Question : What is the meaning of trade credits ?

Trade credit means foreign currency credit/loan extended for imports into India, by overseas supplier, bank and Financial Institution for original maturity of less than three years – Schedule III of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000.

Buyers’ credit and suppliers’ credit for three years and above comes under ECB.

Provisions are summarised in part II of RBI Master Circular No. 12/2014-15 dated 1-7-2014 on ‘External Commercial Borrowings and Trade Credit’ [earlier Master Circular No. 12/2013-14 dated 1-7-2013].

Question:   What are the the types of Trade credit for imports?

Trade credit can be supplier’s credit or buyer’s credit. Supplier’s credit is extended by overseas supplier. Buyer’s credit means loan arranged by the importer from bank/FI outside India.

Such credit can be for maturity of less than three years. Credit of three years and above come under category of External Commercial Borrowing (ECB).

Question:  what are the restrictions on trade credit for imports into India ?

Authorised Dealers can approve trade credits for imports upto USD 20 million per import transaction.

The trade credit can be upto one year for material (except gold, silver, platinum etc.) and five years (or three years?) for capital goods. They can also issue guarantees/Letter of Undertaking/Letter of Comfort upto USD 20 million per transaction.

The trade credit upto 5 years for import of capital goods is permissible to all companies including those in service sector – RBI AP (DIR) Circular No. 53 dated 24-9-2013 [It is five years or three years? Seems some confusion].

The trade credit can be upto maximum five years for import of capital goods by companies in infrastructure sector. The trade credit must be ab initio contracted for a period of not less than 15 months and should not be in the nature of short-term roll overs. AD Banks can issue LC/guarantees for the extended period beyond three years – RBI AP (DIR) Circular No. 28 dated 11-9-2012 as amended vide RBI AP (DIR) Circular No. 59 dated 14-12-2012.

The period of trade credit shall be linked to the operating cycle and trade transactions – RBI AP (DIR) Circular No. 9 dated 11-7-2013.

Question:  Whether Roll over of the trade credit is permitted ?

Roll over/extension is not permitted – Schedule III of Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations, 2000 – see Schedule III of FEM (Borrowing or Lending in Foreign Exchange) Regulations.- para (c) part II of RBI Master Circular No. 12/2014-15 dated 1-7-2014 on ‘External Commercial Borrowings and Trade Credit’ [earlier Master Circular No. 12/2013-14 dated 1-7-2013].

Question: what are the restrictions on All in Cost fees charged for trade credit for imports into India ?

All-in-cost per annum payable for credit shall not exceed LIBOR + 350 basis points for the currency of credit (This limit will continue till further review. This will include arranger fee, upfront fee, management fee, handling/processing charges, out of pocket and legal expenses etc. [RBI AP (DIR) Circular No. 42 dated 28-5-2008 as amended by circular No. 27 dated 27-10-2008 as amended by RBI AP (DIR) Circular No. 39 dated 9-10-2012] – para (b) of part II of RBI Master Circular No. 12/2014-15 dated 1-7-2014 on ‘External Commercial Borrowings and Trade Credit’ [earlier Master Circular No. 12/2013-14 dated 1-7-2013].

Question: What are the reporting requirements in case of trade credits ?

Authorised dealer shall submit details to RBI every month in form TC.