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RBI Relaxes Trade Credit Norms

HomeRBI Relaxes Trade Credit Norms

The Reserve Bank of India (RBI) relaxed the trade credit norms for companies to raise funds from abroad on 30th September 2013. Companies in all sectors can now avail trade credit not exceeding $20 million up to a maximum period of 5 years for import of capital goods.

“On a review, it has been decided to allow companies in all sectors to avail of trade credit not exceeding $20 million up to a maximum period of five years for import of capital goods as classified by the Director General of Foreign Trade (DGFT),” the RBI said in a notification.

Amendment in the Trade Credit Policy

  • Tenure of Trade Credit for import of capital goods has been extended from 3 years to 5 years for companies in all sectors.
  • Minimum tenure of buyers’ credit has been relaxed from 15 months to 6 months which means trade credit can be taken and rollover in multiple of 6 months or more
  • Banks are not permitted to issue Letter of Credit / Letter of Undertaking /Comfort beyond 3 years (from the date of shipment)
  • Policy covers both existing buyers’ credit as well as fresh buyers’ credit against capital goods. 

Understanding Trade Credit Norms

Trade credit is the amount a company allows business customers to purchase on credit, usually for a period of 30 days. Trade credit allows businesses to purchase products from each other simply, without requiring payment in advance. The amount of trade credit assigned to a customer depends on how much is purchased in 30 days, the customer’s ability to pay and the vendor’s appetite for risk.

How does it Work?

The amount of days for which trade credit is given is determined by the company allowing the credit, and is agreed upon by both the company allowing the credit and the company receiving it. With the extension of the payment date, the company receiving the credit essentially could sell the goods and use the net proceeds to pay back the debt. This type of credit is sometimes given to encourage sales. At times, a supplier may give a discount, if the customer pays within a certain period of time.

Eased trade credit norms will allow companies to raise funds with more ease, which will help boost economic growth.

 

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.