Period of Buyers Credit Linked to Operating Cycle

Operating CycleIn 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.

This circular has removed the ambiguity on tenure for which buyers credit (Trade Credit) can be availed. Earlier RBI circular was open ended stating tenure allowed for raw material import was upto 360 days and decision was left on the banks (AD) to decide on clientwise tenure based on their internal criteria.

Above changes in the circular will have impact on…

  • Buyers Credit rollover transaction will not be possible for tenure more than mentioned in sanction limits.
  • Those clients who were using buyers credit for arbitrage purpose earlier, this window has closed.

Reference

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15 thoughts on “Period of Buyers Credit Linked to Operating Cycle”

  1. Dear Mr. Sanjay,

    One query regarding sanction of buyer’s credit. If a Customer’s (manufacturing unit) total operating cycle is 150 days. For example, if, as per the the operating cycle, the bank issues a usance LC on 02.03.2013, which expires on 02.08.2013 and on 31.07.2013, the customer asks the bank for availment of Buyer’s credit for 6 month to repay the import bills falling due on on 02.08.2013.Now, as per the the RBI circular RBI/2013-14/132 dated 11.07.2013 for Trade Credits for Imports into India, can the bank allow availing of buyer’s credit for 6 month maturing on January 2013.

    1. Working capital cycle tenure can used by client using any of the product or its combination but not more than that tenure. As in above example, under LC already complete tenure of 150 days has been used, bank cannot approve further tenure as buyers credit.

  2. In our case the operating cycle is 90 -120 days, but supplier is giving us 360 days credit and we are opening LC for 360 days. Can we say that as supplier is giving us 360 days credit, thus this is the trade transaction. Can bank prevent us to open the 360 days LC, though credit is given by supplier and its under commercial negotiation by us with suppliers.

    1. First paragraph of RBI Master Circular on External Commercial Borrowing and Trade Credit answers your question.

      RBI Circular Extract

      Trade Credits (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers’ credit and suppliers’ credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines.

      Revert on your query

        Can we say that as supplier is giving us 360 days credit, thus this is the trade transaction.: Yes. This will fall under the definition of Trade Credit. Refer bold part of above paragraph.
        Can bank prevent us to open the 360 days LC, though credit is given by supplier and its under commercial negotiation by us with suppliers.: Yes Bank can stop this transaction
    1. As per my understanding, purpose of RBI for coming up with above restriction to stop arbitrage which is getting served by Operating Cycle. Secondly circular does not provide for any room above interpretation. Thus, maximum tenure permissible will be operating cycle incase of any scenario.

  3. If in sanction letter, operating cycle is of 120 days, buyers credit limit sanctioned is 180 days and we open lc of 90 days. Then on date of expiry of lc, for how many days we can take buyers credit. Is it 30 days or we can take for 90 days?

    1. Technically speaking buyers credit can be taken for further 30 days only. Above situation arrises because, new regulation on operating cycle came to effect from June 2013 where as customer sanction letter were prior to that. At the time of renewal of limits, bank will make necessary changes in sanction letter.

  4. I read your article on buyers credit – India & Relevance of operating cycle in Buyers credit transaction.The reading gave me lot of inputs .

    I need your clarification in the following case study.

    Our customer ie importer has received direct bill from overseas exporter . The B/L is dated 01.09.2014 . He has approached us on 14.01.2015 with a quote for 180 days. Drawdown date is 25.01.2015

    Whether
    1. maturity date is 180 days from date of shipment ie B/L date or 180 days from drawdown date of funds.
    2. Nothing is mentioned about operating cycle in sanction and only usance period of letter of credit is clarified then can we extend BC beyond usance period based on the RBI guidelines of upto 360 days for raw materials

    Sir your guidance is very much required

    1. 1. Tenure of buyers credit is from the date of shipment.

      2. Irrespective operating cycle is mentioned in sanctioned letter or not, all buyers credit transaction has to be compliant (link to RBI circular in article reference). Either operating cycle has to calculated a fresh, or you can use non fund based tenure as guide. Normally at the time of sanction of non fund based limit, maximum usance is sanctioned based on operating cycle. Thus based on information provide, further buyers credit cannot be provided to given customer for 180 days. At max it can be for 34 days assuming operating cycle of client is 180 days.

  5. I have two queries
    1. FLC acceptance date was 11th March 2016 and as per SL tenor is of 90 days. However due date for payment is of 18-4-2016. Pls confirm about the calculation methodolgy for FLC tenor.As per client he was not allowed the entire period of 90 days

    2. In case if the LC devolves what are the consequences.Also confirm whether commission is charged upfrnt or at expiry

    1. Query is not related to buyers credit but still answered below.

      1. When one talk about 90 days usance, It would also mention 90 days from which date. It can be from date of shipment, date of acceptance etc. One needs to look at the LC copy to determine how bank is calculating the tenure.
      2. Usually bank would base operating cycle from date of shipment.
      3. Incase Lc get devolved, account become NPA immediately.
      4. Commission: Bank charges are usually debited upfront.

  6. Please tell whether lead period be included in operating cycle eg if lead period is 2 months and operating cycle is 6 months ,please tell whether trade credit period will be 8 months ie 2+6months or only 6 MONTHS

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