Trade Credits for Imports Under FEMA
Import credit reckoned from shipment: up to three years for capital goods, one year for the rest, within per-transaction limits.
A trade credit (TC) is credit for imports into India, extended by the overseas supplier or arranged by the importer from an overseas lender. It lets an importer pay later than shipment without the transaction counting as an ECB, provided it stays within the trade credit framework.
For an AD branch, trade credit is daily work: buyers' credit for an importer's LC, bank guarantees in favour of the overseas lender, and a monthly return to RBI. The exam tests the periods, the per-transaction limits and the cost ceiling.
You save ₹200 today
- 5 full-length mocks
- 553 questions, chapter by chapter
- Rate & risk calculations
One payment, no subscription · Valid for 2 months
Suppliers' Credit vs Buyers' Credit
- Suppliers' credit
- Credit given by the overseas supplier of the goods: the supplier ships now and accepts payment later.
- Buyers' credit
- A loan the importer arranges from an overseas bank or financial institution (or a foreign equity holder, or a financial institution in an IFSC) to pay the supplier.
- Period of trade credit
- Always reckoned from the date of shipment, not the date of the LC or the date of payment.
Trade Credit Framework
Paragraph 14 of the Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations.
| Parameter | Rule |
|---|---|
| Eligible borrower | A person resident in India acting as an importer |
| Goods | Capital or non-capital goods permitted under the Foreign Trade Policy |
| Period: capital goods | Up to 3 years from shipment |
| Period: non-capital goods | Up to 1 year or the operating cycle, whichever is less (shipyards and shipbuilders: up to 3 years) |
| Automatic route amount | Up to USD 150 million per import transaction for oil/gas refining and marketing, airline and shipping companies; up to USD 50 million for others |
| All-in-cost ceiling (foreign currency) | Benchmark rate plus 300 bps for new TCs (plus 350 bps for older LIBOR-linked TCs moved to an alternative reference rate) |
| All-in-cost ceiling (rupee) | Benchmark rate plus 250 bps |
| Currency | Any freely convertible currency or INR; FCY may switch to INR, but INR cannot switch to FCY |
Security and the AD Bank's Role
- check_circleAD banks may give a bank guarantee to the overseas lender, up to the TC amount and for no longer than the maximum TC period.
- check_circleAD banks may not issue a Letter of Undertaking (LoU) or Letter of Comfort (LoC) for trade credit.
- check_circleThe importer may also offer movable, immovable or financial assets (not land in SEZs), or a corporate or personal guarantee, if the loan agreement has a security clause and existing Indian lenders give a no-objection.
- check_circleThe AD bank checks there is no double financing for SEZ and FTWZ transactions, and that non-capital goods credit does not exceed the lower of one year or the operating cycle.
- check_circleMonthly, the AD bank reports drawals, use and repayment of all TCs in Form TC to RBI, by the 10th of the following month, including suppliers' credit beyond 180 days.
Periods, limits and ceilings in the exam format. No signup.
Where Trade Credit Meets the Other Rules
Trade credit with original maturity up to three years is expressly not treated as ECB under the 2026 borrowing rules. Its cost ceiling also does double duty: ECB with average maturity under three years must stay within it, and interest an importer pays on a delayed import payment, or an exporter pays on an export advance, cannot exceed it.
SEZ and FTWZ units and developers can raise TC to buy goods within or between zones, and a DTA unit can raise TC to buy from an SEZ unit. For these, the date of transfer of ownership counts as the TC date.
How CCFE Tests This
Typical questions: the maximum period for capital vs non-capital goods, the date the period runs from, the per-transaction limit, and whether an Indian bank may issue an LoU. Courseware-era options quote ceilings as LIBOR plus a spread; today the ceiling is a benchmark (alternative reference) rate plus 300 bps for new foreign currency TCs. The frequent trap is counting the period from the date of the LC or the payment instead of shipment.
FAQs
What is the maximum period of trade credit for imports?expand_more
Up to three years from shipment for capital goods. For non-capital goods, up to one year or the operating cycle, whichever is less (three years for shipyards and shipbuilders).
What is the difference between buyers' credit and suppliers' credit?expand_more
Suppliers' credit is extended by the overseas seller of the goods; buyers' credit is a loan the importer takes from an overseas bank or financial institution to pay the seller.
What is the trade credit limit under the automatic route?expand_more
USD 50 million per import transaction, or USD 150 million for oil and gas refining and marketing, airline and shipping companies.
Can Indian banks issue LoU or LoC for buyers' credit?expand_more
No. AD Category-I banks cannot issue Letters of Undertaking or Letters of Comfort for trade credit. They may issue bank guarantees within the TC amount and period.
Next steps
Take a full CCFE mock test100 questions across all six CCFE modules.