To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186
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:
- Indian customer imports the goods either under DC / LC, DA / DP or Direct Documents.
- Indian customer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit finance.
- Consultant 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 letter of undertaking / comfort (LOU / LOC) issued in favour of overseas bank via swift.
- 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
- 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)
- 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. <The WHT is not applicable where Indian banks arrange for buyers credit through their offshore offices>
Documents at the time of taking Fresh / Rollover of Buyers Credit
- A1 Form (Principal amount)
- ECB Form
- Offer Letter from overseas bank, Letter of Undertaking format & Swift Address
- Import Documents & Bill of Entry (In Case of Direct Documents)
- Request Letter and along with it authority to debit charges
Documents at the time of Repayment of Buyers Credit
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 per RBI 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 30th June 2013)
- 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
Please let me know, what is logic behind issuance of buyer’s credit limit as a sub limit to the LC( against import of raw material against LC). And can we take the buyers credit from the any other bank except the LC opening bank.
1. All banks have been classifying buyers credit limits differently. Technically, Buyers Credit is a structure which is used by issuing letter of undertaking (LOU) or letter of comfort (LOC). LOU / LOC forms a part of Non Fund Based Limit and is a type of financial guarantee. Banks has been classifying them under sub limits of Letter of Credit (LC), Bank Guarantee (BG) and some banks are creating specific limits in the name of Buyers Credit under Non Funds based limit. So long it is part of non funds limits, it does not matter under what head they are creating sub limit excepts for those whose requirements are for LC and Buyers Credit. As this would result into limits being exhausted for either of the purpose at a given point in time. Based on case to case the same can be taken up with importer bank to change the structure of limits.
2. Answering your second question, Yes, buyers credit can be taken from any bank including LC opening bank overseas branches. But few banks are insisting on taking buyers credit from their own overseas branches or they are creating differential pricing for LOU. Reason being, as per Basell III, capital requirement in case of LOU is going up where as in case of LOC it is not. LOC is issued in case of parent subsidiary relationship.
we have opened an import L C which is due for payment on 27/12/2012.Now the importer hasrequested us to convert the LC as buyer’s credit payable after 180 days as the rate for realisation of LC is costly.Pl clarify whether the importer’s request is correct.
As your query is from Banker’s perspective. Answering above question would require further information, but based on the given information and assuming that import is of raw material, my revert is as below:
Many times importer misunderstand the RBI Master Circular on External Commercial Borrowing and Trade Credit, which say AD can approve trade for import of raw material upto 360 days from date of shipment. This does not mean it is blanked approval for all buyers credit transaction for upto 360 days. For any tenure to be approved as Buyers Credit it depends on the working capital cycle of the customer ( Importer) which is ascertained by bank at the time of sanctioning of limits. So if the sanction limits say tenure of 180 days from the day of shipment, per say it cannot be allowed beyond that tenure. Only exception to this is if the branch is convinced about a particular case, it can go back to credit manager / approving authority for extension of tenure beyond 180 days with justification. If approved, the same can be converted to buyers credit for further approved tenure. Again specific to this case, LC was due on 27/12/2012 and the question was asked on 04/01/2013 which means already there is delay of 8 days on the payment. Banks should go ahead and make the payment immediately. Reason: LC transaction is a guarantee from bank that it would make payment on due date and if the same is not done, it spoils the reputation of bank in international market.
Is buyers credit avalable to the all products which is imported
Please find below RBI Circular Extract, which clearly says, for all imports permissible under current Foreign Trade Policy, bank can provide buyers credit subject to other criteria are fulfilled.
RBI Master Circular: External Commercial Borrowing and Trade Credit, July 2012
Authorised Dealers (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)
why would an importer go for a buyer’s credit? and what benefits would he get?
Question is already answered in the above article. Major factor for importer going for buyers credit is interest cost saving.
What payment mode should importer’s bank use at the time of making repayment of buyers credit transaction principal and interest ? Reimbursement claim or Direct credit to nostro of buyers credit bank.
Importer’s Bank should follow the repayment process as instructed to them buyers credit bank in their MT799 sent at the time of disbursement of buyers credit. As a market practice, method of direct credit to Nostro of buyers credit bank is used. Reason is more of procedural. Liability of importers bank is till the funds come to nostro of buyers credit bank and incase of delay, buyers credit bank tend to claim delay payment interest. Where are incase of reimbursement claim, liability of claiming funds from Importers Bank’s Nosto falls on buyers credit bank on due date.
If the procurement of material is from EOU to SEZ unit then………
Can LC be established in foreign currency?
Can buyers credit take place against the said LC?
Please advice & refer any book which may enhance my knowledge in this case.
Thanks in advance.
For Buyers Credit facility which external rating (short term or long term) rating is to be filled in letter of undertaking format as required by few banks?
External Credit Rating in LOU is SBI and few other bank specific criteria and not the industry practice.As per current process being followed: for raw material import short term rating is used and for capital goods import long term rating is been used.
How bank should calculate the drawing power if customer uses Buyers Credit ?
Drawing Power is the amount of Working Capital funds the borrower is allowed to draw from the Working Capital limit sanctioned to him. Because the working capital limit is usually allotted to a borrower against security of Stock and Book Debts, the amount of funds a borrower is allowed to draw is calculated by considering the total value of Stock or Inventory plus total value of Book Debts (Debtors) less Creditors for the month after deducting the margin.
In cases where customer has taken Buyers Credit, equivalent amount of the buyers credit availed needs to reduced from the total drawing power, as the amount of stock / book debt has already been funded by bank.
Drawing Power = (Stock + Debtors) – (Creditors + Buyers Credit) – Margin Money
Thanks Sanjay for your immediate reply.
Let me explain my case again in detail with figures.
The Bank has sanctioned us interchangable facility for full amount (FLC+BC+CC) to the tune of Rs 11.00 Crs. We have utilised FLC for Rs 10.00 Crs and availed Buyers Credit facility at the time of maturity of FLC. Presently we are enjoying Rs 0.50 Crs as Cash Credit limit. The stock (Rs 6.50 Crs) & Debtros (Rs 8.00 Crs ) which are presently has been funded from Margin and BC.
Now, my question is why we should not calculate the DP considering BC as good as CC facility since either way it will be funded from Bank Fund facility, being BC as fund based facility and present current assets are not funded from Cash credit facility.
Stock 6.50
Drs 8.00
——————————–
Current Assets 14.50
Less: Crs 2.00
——————————–
Net CA 12.50
====================
Cash Credit 0.50 Crs
Buyers’ Cr. 10.00 Crs
Moreover, your site is very helpful to us to update ourselves with the latest changes.
Thanks, Awaiting your reply.
I am importing computer hardware in india. I am importing the material against 100% advance payment. Can you arrange the buyer’s credit against performa invoice?
Buyers Credit is allowed only post shipment of goods. Thus above is not workable. Please refer below article for further details
Transaction where Buyer’s Credit is Restricted
Sir,whether high sea sales goods are eligible for buyers Credit
Yes. High Sea Seller is eligible for taking buyers credit. For further details refer article: Buyers Credit on High Sea Sales Transaction
Can we avail buyers credit in AED
Buyers Credit can be availed in any freely convertible currency. But one also needs to check whether said currency will be available with Buyers Credit providing bank. If not then it is not possible. To specifically answer on AED (United Arab Emirates Dirham), yes, buyers credit can be taken in AED and there are also banks which provides funding in AED.
Can you tell me the different of calculation of DP while considering unpaid stocks and bank borrowing if possible please show with an example???
In Many banks; the threshold limit is USD 100,000 above.. for which they give the low quotes.
If our Import Invoice Amt. is less than USD 100,000 & than also we require the low quotes as applicable to Above 100,000 USD; than what is the via media to solve the issue..
Either you can club multiple invoice to a single buyers credit quote and single funding or touch base with more overseas bank. Both of this option will help to reach near lowest quote if not the lowest quote.
Note: Not all bank allow clubbing of invoice & some allow clubbing of invoice from same supplier. As per RBI perspective there is no such restriction. Above rules are as per bank’s internal policies.
If the below clause would be there in LOU, then how the interest amount should be calculated?
Please Explain.
Please note that the respective drawdowns will be on a six monthly LIBOR reset, where LIBOR will be reset after every six months, and the interest for each six months will be payable on the value date of such reset. Principal and Interest for the final six months will be payable on maturity.
Above clause comes into play only when buyers credit has been taken with a reset of LIBOR every 6 months but margin over LIBOR remains constant. Thus, in the given case, at every reset interest has to be calculated. Importer will pay interest on completion of sixth month and Buyers Credit Bank will send a swift message with revised interest amount (LIBOR+Margin) and next date on which interest payment has to be made.
Has there been any recent amendment by RBI that the Buyer’s credit facility can only be against fund based limits and can no longer be a sub-limit of non-fund based limits. In case it is true can you please send the link of the said circular/prudential guidelines
thanks in advance.
As per few banker there was a letter from RBI which was sent to banks around Oct 2011 in which banks were asked to ensure that borrowers be disallowed from borrowing more than their fund-based limits. There was an article in Economic Times talking in relation to same (Click here to read the Article). Because of the said letter importers have been facing the issue mentioned by you.
As per my understanding there has been no change in relation to earlier stand of RBI and there is no circular which clearly specifies the same. Only way out is to ask your banker to provide copy of the RBI circular with the above clarification or copy of RBI letter which specify the same.
Sir,as per latest RBI circular on import of Gold restrictions are not applicable for exporters hence pl clarify whether we can export gold medallions as gold jewellery.
Good evening sir,
We want to import capital goods from Germany for Euro 43500.00.. Please inform us it is beneficial for going for a buyers credit if our company is debt free company i.e we are holding funds in our fixed deposits and we want to avail buyers credit.. is it beneficial..
In the current market scenario where Forward premium are in range of 5% pa, it is not profitable to take buyers credit by way of keeping 100% FD.
Why one should go for Buyers Credit, If he can import material under Foreign Letter of Credit ?How BC is more beneficial than FLC ?
1. Not all suppliers will be ready to provide a usance period in FLC
2. Even if a supplier is ready to provide a usance period, the period might be lesser than required by you. As per RBI provision, banks are authorised to approve buyers credit upto 360 days from the date of shipment.
3. FLC charges starts from the day of LC opening. LOU charges starts from time of taking buyers credit (after documents reach bank’s counter). Thus resulting to saving in bank charges.