-limit with his bank. As seen in earlier article “Buyers Credit on Capital Goods“, moratorium period is one of the factor which importer needs to take care at time of sanctioning of term loan. This article explains

Rising Libor Rates and Its Impact on Buyers Credit

Buyers Credit transactions are funded on Libor rates. Thus any change in Libor directly impact overall costing of the transaction.

Libor rates started rising in 2015 and pace of which got picked up since beginning of 2017. Below 3 Month Libor and 6 Month Libor charts shows the trend. There are two charts for two range.

Link Between Libor Periods & Buyers Credit Tenure

Trigger for this topic is a question that a reader asked:

Can I take buyer credit quote of 12M+LIBOR for capital goods import. Is there any specified guidelines that we have to take 6M+LIBOR / 3M+LIBOR only.

Subsidy under CLCSS Cannot be Claimed Where Buyers Credit is Availed

Trigger for this topic is a question that a reader asked:

“MSME manufacturing  unit doing expansion of machinery by purchasing machinery from abroad   get credit linked capital subsidy scheme (CLCSS) from Central Government.

MSME unit avails buyers credit for payment to overseas buyer and sanctioned term loan is not utilised . Can the unit be eligible for subsidy? ”

Below article gives basic details about Credit Linked Capital Subsidy Scheme and revert to above query.

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:

Impact of Negative Euribor on Buyers Credit

European Central Bank (ECB) started Quantitative Easing (QE) program last year for European Banks which has resulted into

• Weakening of Euro Currency
• Negative Inter Bank Rates (EURIBOR)

Steps followed by Overseas Branches during Buyers Credit

Indian Bank Overseas Branches / Foreign Bank has to  carry out many processes pre and post disbursement of buyers credit. Below are the steps from end to end.

Can Exporter Retain EEFC A/c Balance for Buyers Credit Repayment

Trigger for this topic is a question that a reader asked:

“Can Exporter retain dollar in EEFC A/c for buyers credit repayment ?”

Below article gives basic details about EEFC account and revert to above query.

Clubbing Import bills for Single Buyers Credit Transaction

Importer regularly gets multiple bills from same supplier and from multiple suppliers. Clubbing these multiple import bills to a single Buyers Credit transaction will reduce overseas bank interest cost.

Should Importer accept Buyers Credit Quote including LOU charges

In earlier article we have discussed about costing of buyers credit, list of which is given below.

• Overseas Bank / Branch Interest cost
• LOU / LOC charges
• Forward / Hedging Cost
• Arrangement fee
• Other charges
• Withholding Tax(WHT)

Difference Between Letter of Comfort and Letter of Undertaking

Letter of Undertaking in simple terms is bank guarantee issued by Indian bank against which overseas bank provide finance on Libor rates. Libor linked finance used by importers are Buyers Credit, Suppliers Credit, ECB etc. Libor linked finance used by exporters is PCFC (Packing Credit in foreign currency)

In earlier articles, terms Letter of Undertaking (LOU) and Letter of Comfort are used regularly. Below article gives difference between both these terms from perspective of buyers credit.

Is Service Tax Applicable on Buyers Credit ?

The trigger for this topic is a question that a reader asked:

“I would like to know whether service tax is applicable under Section 66A of the erstwhile Act on availing Buyer’s credit? It is not only the interest which is paid but a number of other fees like the management fees, arrangement fees, hedging cost etc which is paid to banks by the importer”

Buyers Credit on Import of Non Capital Goods

The trigger for this topic is a question that a reader asked:

We have a processing facility of granite. Can we use buyers credit for consumables (our banker refusing for consumables). As per them only raw material is allowed for buyer credit

Credit Rating and Buyers Credit

What is Credit Rating ?

A credit rating represents the rating agency’s opinion on the likelihood of a rated debt obligation being repaid in full and on time. Usually alphanumeric symbols are used to convey a credit rating. Credit rating can be Internal Rating (Banks rate customers internally) or External Rating by external agencies like CRISIL, ICRA and others.

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.

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.

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.

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.

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?

Relationship Management Application (RMA) and Buyers Credit

Using Swift Codes Banks and Financial Institutions send and receive swift messages. But there must have been times where you might have come across your bankers coming back to you stating that they do not have swift key arrangement with buyers credit bank. Thus they will not be able to send Letter of Undertaking (LOU) / Letter of Comfort (LOC) authenticated swift message (MT799) to buyers credit bank. Below article gives a brief about why situation arise.

Buyers Credit for Co Operative Bank Customers

Importers banking with Co operative Bank’s both AD Category and Non AD Category, face issues with arranging buyers credit because

• In case of AD Category Co operative Bank: Limited Lines in International Market or No Lines
• Non AD Category Co operative Bank: They cannot deal directly in Import or Export transaction but have to route the transaction through tie up bank.

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.

Change in LIBOR Tenures and Impact on Trade Finance

LIBOR scandal was discussed in the earlier articles like Pushing the reset button on LIBOR – Speech by Martin Wheatley and Impact of Libor Review on Trade Finance in India .

Swift Code & Messages Used in Buyers Credit Transaction

Latest Article:

• RBI 2016 Circular: Fraud Related to Trade Finance Transactions – Misuse of Swift 

What is SWIFT Code ?

SWIFT code (also known as ISO 9362, SWIFT-BIC, BIC code, SWIFT ID or SWIFT code) is a standard format of Business Identifier Codes approved by the International Organization for Standardization (ISO). It is a unique identification code for both financial and non-financial institutions. These codes are used when transferring money between banks, particularly for international wire transfers, and also for the exchange of other messages between banks.

Transfer of Limits from One Bank to Another : Buyers Credit Rollover Process

Buyers Credit is arranged against Letter of Undertaking  (LOU) / Letter of Comfort (LOC) issued by Importer’s Bank. During this period if importer decides to shift his limits from X bank to Y bank, few complications arise.  For a Raw material transaction, importer may decide not to rollover the transaction to avoid complications; but for Capital goods  Importer has lesser options. If the buyers credit does not get rolled over, the same would get converted into term loan which would cost the importer higher rate of interest. This article provides details on process to be followed and what documents are needed for smooth transition. For understanding let assume,

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.

Myanmar Economic Sanctions – Background, Recent Relaxation & Trade Finance

Myanmar has been under various international economic sanction for more than a decade, which has crippled its international trade. Below article gives a background of economic sanctions on Myanmar, recent relaxations in these sanctions and what will be its likely impact on trade finance from Indian importers perspective.

Buyers Credit on High Sea Sales Transaction

What is High Sea Sales ?

High Sea Sales (HSS) is a sale carried out by the carrier document consignee to another buyer while the goods are yet on high seas or after their dispatch from the port/airport of origin and before their arrival at the port/ airport of destination.

How to Calculate Total Cost of Buyers Credit

Readers have come back asking for calculator to arrive at total cost on buyers credit transaction. To help readers, a link to excel sheet with buyers credit cost calculation is given below.

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: