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BUYER’S CREDIT

What is Buyer’s credit?

Buyer’s Credit refers to loans for payment of imports into India arranged on behalf of the importer through an overseas bank. The offshore branch credits the nostro of the bank in India and the Indian bank uses the funds and makes the payment to the exporter’ bank as an import bill payment on due date. The importer reflects the buyers’ credit as a loan on the balance sheet.

Can Buyers Credit be availed if I do not have a credit facility with any Bank?

No, you must obtain a credit facility with your bank before availing Buyer’s credit.

What is the Process Flow?

  • Indian customer imports the goods either under DC / LC, DA / DP or Direct Documents.
  • Indian customer inputs a deal in ROUTEFOREX before the due date of the bill to avail buyer’s credit finance.
  • ROUTEFOREX approaches overseas bank for indicative pricing, which is further quoted to Importer.
  • If pricing is acceptable to importer, overseas bank issue’s offer letter in the name of the Importer.
  • Importer approaches his existing bank to get LOU / LOC issued in favour of overseas bank via swift. A Letter of Comfort is a letter issued to lending institution by a parent company acknowledging the approval of a subsidiary company’s attempt for financing.
  • On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will fund the existing bank’s Nostro account.
  • LoU bank to make import bill payment by utilizing the amount credited.
  • On due date existing bank to recover the principal and Interest amount from the importer and remit the same to Overseas Bank on due date

What are the costs involved?

  • Interest cost: This is charged by overseas bank as a financing cost. Normally it is quoted as say “3M L + 350 bps”, where 3M is 3 Month, L is LIBOR, & bps is Basis Points (A unit that is equal to 1/100th of 1%). To put is simply: 3M L + 3.50%. One should also check on what tenure LIBOR is used, as depending on tenure LIBOR will change. For example as on day, 3 months LIBOR is 0.33% p.a. and 6 months LIBOR is 0.50% p.a.
  • Letter of Comfort / Undertaking: Importer’s Bank will charge this cost for issuing Letter of Comfort / Undertaking.

What are the documents at the time of taking of Buyer’s Credit?

What are the regulatory frameworks in this?

  • Maximum Amount Per transaction: USD 20 Million.
  • Maximum Maturity in case of import of non capital goods: Up to 1 year from the date of shipment, however linked to trade cycle of the business.
  • Maximum Maturity in case of import of capital goods: Up to 3 years from the date of shipment.
  • Maximum Maturity in case of import of capital goods for companies classified as Infrastructure sector: Up to 5 years from the date of shipment.
  • No financing is allowed for advance imports.
  • Financing is linked to the operating cycle of the trade transaction.
  • All-in-cost ceilings:
    • Up to 1 year: 6m L+350 bps p.a
    • Up to 5 years: 6m L+350 bps p.a

SUPPLIER'S CREDIT

What is Supplier’s Credit?

It relates to credit for imports into India extended by the overseas suppliers or financial institutions outside India. Usance Import Bills under Letter of Credit (LC) issued by Indian bank branches on behalf of their importers are discounted by Indian bank overseas branches or foreign bank. In simple terms, paying your supplier at sight against Usance bills under letter of credits.

What is the process flow?

  • Importer inputs transaction details in the ROUTEFOREX to get suppliers credit.
  • ROUTEFOREX team gets an offer from overseas bank on the transaction.
  • Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses.
  • Supplier ships the goods and submits documents at his bank counters/
  • Supplier Bank sends the documents to the negotiating Bank.
  • Negotiating Bank post checking documents for discrepancies sends the document to LC issuing bank for acceptance.
  • Importer accepts documents. LC issuing Bank provides acceptance to the negotiating Bank. LC guaranteeing payment on due date.
  • Negotiating Bank based on acceptance, discounts the bill and makes payment to the Supplier.
  • On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank

What are the costs involved?

  • Foreign bank interest cost / usance interest
  • Foreign Bank LC Confirmation Cost (Case to Case basis)
  • LC advising and or amendment cost
  • Negotiation cost (normally in range of 0.10%)
  • Postage and Swift Charges
  • Reimbursement Charges
  • Cost for the usance (credit) tenure. (LC issuing Bank Cost)

What are the necessary requirements in executing a Supplier’s credit transaction? 

  • Import transaction under LC
  • Incoterms : FOB/CIF/C&F
  • Arrangement has to be done before LC gets opened. In case of LC already opened, relevant amendment has to done.
  • LC to be restricted to suppliers credit providing bank under 41D clause of LC/
  • Under Payment Term: 90 days Usance payable at Sight (mention tenure according to tenure and offer received).
  • At times foreign bank may insist on adding confirmation which would result into additional cost

What are the RBI Regulations in a Supplier’s credit transaction?

Supplier’s credit is governed by RBI Circular “Master Circular on External Commercial Borrowings and Trade Credits”.
  • Amount and Maturity
    • Maximum amount per transaction : USD 20 Million
    • Maximum maturity in case of import of non capital goods: up to 1 year from the date of shipment.
    • Maximum maturity in case of import of capital goods: up to 5 years from the date of shipment.
    • No Rollover / Extension will be permitted beyond permissible limits
    • Trade Credit should be linked to the operating cycle and trade transaction.
  • All-in-cost Ceilings
    • Up to 1 year: 6 Month Libor + 350 bps p.a.
    • Up to 5 years: 6 Month Libor + 350 bps p.a.