The
banking regular in India has issued revised framework on trade credits policy
on March 13, 2019. Trade credits is kind of financing in foreign currency provided
by foreign banks, financial institutions, supplier of goods, and other
permitted lenders for import of capital and non capital goods in India. These
include supplier’s credit and buyer’s credit from recognized lenders. Such
financing can be also availed from foreign branches/subsidiaries of Indian
banks. In fact, TCs have been one of the important business segments for them.
Trade
credits have importance in India considering their benefit as low cost of
finance as compared to high cost Rupee debt prevailing in the country. From WC
finance angle, TCs have much wider impact on this front. Not only the costing
but also depending on the operating cycle of the borrower, TCs have helped in
managing cash flows to the companies.
TCs
had came into negative news about an year back when the firms of diamond
merchant misused the system and created a big scam forcing the regulator
discontinuing (in fact exactly one year back on March 13, 2018 !) the LoU/LoC
facility from Indian banks for supporting the TCs. LoUc/LoCs are the kind of foreign bank guarantees
extended by Indian lenders in favour of overseas lenders providing the TCs. The
comfort of such guarantees from Indian banks, made life easy for Indian firms in
raising low cost financing in the form of TCs in quickest of time.
TCs
can be availed for import of non capital goods and the tenor permissible is
upto one year (three years for shipyards/ship builders) or operating cycle of
the borrower, whichever is less. This has huge bearing on the Indian firms
operating in globalized world having severe competition on cost and margin
fronts. Before the ban on LoU/LoCs, Indian firms were considering the global
markets for sourcing of raw materials due to availability of cheap TCs based on
LoU/LoC support. The ban in March 2018 closed this door since without LoU/LoC
it was not possible for most of the mid/small size Indian firms to avail TCs.
The
external debt of the country as on September 2018 reduced from USD 529 bn of
March 2018 to USD 510 billion, of which USD 104 billion was related to short term
trade credits. This reflects the magnitude TCs carry on Indian financial
markets. Exports of the country in FY 2019 till January are estimated to be USD
440 bn against the imports of USD 531 bn during the same period. Therefore, the
country needs to facilitate competitive global financing environment to its
industries in order to achieve exports outpacing imports.
In
a positive move, the regulator has also increased the limit under automatic
route for availing TCs from USD 20 per transaction to USD 50 mn. In fact, the
limit under automatic route has been substantially increased to USD 150 mn for
specific sector viz.oil/gas refining & mining, airline and shipping
companies. This is supportive action and will benefit industries in reducing
the procedural time in availing TCs. Although regulator as reduced the ‘All In
Cost’ ceiling from Benchmark rate plus 350 bps to Benchmark rate plus 250 which
may make TCs less attractive to lenders. The maximum allowed period of TCs for
capital goods has been also reduced from five years to three years.
While
TCs provide advantage of low cost of finance, these instruments are also like a
double edge sword and can be detrimental if not handled aptly. These
instruments carry foreign exchange risks. Many Indian firms have burnt their
fingers in the past and some have been completely devastated by unhedged
foreign currency exposures. The ECB guidelines also stipulate that firms raising
TCs are required to follow the guidelines for hedging with a board approved
risk management policy. Therefore, while regulator has reopened the TCBG gate,
the borrowers will also need to be alert in managing unhedged risks.
It
will take some time to see positive impact of regulator’s move on TCs since
most of Indian lenders had cancelled the sanctioned BG lines for availing TCs
post ban of March 2018. The lenders would need to reassess borrowers and sanction
fresh lines for such TC BGs. Bearing the past mistakes and diamond merchant
fiasco in mind, the lenders are expected to tread cautiously this time. Events
like NBFC liquidity crisis, increasing defaults in loans against pledged shares
etc. are keeping the mood of corporate lending market as sombre. However, over
cautious approach under the shadow of high level of NPAs and diminishing
confidence in external credit ratings would not be good for industries. The
regulator has done its job for supporting industries, now its turn for lenders
to believe in Confucius saying that our greatest glory is not in never falling,
but in rising every time we fall.
Disclaimer: The views
expressed in the article above are personal views of the author and should not
be thought to represent official views, ideas, or policies of any agency or
institution.
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