Buyers' Credit in Import Finance
A foreign currency loan that pays the supplier now and lets the importer repay later. Here's one deal, step by step.
Buyers' credit is a short-term foreign currency loan that an Indian importer takes from a bank or financial institution outside India (or in an IFSC such as GIFT City) to pay its overseas supplier. The supplier is paid on time; the importer repays the lender later. RBI classes it as a trade credit, alongside suppliers' credit.
Importers use it because foreign currency money has often been cheaper than a rupee working capital loan. The importer's Indian bank arranges the deal and usually gives the lender a guarantee, which is where most of the bank's risk, and most exam questions, sit.
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Case: Machinery for a Coimbatore Foundry
A foundry in Coimbatore imports a moulding line from Germany for EUR 1.8 million. The supplier wants payment at sight; the foundry wants two years to pay.
- 1
Request to the AD bank
The foundry asks its AD Category-I bank to arrange buyers' credit for two years from shipment. Capital goods qualify for up to three years, so the tenor fits.
- 2
Quotes from lenders
The bank collects offers from overseas banks and from IFSC banking units. It checks that each all-in cost is within the ceiling: the benchmark rate plus 300 basis points for a new foreign currency trade credit.
- 3
Bank guarantee
The chosen lender wants security. The AD bank issues a bank guarantee in the lender's favour, for no more than the credit amount and no longer than the maximum trade credit period. A Letter of Undertaking or Letter of Comfort is not allowed.
- 4
Payment to the supplier
When the import documents arrive, the lender pays the German supplier directly at sight. The foundry's import payment is complete; its debt is now to the lender.
- 5
Repayment and reporting
The foundry repays the lender in two years, plus interest. Every month the AD bank reports trade credit drawals, use and repayment to RBI in Form TC, by the 10th of the following month.
The Limits That Apply
From Part II of RBI's Master Direction on ECB, Trade Credits and Structured Obligations, as updated in September 2026.
| Parameter | Rule |
|---|---|
| Recognised lenders | Banks, financial institutions and foreign equity holders outside India, and financial institutions in IFSCs in India |
| Period | Reckoned from shipment: up to 3 years for capital goods; up to 1 year or the operating cycle, whichever is less, for non-capital goods |
| Amount, automatic route | Up to USD 50 million per import transaction (USD 150 million for oil and gas refining and marketing, airline and shipping companies) |
| All-in-cost ceiling, foreign currency | Benchmark rate plus 300 bps for new credits |
| Benchmark rate | A widely accepted interbank rate or alternative reference rate of 6-month tenor in the currency of the loan |
| Bank's security | Bank guarantee within the credit amount and period; LoU and LoC not permitted |
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The Cost Check, Worked
Suppose (illustratively) the 6-month euro benchmark is 2.40%. The ceiling is 2.40% plus 3.00%, or 5.40% a year all-in. A lender quoting the benchmark plus a 1.10% margin, with fees and the AD bank's guarantee commission adding another 0.40% a year, gives 2.40% + 1.10% + 0.40% = 3.90% all-in, inside the ceiling. Under the trade credit framework, all-in cost covers interest, other fees, expenses, charges and guarantee fees, whether paid in foreign currency or rupees; only withholding tax payable in rupees is left out.
For the importer, the real comparison is against a rupee loan after the cost of hedging. An unhedged euro loan that looks cheap can end up dearer if the rupee weakens over two years.
How the IIBF Exam Tests This
Case questions give a tenor, a type of goods and an amount and ask whether the credit is allowed. The trap is the start date: the period runs from shipment, not from the LC, the loan agreement or the payment. Older courseware and question banks may still show LIBOR plus a spread and LoUs as the normal security; both are out of date.
FAQs
What is buyers' credit in trade finance?expand_more
A loan from an overseas (or IFSC) bank or financial institution to an Indian importer, used to pay the foreign supplier, which the importer repays later within RBI's trade credit limits.
What is the maximum period of buyers' credit?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.
What is the maximum amount of buyers' credit under the automatic route?expand_more
USD 50 million or equivalent per import transaction, or USD 150 million for oil and gas refining and marketing, airline and shipping companies.
What is the all-in-cost ceiling for buyers' credit?expand_more
For a new foreign currency trade credit, the benchmark rate (a widely accepted interbank rate or ARR of 6-month tenor in that currency) plus 300 basis points. For rupee trade credit, the benchmark plus 250 basis points.
Next steps
- GIFT City Buyers' Creditarrow_forward
- Suppliers' Creditarrow_forward
- LoU Banarrow_forward
- Trade Credit Rules (RBI)arrow_forward
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