Introduction
An Indian importer does not always pay the overseas supplier immediately.
The supplier itself may allow deferred payment, or a separate overseas lender may finance the import. These arrangements are broadly covered by the Trade Credit (TC) framework.
The current IIBF 2026 syllabus for BFM Module A – International Banking expressly includes “Trade Credit – Supplier’s Credit and Buyer’s Credit” under Facilities for Exporters and Importers.
For CAIIB, the most important questions are usually:
Who is providing the credit?
Who receives payment immediately?
Who becomes the importer’s creditor?
Is the import of capital or non-capital goods?
Is the proposed amount within the automatic route?
Is the maturity within the permitted period?
Is the cost within the regulatory ceiling?
What happens when the import bill is retired, overdue or crystallised?
These questions are best understood through transaction flows and case-based reasoning.
Learning Objectives
After studying this topic, you should be able to:
Distinguish Supplier’s Credit from Buyer’s Credit.
Explain the current RBI Trade Credit framework.
Identify eligible borrowers and recognised lenders.
Apply current amount and maturity restrictions.
Understand all-in-cost, security and reporting concepts.
Analyse import-bill retirement, overdue and crystallisation cases.
What Is Trade Credit?
Under the current RBI Master Direction, Trade Credit refers to credit extended by an overseas supplier, bank, financial institution or other permitted recognised lender for import of permissible capital or non-capital goods into India.
Depending on who provides the finance, Trade Credit includes:
Supplier’s Credit
Buyer’s Credit
Trade Credit may presently be raised in a freely convertible foreign currency or in Indian Rupees, subject to the applicable framework.
Supplier’s Credit
In Supplier’s Credit, the overseas supplier itself allows the Indian importer to pay at a future date.
The basic flow is:
Overseas supplier ships the goods.
Importer receives the agreed credit period.
Supplier remains unpaid during that period.
Importer pays the supplier on the agreed due date.
Therefore:
Supplier provides credit → Supplier is the creditor.
Under the current RBI framework, the recognised lender for Supplier’s Credit is the supplier of goods located outside India.
Practical Example
An overseas machinery manufacturer supplies equipment to an Indian company and allows payment after an agreed deferred period.
The supplier has financed the importer by postponing collection of the sale price.
That is Supplier’s Credit.
Buyer’s Credit
In Buyer’s Credit, the supplier does not itself provide the credit.
Instead, an eligible lender finances the Indian importer’s purchase.
Broadly:
Supplier ships goods.
An eligible lender finances the transaction.
Supplier receives payment according to the transaction structure.
Indian importer owes the financing lender.
Importer repays principal, interest and applicable charges according to the Trade Credit terms.
Therefore:
Separate lender finances importer → Lender becomes the creditor.
Current recognised lenders for Buyer’s Credit include specified banks, financial institutions and foreign equity holders located outside India, as well as financial institutions in IFSCs in India, subject to the detailed RBI framework. Foreign branches or subsidiaries of Indian banks are recognised lenders only for foreign-currency Trade Credit.
Supplier’s Credit vs Buyer’s Credit
Basis | Supplier’s Credit | Buyer’s Credit |
|---|---|---|
Credit Provider | Overseas supplier | Eligible bank/financial institution or other recognised lender |
Supplier Waits for Payment | Yes | Normally lender financing enables supplier payment according to structure |
Importer Owes | Supplier | Financing lender |
Nature | Deferred supplier payment | Separate financing arrangement |
RBI Classification | Trade Credit | Trade Credit |
Main Exam Question | Who grants the credit? | Who finances the importer? |
Current RBI Trade Credit Framework
RBI’s Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations, updated as on 16 February 2026, contains the current Trade Credit framework.
Eligible Borrower
The eligible borrower is a person resident in India acting as an importer.
The underlying import must also be permissible under the Foreign Trade Policy.
Therefore, availability of overseas finance does not make an otherwise prohibited import permissible.
Automatic-Route Amount
The current automatic-route limit per import transaction is:
Importer Category | Maximum under Automatic Route |
|---|---|
Oil/gas refining and marketing, airline and shipping companies | USD 150 million or equivalent |
Other eligible importers | USD 50 million or equivalent |
These are per import transaction limits.
Period of Trade Credit
The permitted period is linked to the nature of goods.
Capital Goods
Trade Credit may have a period of up to:
Three years from the date of shipment.
Non-Capital Goods
The maximum period is:
One year or the operating cycle, whichever is less.
Shipyards and Shipbuilders
For import of non-capital goods by shipyards or shipbuilders, Trade Credit may extend up to three years.
The Trade Credit period is generally reckoned from the date of shipment.
This distinction is highly important for CAIIB case studies.
All-in-Cost
Trade Credit is not regulated merely by its principal amount and maturity. Its total financing cost must also remain within the applicable all-in-cost ceiling.
All-in-cost broadly includes:
interest;
fees;
expenses;
charges; and
guarantee fees,
whether paid in foreign currency or INR. Withholding tax payable in INR is excluded from all-in-cost.
Under the current framework, the Master Direction specifies different ceilings for foreign-currency and INR-denominated Trade Credit, including benchmark-based spreads. For new foreign-currency Trade Credit, the table presently specifies Benchmark Rate + 300 basis points, while INR-denominated Trade Credit carries the specified INR benchmark plus 250 basis points. A separate treatment exists for legacy LIBOR-linked Trade Credits migrated to an alternative reference rate.
For exam questions, always identify:
currency of Trade Credit;
whether it is a new or legacy transaction; and
applicable benchmark.
Exchange-Rate and Hedging Risk
Buyer’s Credit or Supplier’s Credit may create a foreign-currency liability for the Indian importer.
Suppose an importer incurs a USD liability but generates income mainly in rupees.
If the rupee depreciates before repayment:
the same USD liability requires more rupees to repay.
Therefore, a lower overseas interest rate does not by itself mean that foreign-currency Trade Credit is cheaper.
The importer should consider:
interest cost;
currency movement;
hedge cost;
fees;
maturity; and
overall cash-flow risk.
The current RBI framework requires entities raising Trade Credit to follow applicable hedging requirements of the relevant sectoral or prudential regulator and maintain a Board-approved risk-management policy.
Security for Trade Credit
Trade Credit may be supported by permitted security arrangements.
RBI presently permits, subject to applicable conditions:
bank guarantees;
overseas guarantees;
security over eligible movable or financial assets;
permitted immovable assets; and
corporate or personal guarantees.
A bank guarantee given by an AD on behalf of an importer in favour of an overseas Trade Credit lender cannot exceed the Trade Credit amount, and its period cannot extend beyond the maximum permissible Trade Credit period.
LoU and LoC: Important Historical Trap
RBI discontinued issuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) by AD Category-I banks for Trade Credits with effect from 13 March 2018.
Letters of Credit and permitted Bank Guarantees for Trade Credits were not discontinued by that circular.
Trade Credit and Normal Import Bills
An ordinary import bill and Trade Credit are related but not identical concepts.
Under the RBI Import Master Direction currently applicable on 30 August 2026, normal import payments are generally required to be completed within six months from the date of shipment, subject to specified exceptions and permitted extensions.
Deferred payment arrangements, including Supplier’s Credit and Buyer’s Credit, falling within the applicable longer periods are treated as Trade Credit and must comply with the Trade Credit framework.
Regulatory Change from 1 October 2026
RBI has notified the Foreign Exchange Management (Export and Import of Goods and Services) Regulations, 2026, effective from 1 October 2026.
Under the new framework, the AD will monitor import payment according to the payment period specified in the underlying contract, with power to allow an extension where satisfied with the reasons for delay.
This date distinction is important when analysing a current-development question.
Retirement of an Import Bill
When the importer pays the bank and takes up the import bill, the bill is said to be retired.
Under the current FEDAI Rule 3:
if a hedge contract is in place, the applicable exchange rate is determined according to that hedge contract;
if there is no hedge contract, the prevailing Bill Selling Rate applies to retirement of the import bill.
This is an important distinction from export bills, where buying rates are generally relevant.
Crystallisation of an Unpaid Import LC Bill
If a foreign-currency import bill drawn under an LC remains unpaid, the foreign-currency liability may be converted into a rupee liability.
This is called crystallisation.
Current FEDAI Rule 3 states that unpaid foreign-currency import bills under LCs are crystallised according to the stated policy of the bank.
For exchange-rate application:
hedge-contract rate applies where a hedge exists;
otherwise, the prevailing Bill Selling Rate applies.
Therefore, a candidate should not memorise an old universal crystallisation day and apply it to every bank.
Integrated Case 1: Identify Supplier’s Credit
An Indian manufacturer imports raw material.
The overseas seller ships the goods but agrees to receive payment after an agreed deferred period. No separate overseas bank finances the importer.
Analysis
This is Supplier’s Credit because the overseas supplier itself is extending the payment period.
The importer’s creditor remains the supplier.
The banker should then examine:
whether the goods are permissible imports;
whether the maturity complies with the Trade Credit period;
whether the cost is within the permitted ceiling; and
whether reporting and other regulatory requirements are satisfied.
Integrated Case 2: Identify Buyer’s Credit
An Indian company imports machinery. A recognised overseas financial institution finances the import and the importer undertakes to repay that institution according to the agreed Trade Credit terms.
Analysis
This is Buyer’s Credit.
The key difference from Supplier’s Credit is not the goods imported. It is the source of finance.
The separate lender has financed the importer, and the importer must repay that lender.
Integrated Case 3: Non-Capital Goods with Long Tenor
An ordinary manufacturing company wants Trade Credit for imported raw materials for a period longer than its operating cycle and also beyond one year.
Analysis
The proposed structure does not fit the normal permitted maturity for non-capital goods.
Under the current framework, the maximum period is one year or the operating cycle, whichever is less, except for the specific shipyard/shipbuilder relaxation.
The examiner may deliberately describe the goods as “essential for production” to distract you. The relevant test is whether they are capital or non-capital goods, not how important they are to the business.
Integrated Case 4: Capital-Goods Trade Credit
A company imports eligible plant and machinery and proposes a Trade Credit period within three years from shipment.
Analysis
Capital goods can qualify for Trade Credit for a period of up to three years from the date of shipment, subject to all other conditions.
Do not apply the one-year non-capital-goods rule merely because both transactions are imports.
Integrated Case 5: Automatic-Route Limit
A manufacturing importer outside the specially listed oil/gas, airline and shipping categories proposes Trade Credit exceeding USD 50 million equivalent for one import transaction.
Analysis
The normal automatic-route ceiling for such an importer is USD 50 million or equivalent per import transaction.
The USD 150 million limit cannot be applied merely because the borrower is a large company.
Integrated Case 6: Import Bill Not Paid on Due Date
An issuing bank has honoured its LC obligation, but the importer fails to provide funds.
Analysis
The bank’s contingent LC exposure has now become a funded exposure on the importer.
If the foreign-currency import bill remains unpaid, crystallisation is handled according to the bank’s stated policy.
Where no hedge contract exists, current FEDAI rules provide for application of the prevailing Bill Selling Rate for crystallisation.
This should not be confused with Buyer’s Credit. A devolved import LC is a funded liability of the importer to its bank; Buyer’s Credit is a separately structured Trade Credit arrangement with a recognised lender.
Practical Banking Application
When an importer asks a branch to arrange deferred import finance, the banker should not begin by asking only, “What is the interest rate?”
The correct sequence is:
Verify the underlying import.
Identify whether the proposal is Supplier’s Credit or Buyer’s Credit.
Identify capital or non-capital goods.
Check the proposed amount against the automatic-route limit.
Check the permitted maturity.
Verify the recognised lender.
Check all-in-cost.
Assess foreign-exchange and repayment risk.
Examine security and guarantee structure where applicable.
Ensure Trade Credit and import reporting requirements are completed.
RBI places primary responsibility for compliance on the importer, but AD banks are also expected to ensure that their constituents comply with the applicable Trade Credit and FEMA parameters.
CAIIB Exam Focus
Remember these high-value points:
Supplier’s Credit and Buyer’s Credit are both forms of Trade Credit.
Supplier’s Credit comes from the overseas supplier.
Buyer’s Credit comes from a separate recognised lender.
A person resident in India acting as an importer is the eligible borrower.
Automatic-route limit is normally USD 50 million per transaction for ordinary eligible importers.
The higher USD 150 million limit applies to specified oil/gas refining and marketing, airline and shipping companies.
Capital-goods Trade Credit can run up to three years from shipment.
Non-capital-goods Trade Credit is limited to one year or operating cycle, whichever is less.
Shipyards and shipbuilders have a special three-year provision for non-capital goods.
All-in-cost includes interest and specified fees and charges.
LoUs and LoCs for Trade Credit were discontinued in 2018.
Import-bill retirement without a hedge uses the prevailing Bill Selling Rate under current FEDAI rules.
Crystallisation of an unpaid LC import bill follows the bank’s stated policy.
A devolved LC and Buyer’s Credit are not the same thing.
The new FEMA Export and Import of Goods and Services Regulations take effect on 1 October 2026.
Common Exam Traps
Trap 1: “Supplier’s Credit Means the Importer’s Bank Finances the Supplier”
Incorrect.
The overseas supplier itself gives the importer deferred payment terms.
Trap 2: “Buyer’s Credit Is Credit Given by the Overseas Buyer”
Incorrect.
In an Indian import transaction, the Indian importer is the buyer. Buyer’s Credit finances that importer through a recognised lender.
Trap 3: “All Trade Credit Can Run for Three Years”
Incorrect.
Three years generally applies to capital goods, with a specific exception for shipyards/shipbuilders. Non-capital goods normally have the lower of one year or the operating cycle.
Trap 4: “USD 150 Million Automatic Route Applies to Every Importer”
Incorrect.
Most eligible importers have the USD 50 million equivalent per-transaction ceiling.
Trap 5: “A Low Overseas Interest Rate Means Buyer’s Credit Is Always Cheaper”
Incorrect.
Foreign-exchange movement, hedge cost and other all-in-cost components must also be considered.
Trap 6: “LoU Can Still Be Issued by an Indian AD Bank for Trade Credit”
Incorrect.
RBI discontinued LoUs and LoCs for Trade Credit in March 2018.
Trap 7: “Buyer’s Credit and LC Devolvement Are the Same”
Incorrect.
Buyer’s Credit is a planned Trade Credit financing arrangement. LC devolvement occurs when the issuing bank pays under its obligation but the importer fails to provide funds.
Trap 8: “Crystallisation Must Always Occur on One RBI/FEDAI-Fixed Day”
Incorrect.
Current FEDAI rules require crystallisation according to the bank’s stated policy.
Memory Technique
Remember S-B-A-M-C:
S – Source: Supplier or separate lender?
B – Borrower: Resident Indian importer
A – Amount: Check automatic-route limit
M – Maturity: Capital vs non-capital goods
C – Cost: Check all-in-cost and currency risk
This sequence helps solve most CAIIB Trade Credit case studies.