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:
- Trade credit can be raised for import of all items (except gold) permissible under the extant Foreign Trade Policy.
- Trade credit period for import of non-capital goods can be upto one year from the date of shipment or upto the operating cycle whichever is lower
- Trade credit period for import of capital goods can be upto five years from the date of shipment
- No roll-over / extension can be permitted by bank beyond the permissible period
- Banks can permit trade credit upto USD 20 million equivalent per import transaction
- Banks are permitted to give guarantee, Letter of Undertaking or Letter of Comfort in respect of trade credit for a maximum period of three years from the date of shipment
- The all-in-cost of such Rupee (INR) denominated trade credit should be commensurate with prevailing market conditions
- All other guidelines for trade credit will be applicable for such Rupee (INR) denominated trade credits
Overseas lenders of Rupee (INR) denominated trade credits will be eligible to hedge their exposure in Rupees through permitted derivative products in the on-shore market with a bank in India.
Modes Operandi for Importer, Importers Bank and Indian Bank Overseas Branches (Probable)
- Importer imports goods in USD / EUR / Or any other freely convertible foreign currency
- Importer will ask Importers Bank to book conversion rate for making payment on due date of bill and provide equivalent INR details for arranging buyers credit quote.
- Importers arranges quote through buyers credit consultant in INR
- Indian Bank sends lou in INR to Indian Bank Overseas Branch
- Indian Bank Overseas Bank transfers INR to Importers Bank
- Importers Banks receives INR, converts the same in USD / Eur and makes payment to Supplier.
- On due date importer pay Principal + Interest in INR to Importers Banks
- Importers Bank makes payment in INR to Indian Bank Overseas Branch.
**As Indian Bank overseas bank borrows in USD / EUR in international market and if they lend in INR, they will have to do hedging.
Benefits to Importer
- As funding will be in INR, no hedging requirement.
- Margin requirement will be reduced / stabilize. Every time because of dollar movement, Importer had to bring in extra margin. If trade credit lending is in INR, once margin is given to bank, it will remain fixed. Thus importer will be able to better plan his fund requirement.
- Nullify expected interest hike by Federal Service System (FED) of USA, as lending will be in INR. Libor rates have already gone up by 20 basis points (bps) in last 6 months and are still expected to go up if FED increased rate of interest.
Few Question ???
- In current process of Trade Credit, there was no requirement of loan agreement, but above policy has used wording of Loan Agreement. Whether Letter of Undertaking (LOU / LOC) will be considered as loan agreement or not is a question which will get raised. Clarification from RBI would be required on same.
- How many banks would be interested in taking up Trade Credit in INR ?
- What will be the lending rates in case of INR based funding ?
- Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
- RBI Master Direction – Import of Goods and Services: Dated: 31-03-2016