RBI Trade Credit (Buyers Credit & Suppliers) Circular Extract

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

Trade Credits’ (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers’ credit and suppliers’ credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines.

a) Amount and Maturity AD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment). For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years (from the date of shipment). No roll-over/extension will be permitted beyond the permissible period. AD banks shall not approve trade credit exceeding USD 20 million per import transaction.

b) All-in-cost Ceilings
The current all-in-cost ceilings are as under : All-in-cost ceilings over  6 Libor (* for the respective currency of credit or applicable benchmark) for the tenure upto 3 years has been capped at 200 bps
The e all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.

c) Guarantee
AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, platinum, Rodium, silver etc.) and up to three years for import of capital goods, subject to prudential guidelines issued by Reserve Bank from time to time. The period of such Letters of credit / guarantees / LoU / LoC has to be co-terminus with the period of credit, reckoned from the date of shipment.

Procedure for Buyers Credit

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

Further to my earlier post. Before you proceed for buyers credit below check needs to done

Internal Check from your end.
  1. Non Fund based Limit. In order to avail buyers credit, you should have non fund based limit with you existing bank. Under banking terms, Non Funds limits are defined as Letter of Credit (LC) limits, Bank Guarantee limits (BG) limts etc. Normally during sanction, bank tends to keep these limits inter changeable between LC / BG or fund based limits. If not, your bank would not be able to issue Letter of undertaking / Comfort for buyers credit. Some nationalized bank insist on using word buyers credit in sanction before you can avail buyers credit. Thus as a first check, check if this limits are available in your sanction, if not get you bank to add this limits or make it interchangeable.
  2. Gap availability in Non fund based limits: Incase, where you already have non fund based limits but it is already fully utilized for say LC or BG, than also, you might not be able to utilize it for buyers credit. Thus at the time of sanction of loan or at the time of renewal, you make sure that there are sufficient limit available and interchange with fund based limit as well, if required, can convert fund based limit to non fund based for that much amount.
  3. Tenure of Buyers Credit: At the time of sanction, bank clearly mention for what tenure an lc / bg can be issued for.  This needs to be check, as maximum tenure for which you can avail buyers credit would depend on that. Say you may want buyers credit for 180 days were as you non funds based limits say 90 days, than maximum you can avail 90 days buyers credit at a time and than you will have to role it over.
  4. Forward Booking: Depending on bank to bank, they would either insist on booking forward cover for the currency risk upto the amount of buyer credit amount. So before moving into transaction, check on the approximate forward premium for the tenure.
  5. Format of Letter of Comfort: Every international bank offering buyers credit has their own format of letter of comfort / undertaking. There might be a chance that your bank might not issue letter of comfort in that format or might insist on using their own format. Thus check with your bank on this before proceeding.
  6. Operation Issue: Say each of the above is taken care of and you got the offer letter for buyers credit and now you have has to issue letter of comfort and payment is due in couple of days. Normally it should not take more than few hours to issue a letter of comfort /undertaking if the above points were already taken care. But some nationalized bank branches would still take couple of days to issue letter of comfort. Thus you should make provision for same. Secondly some international bank might insist on getting Letter of comfort / undertaking to be sent by authenticated swift. Thus you might have to check if there is swift key arrangement between your bank and the fund offering bank.

Initial requirement for getting quote issued
  1. Amount and Currency of Transaction: Exact value of as per invoice or lc has to be provided here
  2. Tenure for which buyers credit is required: Details of tenure for which buyers credit is required has to provided here. As per RBI regulation, under non capital goods (Raw material etc) payment has to be made with 360 days from the shipped on board date of BL and for Capital goods with 3 years from the shipped on board date. Thus according to you requirement, RBI regulation and your sanction (as per point 3 of initial check), will determine for what tenure to be mentioned
  3. Due date of transaction: Date on which you want funds to be in your bank Nostro Account. Normally one should mention 1 day before due date. Also care should be taken to check if the same is not Saturday or Sunday or Currency holiday for that currency. Otherwise it would delay your transaction.
  4. Bank which will provide letter of comfort / undertaking: Mention your bank name. Every bank has line of credit on other bank. It might be possible that overseas bank from where you are arranging quote does not have line on your bank and thus would not be able to offer you funds for the transaction.
  5. Underlying transaction (Goods involved): What goods are involved in the transaction. As per bank's internal policy, they would not like to deal in few products and thus would not offer funds for the transaction. Like i know of one bank which does not provide buyers credit if the underlying goods involves wood.
  6. Country of Origin of Goods: Internationally there are sanction on various countries under UN sanction or OFAC sanction and thus dealing under a particular currency is not allowed for that country. For example, import from Iran, Libya etc, international branches would not offer buyers credit on such transaction because of OFAC sanction.

Other than above bank to bank would ask for additional info like, in case of LC transaction, LC no, issue date, expiry date, last date of shipment etc.

As you have seen above, there are many operational check before you can enter into a buyers credit transaction. Thus is it suggested that you take help of consultant like me so that your keep on moving smoothly. One more benefit it brings in that, because as consultant are in touch with many international bank, thus would be in position to provide you competitive rates.

Quote for Buyers /Suppliers Credit @ Ahmedabad, Surat, Jamnagar, Bhavnagar, Gujarat

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186


What is Buyers Credit?

Buyers' Credit refers to loans for payment of imports into India arranged on behalf of the importer through a 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.

Benefits of Buyers Credit:

The benefits of buyers credit for the importer is as follows:
  • The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows
  • The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
  • The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
  • The importer can use this financing for any form of trade viz. open account, collections, or LCs.
  • The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.
Process flow:
  1. The Indian customer will import the goods either under DC, Collections or open account
  2. The Indian customer request the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing
  3. Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer
  4. Overseas Bank to fund your existing bank nostro account for the required amount
  5. Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment)
  6. On due date existing bank to recover the principal and amount from the importer and remit the same to Overseas Bank on due date.

Cost Involved:

The cost involved in buyers credit is as follows:
  • Interest cost: This is charged by overseas bank as a financing cost
  • Letter of Comfort / Undertaking: Your existing bank would charges this cost for issuing letter of comfort / Undertaking
  • Forward / Hedging Cost
  • Arrangement fee: Charged by person who is arranging buyer's credit for you.
  • Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges.
  • WHT: The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities.

Regulatory Framework:

Banks can provide buyer’s credit upto USD 20M per import transactions for a maximum maturity period of 1 year from date of shipment. Incase of import of capital goods banks can approve buyer’s credits upto USD 20M per transaction with a maturity period of upto 3 years. No roll over beyond this period is permitted.
RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for short term credit for financing — by way of either suppliers' credit or buyers' credit — of import of goods into India, based on uniform criteria. Credit is to be extended for a period of less than three years; amount of credit should not exceed $20 million, per import transaction; the `all-in-cost' per annum, payable for the credit is not to exceed LIBOR + 50 basis points for credit up to one year, and LIBOR + 125 basis points for credits for periods beyond one year but less than three years, for the currency of credit.
All applications for short-term credit exceeding $20 million for any import transaction are to be forwarded to the Chief General Manager, Exchange Control Department, Reserve Bank of India, Central Office, External commercial Borrowing (ECB) Division, Mumbai. Each credit has to be given `a unique identification number' by authorised dealers and the number so allotted should be quoted in all references. The International Banking Division of the authorised dealer is required to furnish the details of approvals granted by all its branches, during the month, in Form ECB-ST to the RBI, so as to reach not later than 5th of the following month. (Circular AP (DIR Series) No 24 dated September 27, 2002.