Module: | MODULE A: INTERNATIONAL BANKING
Q139: Consider the following statements regarding the refinancing and end-use restrictions of Buyer Credit:
1. Domestic importers can raise fresh trade credit to refinance an existing trade credit, provided the total maturity period remains within the overall maximum legal limit of 1 year or 3 years, depending on the classification of the goods.
2. The total all in cost for the newly refinanced trade credit must legally remain within the prescribed 250 basis points spread over the benchmark reference rate.
3. An importer can legally utilize short term foreign currency trade credit specifically to settle domestic rupee loans borrowed from local Indian banks to save on high interest costs.
Which of the above statements is or are correct?
2. The total all in cost for the newly refinanced trade credit must legally remain within the prescribed 250 basis points spread over the benchmark reference rate.
3. An importer can legally utilize short term foreign currency trade credit specifically to settle domestic rupee loans borrowed from local Indian banks to save on high interest costs.
Which of the above statements is or are correct?
✅ Correct Answer: A
🎯 Quick Answer:
Statements 1 and 2 are correct. Statement 3 is incorrect.Refinancing means taking a new loan to pay off the old one.
Structural Breakdown: Importers are allowed to roll over or refinance their trade credit to manage tight cash flow.
However, the legal time clock does not reset.
The total time from the original shipment to the final repayment of the refinanced loan must not exceed the original 1 year or 3 year cap.
Furthermore, the new loan must still obey the 250 basis points pricing limit.
Historical Context: The central bank allows refinancing to provide flexibility during temporary economic downturns, but strictly maintains the outer maturity walls to prevent the disguised creation of unhedged long term external debt.
Causal Reasoning: Statement 3 is strictly incorrect due to ironclad end-use restrictions.
Foreign currency trade credit is exclusively meant for settling physical import bills.
It is strictly prohibited from being diverted to pay off domestic rupee loans, as this would expose the domestic banking system to severe currency mismatch and massive arbitrage risks.