RBI revises trade credit policy framework

The Reserve Bank of India has notified a new Trade Credit Framework under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 vide A.P (DIR Series) Circular No.23 [‘the Regulation’] after recently amending the ECB framework based on its Regulation in January, 2019. The Trade Credit framework will come into effect immediately on the date of its notification ie 13 March 2019.

Highlights of the New Trade Credit Framework

1. Trade Credits (TC) refer to the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India.
2. The definition of a TC has been widened to include credits from other recognised lenders. The recognised lenders for Supplier’s credit is the supplier of goods located outside India and buyer’s credit is Banks, financial institutions, foreign equity holder(s) located outside India and financial institutions in International Financial Services Centres located in India.
3. TC can be raised either under the automatic route or the approval route.
4. The threshold for raising TC under automatic route has been increased from USD 20 million or equivalent per import transaction to USD 50 million and USD 150 million or equivalent per import transaction for oil/gas refining & marketing, airline and shipping companies. 
5. The Maturity period for a TC has been altered and now shall be up to three years for import of capital goods. For non-capital goods, this period shall be up to one year or the operating cycle whichever is less. For shipyards / shipbuilders, the period of TC for import of non-capital goods can be up to three years.
6. All in cost ceiling is amended to: Benchmark rate plus 250 BPS spread, and it will now include rate of interest, other fees, expenses, charges, guarantee fees whether paid in foreign currency or INR. Withholding tax payable in INR shall not be a part of all-in-cost.
   
7. The entities raising TC are required to follow the guidelines for hedging, if any, issued by the concerned sectoral or prudential regulator in respect of foreign currency exposure. Such entities shall have a board approved risk management policy.
8. It has been clarified that TC can be raised by a unit in SEZ/ FTWZ, or a developer of SEZ/ FTWZ. An entity in DTA is also allowed to raise TC for purchase of capital / non-capital goods from an SEZ/FTWZ unit or a developer of a SEZ/ FTWZ, subject to compliance with other conditions mentioned in the framework.
9. Importers can now secure TC by way of Bank Guarantee issued by foreign banks / overseas branches of Indian banks. Further, the importer may also offer security of movable assets (including financial assets) / immovable assets (excluding land in SEZs) / corporate or personal guarantee.
10. If TC is raised under the approval route, the prospective importers are required to send their requests to the Foreign Exchange Department, Central Office, Reserve Bank of India through their Authorised Dealer (AD) Banks for examination.
11. For the automatic route, the cases are examined by the Authorised Dealer Category-I banks.
12. The designated AD Category I bank while considering the TC proposal is expected to ensure compliance with applicable TC guidelines by their constituents. Any contravention of the applicable provisions will invite penal action or adjudication under the Foreign Exchange Management Act, 1999.

Click here to read the notification