What changed
Previously, trade credit for capital goods imports was allowed for a maturity period of more than one year and less than three years for all sectors. Now, infrastructure sector companies can avail trade credit for up to five years, provided the credit is initially contracted for at least fifteen months and not structured as short-term rollovers. AD banks are still prohibited from issuing Letters of Credit, guarantees, LoUs, or LoCs for the extended period beyond three years.
What it means for you
This change gives infrastructure firms more breathing room to finance expensive capital goods imports with longer repayment timelines, easing working capital pressure. Banks must carefully assess the creditworthiness of borrowers for the extended tenure and ensure compliance with the no-rollover condition. The all-in-cost ceiling for the three-to-five-year bucket is set at 350 basis points over six-month LIBOR, matching the rate for one-to-three-year credits.
What you must do
- Update internal trade credit approval policies to include the five-year option for infrastructure sector borrowers importing capital goods.
- Verify that the borrower qualifies as an infrastructure company as per the extant ECB definition before approving the extended tenure.
- Ensure that any Letters of Credit, guarantees, LoUs, or LoCs issued do not extend beyond three years, even if the underlying trade credit is for five years.
- Monitor compliance with the condition that the trade credit is contracted ab initio for at least fifteen months and not rolled over.
- Communicate the revised guidelines to your trade finance and relationship teams handling infrastructure clients.
Who it affects
AD Category-I banks approving trade credits for capital goods imports, Infrastructure sector companies importing capital goods, Trade finance and credit risk teams in banks
Can AD banks issue Letters of Credit for the full five-year trade credit period?
No. AD banks are not permitted to issue Letters of Credit, guarantees, LoUs, or LoCs for the extended period beyond three years. The bank's credit instrument must be co-terminus with the credit period only up to three years.
What is the all-in-cost ceiling for trade credits with a maturity of more than three years and up to five years?
The all-in-cost ceiling is 350 basis points over six-month LIBOR (or the applicable benchmark for the currency of credit), which is the same as the ceiling for credits with maturity of more than one year and up to three years.
Does this circular apply to all sectors or only infrastructure?
The extended five-year tenure applies only to companies in the infrastructure sector as defined under the extant ECB guidelines. For all other sectors, the existing three-year limit remains unchanged.