RBI Trade Credit Circular Highlights

RBI Trade Credit Circular Highlights

20 Mar 2019 10:00 AM

Recently RBI issued Notification No. FEMA.3(R)/2018-RB dated December 17, 2018 and made changes to the Trade Credit (Supplier’s Credit/Buyer’s Credit) framework. The circular covered borrowing & lending in foreign currency (including Trade Credit which is a type of borrowing in foreign currency). The changes effected were covered in Schedule II of the said circular.

Subsequently, RBI issued A.P. (DIR Series) Circular No. 23 dated March 13, 2019 and laid out the revised framework for Trade Credit in India. This revised policy replaces the existing Master Direction on Trade Credits with immediate effect.

This brings us to the pertinent question – what has changed? Our team at Myforexeye studied the two circulars and has consulted with few industry veterans and prepared a short summary for clients & other enthusiasts. The summary is for Trade Credit under the ‘automatic route’.

What has changed/been amended?

  1. All-in-cost ceiling has been revised from benchmark rate plus 350bps to 250bps p.a. Earlier the guidelines specifically stated LIBOR or other benchmark rates, however, now only ‘Benchmark rate’ is mentioned.
  2. All-in cost ceiling now includes guarantees fees for arranging trade credit. 
  3. The all-in-cost excludes the cost of Withholding Tax payable in INR (chargeable in case the trade credit is raised from a foreign Bank/ Institution). While this was implied earlier, RBI has clarified it in the circular
  4. Amount for availing trade credit has been increased from USD 20 million to USD 50 million or equivalent per import transaction for imports into India
  5. Tenor for availing trade credit for capital goods is now up to 3 years (up to 5 years earlier).

What is new?

  1. Oil/gas refining & marketing, airline & shipping companies can avail Trade credit up to USD150 million per import transaction.
  2. Shipyards/ Shipbuilders can avail trade credit up to a period of 3 years for non-capital goods.
  3. Companies operating in Special economic zone (SEZ) & Free trade warehousing zone (FTWZ) are now eligible to avail trade credits in freely convertible foreign currencies in one of the following scenarios: 
    1. Physical imports (goods crossing into India) of the SEZ entity (this was allowed earlier too)
    1. Purchases from another entity operating within the same SEZ/FTWZ (goods are moving within the same SEZ).
    1. Purchases from another entity operating in another SEZ/FTWZ (goods are moving between two SEZs).
  4. Inter unit receipt generated through NSDL can be treated as an import document for availing trade credits (in case of absence of Bill of entry in transactions related to SEZ/FTWZ).
  5. Domestic Tariff area units can also avail trade credits in freely convertible foreign currency if they purchase capital/ non-capital goods from a company operating in a SEZ/FTWZ.
  6. For the purpose of raising TC, the importer may also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee for raising TC. ADs are, therefore, allowed to permit creation of charge on security offered / accept corporate or personal guarantee. 

What remains the same?

  1. Tenor for availing trade credit for non- capital goods is up to 1 year or operating cycle of the business whichever is lower (except for Shipyards/ Shipbuilders). 
  2. The prohibition on issuance of Letter of Undertaking (LOU)/ Letter of Comfort (LOC) to secure Trade Credit continues.

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