What changed
The all-in-cost ceiling for trade credits with maturity up to one year has been raised from 50 basis points to 75 basis points over the 6-month LIBOR (or applicable benchmark). For trade credits with maturity between one and three years, the ceiling stays at 125 basis points. The revision is effective from May 28, 2008.
What it means for you
Banks can now offer short-term trade credit to importers at a slightly higher cost, giving more flexibility in pricing. This may help importers access funds more easily, especially when LIBOR is elevated. The unchanged ceiling for longer maturities suggests RBI is comfortable with current pricing for medium-term trade finance.
What you must do
- Update internal trade credit pricing models to reflect the new 75 bps ceiling for up to one year maturities.
- Communicate the revised all-in-cost ceiling to your trade finance and relationship teams.
- Advise importers that short-term trade credit can now be priced up to 75 bps over LIBOR.
- Ensure compliance with FEMA regulations and maintain records as per existing guidelines.
Who it affects
AD Category-I banks handling trade credit, Importers using short-term trade credit (up to one year), Trade finance departments of banks
What is the new all-in-cost ceiling for trade credits up to one year?
The ceiling has been increased from 50 basis points to 75 basis points over the 6-month LIBOR for the respective currency or applicable benchmark.
Does this change affect trade credits with maturity over one year?
No, the ceiling for trade credits with maturity more than one year up to three years remains unchanged at 125 basis points over 6-month LIBOR.
When does this revision take effect?
The revision is effective immediately from the date of the circular, May 28, 2008.