Module: | MODULE A: INTERNATIONAL BANKING
Q137: Consider the following statements regarding the maturity limits of Supplier Credit under the Trade Credit framework:
1. For the import of capital goods, such as heavy manufacturing machinery, the maximum permitted maturity period for trade credit is up to 3 years from the date of shipment.
2. For the import of non-capital commercial goods, such as standard raw materials, the maximum maturity period is strictly capped at 1 year or the operating cycle of the business, whichever is lower.
3. Importers can freely extend the 3 year trade credit limit for capital goods up to 5 years by merely paying a standard penalty fee to their Authorized Dealer bank.
Which of the above statements is or are INCORRECT?
2. For the import of non-capital commercial goods, such as standard raw materials, the maximum maturity period is strictly capped at 1 year or the operating cycle of the business, whichever is lower.
3. Importers can freely extend the 3 year trade credit limit for capital goods up to 5 years by merely paying a standard penalty fee to their Authorized Dealer bank.
Which of the above statements is or are INCORRECT?
✅ Correct Answer: C
🎯 Quick Answer:
Statement 3 is the only incorrect statement.Structural Breakdown: The central bank categorizes imports into capital goods, which build long term manufacturing capacity, and non-capital goods, which are consumed rapidly.
Consequently, capital goods are granted a longer credit maturity of up to 3 years, while non-capital goods are restricted to 1 year or the natural operating cycle.
Historical Context: These strict maturity caps are designed to prevent the dangerous accumulation of short term external debt, ensuring that domestic businesses do not over-leverage themselves with massive foreign currency liabilities.
Causal Reasoning: Statement 3 is strictly incorrect.
An importer cannot unilaterally extend the 3 year limit simply by paying a penalty fee.
Any extension beyond the legally permitted maturity period constitutes a structural change from a short term Trade Credit to a long term External Commercial Borrowing.
This requires explicit, prior regulatory approval from the central bank, preventing disguised long term debt.