No.CLE -HO/Pol/RBI Circular/13-14

Aug. 2, 2013

Members of the Council

Sub : Trade Credits for Imports into India – Review of all-in-cost ceiling

Dear Member,

As members are aware, Trade Credits’ refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. Buyers’ credit and suppliers’ credit for three years and above come under the category of External Commercial Borrowings (ECB) which is governed by ECB guidelines.

RBI circular no. A.P. (DIR Series) Circular No. 28 dated Sept. 11, 2012 (copy enclosed) stated the following with regards to trade credits for imports into India.

As per the extant guidelines, for import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years (from the date of shipment). No roll-over/extension is permitted beyond the permissible period. AD banks are also permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to three years for import of capital goods, subject to prudential guidelines issued by the Reserve Bank from time to time. The period of such Letters of credit / guarantees / LoU / LoC has to be co-terminus with the period of credit, reckoned from the date of shipment. AD banks shall not, however, approve trade credit exceeding USD 20 million per import transaction.

On a review, it has been decided to allow companies in the infrastructure sector, where “infrastructure” is as defined under the extant guidelines on External Commercial Borrowings (ECB) to avail of trade credit up to a maximum period of five years for import of capital goods as classified by DGFT subject to the following conditions:

(i) the trade credit must be abinitio contracted for a period not less than fifteen months and should not be in the nature of short-term roll overs; and

(ii) AD banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years.

The all-in-cost ceilings of trade credit will be as under:

Maturity period

All-in-cost ceilings over 6 months LIBOR*

Up to one year

350 basis points

More than one year and up to three years

More than three years and up to five years
* for the respective currency of credit or applicable benchmark

The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.

The RBI has now issued a circular A.P. (DIR Series) Circular No.9 (copy enclosed) stating that the all-in-cost ceiling as specified under paragraph 4 of A.P. (DIR Series) Circular No.28 dated September 11, 2012 will continue to be applicable till September 30, 2013 and is subject to review thereafter.

Members may kindly note the above.

With regards

R Ramesh Kumar, IAS
Executive Director
Council for Leather Exports

A.P. (DIR Series) Circular No.9 || A.P. (DIR Series) Circular No. 28