Regulatory and Compliance Aspects of Vendor Financing

Vendor financing is an important aspect of the business landscape in India. This permits the buyer to use goods and services under credit terms. Managing trade credit does require knowledge of vendor financing regulations and compliance policies to mitigate risks, meet regulatory obligations, and avoid legal consequences. Consequently, compliance should be a priority for any business employing vendor financing. This guide outlines some of the regulatory and compliance factors that will impact vendor financing in 2025. 

Key Regulatory Framework Governing Vendor Financing in India

Vendor financing in India will be governed by rules from the RBI, the MCA, as well as GST laws and other relevant legal frameworks. The goal of monitoring vendor financing is to provide transparency, control risks, and establish an understanding of the formal legal responsibilities of all parties involved in vendor financing contracts. The following are the basic guidelines: 

Reserve Bank of India (RBI) Guidelines

• Digital Lending Directions 2025: The RBI has introduced new Directions to regulate digital vendor financing across platforms and to issue procurement financing. Under these Directions, vendor financing requires a transparent upfront disclosure. They must register licensed lending activity and provide current information to the RBI for transparency, ensuring vendor financing risk and compliance is met.

• MSME Lending Reforms: As MSMEs constitute the primary segment of borrowers benefitting from vendor finance through digital lending platforms, the recent RBI guidelines on MSME Lending will improve many emerging businesses’ access to credit to include accepting alternative forms of credit data for credit decisions.

• Project Finance Directions 2025: The Project Finance Directions govern lending to infrastructure or large projects, which often encompass vendor finance as part of the overall loan facility. The Directions establish a standard of exposure limits, repayment schedules based on project cash-flows, and risk-sharing arrangements for consortium lenders to encourage appropriate financing practices.

Ministry of Corporate Affairs (MCA)

Amendment to Ind AS 7 (FY26): MCA has requested that all companies separately disclose supplier financing from trade payables on a go-forward basis from FY26 in the form of financial statements. This would improve transparency around understanding vendor compliance and liabilities.

Companies Act 2013 & Contractual Compliance

Vendor financing agreements need to comply with the Companies Act, 2013, and the Indian Contract Act, 1872. The conditions of the credit term must be clearly stated, the repayment schedule must be transparent, along with penalties for either party not satisfying the agreement. This ensures consistency with vendor financing compliance requirements.

Goods and Services Tax (GST) Compliance

Proper GST compliance ensures our tax liabilities and credits are accurately recorded; this accuracy is extremely important for the financial operations of the company to run smoothly, to avoid any risk of penalties. Regular vendor GST compliance ensures that companies also receive Input Tax Credit in the appropriate regime and within the timelines.  

Data Privacy and IT Regulations

This is essential to keep vendor and customer data private from breaches and unauthorized use. Compliance with IT Regulations not only improves trust with clients and vendors but also satisfies RBI legislation that emphasizes and reinforces secure Digital Lending practices, aligned with vendor compliance certification.

Key Vendor Financing Compliance Requirements

Vendors and Buyers should take the following vendor compliance considerations into account for regulatory risk management:

Contractual Compliance and Documentation

Financing agreements should include:

• Clear credit terms, interest rates, tenure, and repayment conditions.
• Terms of default, penalties, and dispute resolution.
• Properly labelled documentation such as approvals, invoices, and supporting documentation should be kept to help with audit and compliance, while enhancing vendor compliance.

Regulatory Reporting and Disclosures

• All companies using supplier finance must report this separately in their financial reporting documents in accordance with disclosure requirements as set up by the MCA.
• Digital lending platforms that act as vendor finance providers must also record their usage of vendor finance from their borrowers in the CIMS portal provided by the RBI.
• Adequate and transparent disclosures to stakeholders about the credit terms and liabilities associated with finance.

Vendor Risk Assessment

• Due diligence should be undertaken to assess the financial condition, creditworthiness, and compliance certificate of the vendor.
• Implement a risk monitoring vendor financing legal framework that would assess the behavior of vendor repayment and adherence to existing contracts.
• Periodic audits to mitigate defaults and illegal/unlawful practices.

Aligning with RBI Digital Lending and Multi-Lender Norms

• Adhere to coherent terms of lending to buyers from multiple lenders as part of a financing arrangement.
• Stick within the overall aggregate limit of lender exposure permitted, allowing for appropriate and responsible lending.
• The compliance officer must continuously ensure that certification has been provided by the RBI, continuously overseen, and that certifications are complied with by the compliance officer.

Ensuring Data Security and Fair Practices

• Ensure borrower acceptance and an open disclosure of loan terms.
• Prohibit aggressive recovery or unauthorized information sharing.
• Adopt cybersecurity controls that comply with IT and financial vendor financing regulations.

Vendor Compliance Certification and Risk Assessment

Modern vendor financing is likely to include certifications of compliance and risk assessments to help all stakeholders:

• Vendor Due Diligence: Getting a thorough background check and financial health check on a vendor before extending credit.
• Risk Scoring Models: Using risk and credit scoring and algorithms that satisfy regulatory expectations for continued monitoring.
• Compliance Certification Programs: Vendors may need to obtain certifications that attest to their compliance with financial, legal, and operational-related compliance areas.
• Periodic Risk Audits: Assessing compliance with a contract, payment behavior, and compliance changes through vendor financing regulations.

Best Practices for Ensuring Vendor Financing Compliance Requirements

Organizations should consider some steps to comply with vendor financing regulations when optimizing vendor finance:

• Establish compliant, robust compliance programs dealing with contract management, required disclosures, and risk monitoring.
• Use compliant technology platforms that automate compliance and reporting. 

• Train staff and vendor partners on the latest guidance and contractual requirements for compliance.
• Hire legal and financial experts periodically to assess and establish your vendor financing agreements.
• Have open channels of communication with your vendors and financiers in order to avoid compliance risk.

Navigating Vendor Financing Compliance Effectively

The regulatory and compliance aspects concerning vendor financing in India are crucial to ensure financial integrity, limit risk, and trade on the best sustainable business practices. With the changing legal environment, businesses continuously need to remain aware and engaged in technologies like Credlix to seamlessly follow vendor financing compliance requirements. Credlix is a technology-minded global platform to improve compliance with transparency, automate compliance with adherence, and allow businesses to drive their supply chain by providing vendor financing, more effectively and with confidence.