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.

RBI Master Direction – External Commercial Borrowing and Trade Credit

On 11th July 2013, RBI revised the policy by linking Trade Credit to Operating Cycle.

Maturity prescriptions for trade credit on the non-capital goods, the maturity period is up to one year from the date of shipment or the operating cycle whichever is less.

Operating CycleWhat is Operating Cycle ?

In simple terms operating cycle is period for which funds are blocked in business. Every business transaction passes through a Operating Cycle– from initial cash – to Credit Purchase of raw material – to Manufacturing Process – to Credit Sales to Customer – to Realisation of Book Debts – to payment to creditors- and again in Cash

Business owner fill this gap by using their own funds and banks funds by way of Fund Based and Non Fund based limits.

How to Calculate Operating Cycle (Net Operating Cycle)

Net Operating Cycle = Days Stock Held (1) + Days Sales Outstanding (2) – Days Payable Outstanding (3)

(1)  Days Stock Held = (Average Stock * 365) / Cost of Goods Sold

      A. Average Stock =  (Opening Stock + Closing Stock) / 2

     B. Cost of Goods Sold = Opening Stock + Purchases – Closing Stock

(2) Days Sales Outstanding = (Debtors * 365) / Sales

(3) Days Payables Outstanding = (Creditors * 365) / Cost of Goods Sold

How will Bank Implement

At the time of sanctioning of fresh limits or renewal of existing limits, banks will have to define Operating Cycle of every importer and based on sanction tenure, importer will be able to take buyers credit.

Impact of the Policy

  1. Buyers Credit beyond Operating Cycle has stopped.
  2. Rollover of Buyers Credit beyond Operating Cycle has stopped. This is having negative impact of genuine imports whose operating cycle has gone up because of economic downturn.
  3. Few importers who were using Buyers Credit for Arbitrage has stopped.

Reference

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4 thoughts on “Relevance of Operating Cycle in Buyers Credit Transaction”

  1. can any body avail 360 days buyers credit if it is not availing any bank limit for working capital and 100% cash security is provided? Means bank has no information about period of operating cycle.

  2. Hi this is raghu from bangalore
    I need ur valuable suggestion… my banks have made me max 180 days bc… now I am not able to pump more money to purchase becoz of this credit issue..
    They suggest me to write a letter about business circle.. based on this they will revert back to us.. but my question is they deny..what is the next option ti get bc.. plz help

    1. Banks are bounded by Operating Cycle clause as instructed by RBI for buyers credit transaction. The same is derived by bank based on your balance sheet and CMA data provided by you.

      Thus there can be only two options:

      1. If there is change in your operating cycle, you can provide revised CMA data with justification. If banks accepts it then they will increase your tenure from 180 days to say 270 days or what ever is new operating cycle.
      2. If bank is not accepting the above justification and does not increase your operating cycle, in that case nothing can be done about it.

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