What Is Trade Credit?
Trade Credit is short-term foreign financing for the import of goods into India. It takes two forms: Suppliers' Credit, extended directly by the overseas exporter of the goods, and Buyers' Credit, arranged by the Indian importer from a bank or financial institution outside India to pay the exporter. Both are regulated by the RBI under the same FEMA framework that governs External Commercial Borrowings (ECB), and both carry a statutory ceiling on the interest and fees the importer can be charged.
For a foreign company's Indian subsidiary, Trade Credit is often the cheapest way to finance imported machinery, components, or raw materials from a group entity or a global supplier — cheaper than a normal ECB or a bank guarantee, because it is priced against the transaction itself rather than underwritten as a standalone loan. The cost cap is what keeps it cheap, and it is also the rule foreign investors most often get wrong.
Legal Basis
Trade Credit sits inside the same regulatory instrument as ECB: the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018, notified as Notification No. FEMA 3(R)/2018-RB dated 17 December 2018 under clauses (a), (d) and (e) of section 6(3) and section 47(2) of FEMA. Regulation 2 of those Regulations, as substituted in February 2026, defines trade credit as "credit extended by the overseas supplier or financial institution for permissible imports into India and includes both suppliers' credit and buyers' credit."
The operating rules sit in the Reserve Bank of India's Master Direction on External Commercial Borrowings, Trade Credits and Structured Obligations. Read it with care in 2026: its Part I, the ECB framework, was deleted on 16 February 2026 and is superseded by the amended Regulations, but Part II, the Trade Credits Framework, remains in force and is still the operative RBI direction on Trade Credit pricing, tenor, amount and reporting.
Schedule I of the 2018 Regulations — the ECB schedule — was substituted with effect from 16 February 2026 by Notification FEMA 3(R)(5)/2026-RB, dated 9 February 2026. That reform removed the all-in-cost ceiling for ECB with an average maturity of three years or more, but it did not touch Trade Credit's own cost ceiling — and, as explained below, it explicitly ties short-tenor ECB back to that same ceiling.
Buyers' Credit vs. Suppliers' Credit
| Feature | Suppliers' Credit | Buyers' Credit |
|---|---|---|
| Who extends the credit | The overseas exporter itself | A bank or financial institution outside India, on the importer's behalf |
| Relationship to the sale | Deferred payment term built into the supply contract | A separate financing arrangement used to pay the exporter on the exporter's own payment terms (often at sight) |
| Typical use case | A foreign parent extending payment terms to its Indian subsidiary on an equipment or component shipment | The Indian importer's Authorized Dealer bank arranging financing through a correspondent bank abroad |
| Who bears documentation | Import documents (invoice, Bill of Lading, Bill of Entry) flow between exporter and importer | The AD bank routes the arrangement and reporting on the importer's behalf |
Both routes require the underlying import to be genuine — the credit finances a real shipment of goods against an Import Export Code (IEC)-registered import, not a standalone cash loan.
The Cost Ceiling — and Its 2026 Link to ECB
The core protection Trade Credit gives an Indian importer is a statutory cap on what the credit can cost. Under the substituted Schedule I, paragraph 7(2) of Notification FEMA 3(R)(5)/2026-RB now reads:
"In case of eligible ECBs with average maturity period of less than three years, the cost of borrowing shall be in compliance with cost ceiling specified for Trade Credit under these regulations."
In other words, the February 2026 reform freed ECB of three years or more from any cost ceiling — pricing there now just has to be "in line with prevailing market conditions." But any ECB priced below the three-year minimum average maturity threshold, and any Trade Credit itself, must still stay inside the ceiling that applies to Trade Credit. Paragraph 14 of the Master Direction sets that all-in-cost ceiling per annum at the benchmark rate plus 300 basis points for a new foreign-currency Trade Credit and the benchmark rate plus 250 basis points for a rupee-denominated one. Existing foreign-currency Trade Credits whose LIBOR benchmark was switched to an Alternative Reference Rate are allowed the benchmark rate plus 350 basis points.
Two definitions in the amended Regulations decide what those numbers actually mean. "Benchmark rate" means "any widely accepted interbank rate or Alternative Reference Rate (ARR) of 6-month tenor, applicable to the currency of borrowing" for foreign-currency credit, and the "prevailing yield of the Government of India security of corresponding maturity" for rupee credit. What is measured against the ceiling is the whole "cost of borrowing" — "rate of interest, other fees, expenses, charges, guarantee fees and export credit agency charges, whether paid in FCY or INR, but shall not include commitment fees and statutory taxes payable in India." Arrangement, upfront and guarantee fees therefore count toward the cap, so a Trade Credit priced just under the rate ceiling can still breach it once fees are added in.
The practical effect for 2026: a foreign parent extending 18-month Suppliers' Credit to its Indian subsidiary, or an Indian importer drawing Buyers' Credit through its AD bank, gets none of the pricing freedom that now applies to longer ECB. The short-tenor ceiling is unchanged and remains the binding constraint.
Amount, Tenor and Recognised Lenders
Paragraph 14 of the Master Direction also fixes the outer limits of the Trade Credit route:
| Parameter | Limit under the automatic route |
|---|---|
| Amount | Up to USD 50 million or equivalent per import transaction; up to USD 150 million or equivalent for oil and gas refining and marketing, airline and shipping companies |
| Period, reckoned from the date of shipment | Up to three years for import of capital goods; up to one year or the operating cycle, whichever is less, for non-capital goods (up to three years for shipyards and shipbuilders) |
| Recognised lenders — Suppliers' Credit | The supplier of the goods, located outside India |
| Recognised lenders — Buyers' Credit | Banks, financial institutions and foreign equity holders located outside India, and financial institutions in IFSCs located in India |
The three-year line matters in both directions. Trade Credit with an original maturity of up to three years, raised under these Regulations, is expressly excluded from the definition of ECB; run past that tenor and the borrowing has to be structured as an ECB instead, with the ECB framework's own eligibility, maturity and registration requirements.
Routing and Compliance
Trade Credit must be routed through the importer's Authorized Dealer (AD) Category-I bank — never arranged informally between the Indian company and the overseas supplier or lender outside the FEMA framework. The AD bank verifies the underlying import documentation, confirms the credit terms sit within the cost ceiling, and handles the RBI reporting. Under paragraph 17 of the Master Direction, AD Category I banks report the drawal, utilisation and repayment of every Trade Credit approved by their branches in a consolidated monthly statement in Form TC, which must reach the Reserve Bank no later than the 10th of the following month.
A contravention — Trade Credit priced above the ceiling, drawn without AD bank involvement, or used for a purpose other than financing a genuine import — is a contravention of FEMA. Under Section 13 of FEMA, 1999, the penalty for contravention is up to three times the sum involved (if quantifiable) or up to INR 2 lakh (if not quantifiable), plus INR 5,000 per day for continuing contraventions.
Why It Matters for Foreign Companies
- It is often the cheapest import financing available. Because the cost is capped relative to a benchmark, Trade Credit is frequently cheaper than a bank guarantee or a standalone ECB for financing a single import transaction.
- It is a common intercompany tool. A foreign parent can extend Suppliers' Credit to its own Indian subsidiary on an equipment or raw-material shipment, deferring payment while the subsidiary generates revenue from the imported goods — subject to the same cost ceiling and FEMA reporting as third-party Trade Credit.
- It is easy to misclassify. Deferred payment terms that run past what the AD bank recognizes as ordinary trade credit, or credit not tied to a genuine import, risk being treated as an unauthorized capital account transaction or an ECB drawn outside the ECB framework.
Common Mistakes
- Assuming the February 2026 ECB reform lowered Trade Credit's own cost cap. It did not — the reform removed the ceiling only for ECB of three years or more; Trade Credit itself, and any shorter ECB, remain capped at benchmark plus 300 bps (foreign currency) or 250 bps (rupee).
- Pricing only the headline interest rate against the ceiling. Arrangement fees, upfront fees, and guarantee fees all count toward the same cap — a credit that looks compliant on interest rate alone can still breach it once fees are added.
- Arranging Suppliers' Credit informally, outside the AD bank channel. Even when the credit comes directly from a foreign parent or supplier, it must still be reported and verified through the importer's AD Category-I bank.
- Treating intercompany Suppliers' Credit as exempt from FEMA scrutiny. A parent-to-subsidiary credit line is not automatically compliant merely because the parties are related; the same cost ceiling and documentation rules apply.
Practical Example
A US manufacturer ships machinery worth USD 2 million to its wholly owned Indian subsidiary and agrees to 18-month Suppliers' Credit instead of requiring payment at sight. Assume the applicable foreign-currency benchmark rate is 5.00% per annum at drawdown. The Trade Credit ceiling caps the all-in cost at 5.00% + 300 bps = 8.00% per annum, inclusive of any arrangement or guarantee fee — not 8.00% interest plus a separate fee on top. The Indian subsidiary's AD bank confirms the credit terms are within this ceiling before the import documentation is accepted and the credit is reported to the RBI. Had the parent instead charged 6.5% interest plus a 2% arrangement fee, the effective all-in cost would breach the 8.00% ceiling and expose both companies to a FEMA contravention.
Frequently Asked Questions
What is the difference between Buyers' Credit and Suppliers' Credit?
Suppliers' Credit is extended directly by the overseas exporter as deferred payment terms on the sale. Buyers' Credit is a separate financing arrangement the Indian importer draws from a bank or financial institution outside India, typically so the exporter can still be paid at sight. Both are capped by the same Trade Credit cost ceiling.
Did the February 2026 ECB reform make Trade Credit cheaper?
No. The reform removed the all-in-cost ceiling only for ECB with an average maturity of three years or more. Trade Credit itself — and any ECB priced below that three-year threshold — remains capped at the benchmark rate plus 300 basis points for a new foreign-currency Trade Credit or 250 basis points for rupee credit, under paragraph 14 of the RBI's Master Direction — the ceiling that paragraph 7(2) of the substituted Schedule I now applies to short-tenor ECB as well.
Which bank do we route Trade Credit through?
Trade Credit must be routed through the Indian importer's Authorized Dealer Category-I bank. The AD bank verifies the import documentation, checks the pricing against the cost ceiling, and handles the RBI reporting — it cannot be arranged directly between the importer and an overseas lender outside this channel.
Can a foreign parent extend Suppliers' Credit to its Indian subsidiary?
Yes. Intercompany Suppliers' Credit on a genuine import of goods is common and permitted, but it is not exempt from FEMA scrutiny merely because the parties are related. It must still be routed through the subsidiary's AD bank, priced within the same cost ceiling, and reported like third-party Trade Credit.
What happens if Trade Credit is priced above the cost ceiling?
Pricing above the ceiling — whether through interest, arrangement fees, or guarantee fees — is a contravention of FEMA. Under Section 13 of FEMA, 1999, the penalty is up to three times the sum involved (if quantifiable) or up to INR 2 lakh (if not quantifiable), plus INR 5,000 per day for continuing contraventions.
See also: External Commercial Borrowing (ECB), Trade Finance (Letters of Credit and Bank Guarantees), and FEMA.
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