What changed
Earlier, exporters needed RBI's prior approval to receive advance payment if the export agreement involved shipment beyond one year from receipt of advance. Now, AD Category-I banks can directly permit such advances, provided they meet specified conditions like KYC, AML compliance, interest cap, and no refund history exceeding 10% in three years.
What it means for you
This liberalization reduces regulatory burden on exporters and banks for long-gestation export contracts. Banks must now take on additional due diligence and monitoring responsibilities, ensuring advances are used only for export execution and that shipment documents are routed through them. Non-compliance could lead to penalties, so robust internal controls are essential.
What you must do
- Update internal policies to allow AD banks to approve advance payments for exports with shipment beyond one year, subject to conditions.
- Ensure thorough KYC and AML checks on overseas buyers before approving such advances.
- Monitor that advances are used solely for export execution and that progress payments are received per contract.
- Verify no refund exceeding 10% of advance in the last three years for the exporter.
- Route all shipment documents through your bank and obtain RBI approval before any refund of unutilized advance or interest.
Who it affects
AD Category-I banks, Exporters with long-gestation manufacturing contracts, Overseas buyers making advance payments
What is the maximum interest rate allowed on advance payments under this circular?
Interest payable on advance payment must not exceed LIBOR plus 100 basis points.
Can we refund the advance if the exporter fails to ship?
No remittance for refund of unutilized advance or interest is allowed without prior RBI approval.
What happens if the exporter has a history of refunds?
The bank must ensure there is no instance of refund exceeding 10% of the advance payment received in the last three years.