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

• Change in LIBOR Tenures and Impact on Trade Finance
• Buyers Credit Cost Calculation Sheet

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.

Benefits of Buyer’s Credit:

The benefits of buyer’s 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.

Buyers Credit Process flow:

1. Indian customer imports the goods either under DC / LC, DA / DP or Direct Documents.
2. Indian customer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit finance.
3. Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
4. If pricing is acceptable to importer, overseas bank issue’s offer letter in the name of the Importer.
5. Importer approaches his existing bank to get letter of undertaking / comfort (LOU / LOC) issued in favour of overseas bank via swift.
6. On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will either funds existing bank’s Nostro account  or pays the supplier’s bank directly
7. 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)
8. 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.

Cost Involved:

The cost involved in buyers credit is as follows:

• 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 month LIBOR is 0.33561% and 6 Month LIBOR is 0.50161%
• Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking
• Forward / Hedging Cost
• Arrangement fee: Charged by Buyers Credit Agents / Brokers how is arranging buyer’s credit for you.
• Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges etc.
• Withholding Tax(WHT): The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities.

Regulatory Framework:

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.

Over the years there has been changes in norms. Current norm as perRBI Master Circular on External Commercial Borrowing (ECB) and Trade Finance 2012 are

A. Amount and Maturity

• Maximum Amount Per transaction : $20 Million
• Maximum Maturity in case of import of non capital goods: upto 1 year from the date of shipment
• Maximum Maturity in case of import of capital goods : upto 3 years from the date of shipment
• Maximum Maturity in case of import of capital goods for companies classified as Infrastructure sector: Upto 5 years from the date of shipment

B. All-in-cost Ceilings

• Upto 1 year : 6 Month Libor + 350 bps
• Upto 3 years : 6 Month Libor + 350 bps
• Upto 5 years: 6 Month Libor + 350 bps  (applicable only for import of capital goods by companies classified as infrastructure as defined in external commercial borrowing)

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.

Reference

RBI Latest Circular: Trade Credit for Imports into India – Review of all-in-cost ceiling:Dated 09-10-2012