Buyer’s Credit – India

Email : sanjaymandavia@gmail.com, Mobile : +919825560186

What is Buyer’s Credit?

Buyer’s Credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institutions outside India. Based on letter of undertaking of Importer’s bank, Overseas bank credits the nostro of the importer’s bank which in turn uses the funds to make payment to the Suppliers bank against the import bill.

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. Importer imports the goods either under DC / LC, DA / DP or Direct Documents.
  2. Importer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit.
  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 (using only MT202 payment mode).
  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 0.23560% and 6 Month LIBOR is 0.33350%
  • Letter of Comfort / Undertaking: Importers Bank will charge this cost for issuing letter of comfort / Undertaking
  • Forward / Hedging Cost: In few banks it is mandatory for importers to book for forwards and few leave the option of deciding on importers.
  • Arrangement fee: Charged by Buyers Credit Agents / Brokers how is arranging buyer’s credit for importer.
  • Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges etc.
  • Withholding Tax(WHT): When funds are arranged from Foreign Bank, Importer has to pay WHT on the interest amount remitted to the Indian tax authorities.

Documents at the time of taking Fresh / Rollover of Buyers Credit

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 2014 are

A. Amount and Maturity

B. All-in-cost Ceilings

  • Upto 1 year : 6 Month Libor + 350 bps
  • Upto 5 years: 6 Month Libor + 350 bps 

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

92 thoughts on “Buyer’s Credit – India”

  1. 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. 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.

  2. 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.

    1. 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 non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc), 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 non capital goods 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.

    1. 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)

  3. 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.

    1. 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.

  4. If the procurement of material is from EOU to SEZ unit then………
    1. Can LC be established in foreign currency?
    2. Can buyers credit take place against the said LC?
    Please advice & refer any book which may enhance my knowledge in this case.

  5. 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?

    1. 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.

    1. 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

      1. 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.

      2. thanks a lot for sharing such a beautiful article and finest replies ….I want to clarify my understanding on the issue that correctly stocks came through Buyers credit facility are added while calculating Drawing Power , but whether Drawing Power means both Fund based and Non-fund based !!! because CC is under fund based facility and BC is under non-fund based facility…so what is the logic behind deducting Buyers Credit amount….

  6. 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?

    1. 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.

  7. Can you tell me the different of calculation of DP while considering unpaid stocks and bank borrowing if possible please show with an example???

  8. 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..

    1. 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.

  9. 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.

    1. 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.

  10. 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.

    1. 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.

      1. 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.

  11. 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..

  12. 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.
  13. If the goods procured, falls in capital goods catagory then we can enjoy the buyers credit facility for 3 years from the date of BL. This is a standard rule or it may change as per the sanctions from the banks. If sanction letter is silent about the above rule then can we take buyers credit for 3 years. Can we have any RBI circular on that.

    1. 3 Years is not a standard rule. RBI Circular on External Commercial borrowing & Trade Credit say, Banks can approve buyers credit in case of capital goods upto 3 years from the date of shipment. Thus at the time of sanctioning of term loan, given term for tenure approved for buyers credit has to be mentioned. If not, one should get a revised sanction letter with given terms. Additionally tenure in case of capital goods buyers credit is also depend agreed moratorium period with your bank for the given import (As submitted in CMA Data)

  14. Is there any training programe arranged on these aspects i.e foreign transaction like FLC, Buyers credits, imports benefits etc so that we can attend.. If any others then please inform so that we can contact

  15. We were using the Buyers Credit facility and paying the interest to the bank but now we have made an arrangement with the supplier and arranged for the extended credit from the supplier. In other words now the interest we were paying for the BC will be paid to supplier.

    What are the procedures for the same?

      1. Thanks a lot Sanjay for such a prompt response. Can you please help me with the documents to be executed or required before entering in to such transaction and subsequently at the time of payment of interest and principal amount. Further is there any limit on the period of trade credit without any interest. And further can we delay the payment beyond 360 days from shipment date in any circumstances.

        1. Process to be followed at Suppliers End

          1. Commercial Invoice to mention payment term. For example 180 from the date of shipment
          2. Bill of Exchange: to mention both Invoice Value and Interest Value separately.(along with rate of interest charged)
          3. Interest charges cannot exceed 6 Month Libor + 350 bps pa

          Process to be followed at Importers End

          1. Incase of any prepayment : interest allowable will be only for used tenure.
          2. Interest payable is taxable under sec 195 and relevant process to be followed. Refer Article: Withholding Tax (WHT) is applicable on Suppliers Credit Transactions

  16. if i need Credit of 90 days for import, but my suppliers is asking for advance payment of 30% remaining 70% on 90 days DA. I am agreeable for DA 90 days but suppliers also want SINOSURE to insure 70% DA payment. Supplier wants me to first pay 30% of the amount then will start Sinosure process. My question are

    a. any option to secure 30%
    b. if Sinosure accepts to insure then which type of documents or asset will be required by Sinosure.
    c. Also what are the eligibility criteria for Sinosure

  17. Our unit is jewellery manufacturing unit in SEZ (100% manufacturing unit) we import of Gold
    at present RBI Latest norms in import of Gold for SEZ manufacturing unit

    1. Import under SBLC Gold Loan from Foreign Banks (100% cash margin) for 180 days
    2. FLC (100% cash margin) for 90 days
    3. Buyers Credit (100% cash margin) for 90 days
    please conform to us

  18. Sir we have imported a machine for the value of USD 400000 and for which we have taken buyers credit when USD INR was at 55.50. But as USD INR has gone up to 69, What would be the impact of this and what will happen if i am not able to maintain the mtm.

    1. As the term loan is approved in INR and Buyers Credit (BC) being foreign currency (FCY) funding, it will have impact on the Mark to Market (MTM) requirement. You will have double impact….

      A. You will have to bring MTM every time dollar move up for your share
      B. You will also have to bring MTM on bank share. As bank share is locked in INR and with movement of dollar there is shortfall.

      Possible solutions to come of this situation

      A. Book Forward / Call options for the transaction to avoid future MTM.
      B. Approach bank to increase the term loan amount.
      C. At time of rollover of buyers credit transaction, convert part / full amount to term loan and rest is to be rolled over.

      Impact if you are not able meet MTM

      Bank will have to start converting BC to Term Loan at whatever rate is going. Incase of shortfall and you are not able to bring in money, it result in devolvement of guarantee and thus your account will be converted to NPA

  19. Sir in my case my term loan banker is different and Buyers Credit arrangement has done by other bank.BC has made by pledging my fd which has done at that time for the equivalent amount of BC. Thus increasing the term loan is not possible and right now i don’t have money to maintain the mtm for BC bank in the case what will happen. Pls clarify and what is that npa means

  20. What are the RBI guidelines for availing Letter of credit facility and/or buyers credit facility for the import of second hand capital goods? Is it possible for a company to avail these facility for second hand machinery.

    1. RBI Master Circular Circular on Import of Goods and Services & External Commercial Borrowing and Trade Credit are silent on the above subject. Reference is found in Exchange Control Manual in relation to second hand machinery, extract of the same is given below.

      In terms of Export-Import Policy presently in force, second hand capital goods are allowed to be imported freely subject to certain conditions. Such imports sometimes involve payment against delivery of second hand plant and machinery abroad on ‘as is where is basis’. In the absence of shipping documents, it will not be possible for authorised dealers to open letters of credit or make remittances against such imports. Applications for opening of Letters of Credit or for making remittances in regard to imports with such payment conditions should, therefore, be referred to Reserve Bank for prior approval with full details

      Based on the understanding of above, buyers credit can be taken on the second hand goods without RBI Approval subject

      A. Machine delivery is not taken abroad on ‘as is where is basis’
      B. Import of the given category of second hand machinery is allowed as current Foreign Trade Policy.

  21. As per the RBI Master Circular on ECB & Trade Credits 2013 it states that no banks/ FI’s/ NBFC’s in India can issue a guarantee, standby letter of credit, letter of undertaking or letter of comfort relating to ECB under both the automatic and approval route. In that case how is it possible to arrange a guarantee/ SBLC/ LOU/ LOC on behalf of an Indian client through an Indian Bank. Please clarify

    1. 1. Rules of ECB are applicable on Trade Credit (Buyers Credit / Suppliers Credit) only if their tenure is more than 3 years.

      RBI Circular Extract: 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

      2. Same Circular under section of Trade Credit for Imports into India part c gives rights to banks to issue LOU/LOC/LC.

      RBI Circular Extract: 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.

      RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2013

  22. If an Indian company avails certain type of services from a foreign parent company on credit will that fall under the purview of Trade Credit as per External Commercial Borrowing?

    1. It is a difficult question to answer. Below are few points which can provide some clarity.

      1. Both Master Circular on External Commercial Borrowing and Trade Credit and Import of Goods and Services are silent on the subject

      2. Master Circular ECB and Trade Credit say at one place “Imports permissible under the current Foreign Trade Policy of the DGFT”. As per Foreign Trade policy, below is the definition of Service:

      “Services” include all tradable services covered under General Agreement on Trade in Services (GATS) and earning free foreign exchange.”

      There are in all 161 services which are under GATS. Check if service provided by your parent company falls under any of the same.

      3. One also needs to understand if the import of services is in relation to import of Capital Goods. Extract from Circular ECB Policy – Import of Services, Technical know-how and License Fees

      On a review, it has been decided to include import of services, technical know-how and payment of license fees as part of import of capital goods by the companies for the use in the manufacturing and infrastructure sectors as permissible end uses of ECB under the automatic / approval route as the case may be subject to conditions

      4. In ECB and Trade Credit circular highlights point “from the date of shipment” meaning ment for import of physical goods. If that is correct than trade credit is not allowed in import of services.

      5. At last, as a market practise, buyers credit (a form of Trade Credit) is not been done for import of services.

    1. First one needs to understand whether it is raw material or capital goods import. Given below are links to articles which will give you complete details about what you will have to check with your bank first for both case.
      1. Procedure for Buyers Credit in India (Incase of raw material import)
      2. Buyers Credit on Capital Goods

      Secondly, RBI has given rights to approve buyers credit to bank subject to below conditions are fulfilled.
      A. Amount : Per Transaction buyers credit is less than $20 Million
      B. Maturity : Incase of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc) maximum tenure allowed is as per operating cycle or upto 360 days whichever is less and incase of capital goods it is upto 5 years
      C. All-in-cost ceiling : Maximum interest which can be charged by overseas bank is 6 Month Libor + 350 bps.

  23. I am under impression that that BC can be taken maximum 180 days from Bill of lading date (BL date), but can we take roll over BC again, means beyond 180 days.
    if we can what are the formalities to be done.

    1. This has to be looked at with below conditions by importer ( I am assuming that below is for raw material import)

      A. As per RBI maximum tenure which banks can approve buyers credit in case of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc) import is 360 days from date of shipment.
      B. As per RBI, maximum tenure which can banks can allow does not exceed operating cycle of importer
      C. Banks where importer is having limits, sanctioned tenure.

      Based on the answers to the above question, importer can or will be allowed by bank to rollover the transaction beyond 180 days or also take buyers credit for 180 days.

  24. what is meant by (1) “to relax the ab-initio contract period of 15 months for all trade credit to 6 months and (2) “for the extended period of beyond three years” in the RBI circular dated 24-9-2013 relating to trade credits for imports in India

    1. 1. Before this circular, earlier guidelines for buyers credit beyond 3 years was restricted to Infrastructure firms with various terms (refer below link). One of the terms was that companies wishing to extend buyers credit beyond 3 years had to take buyers credit tenure for min. 15 months from beginning and at rollover. This circular has relaxed this condition to min tenure of 6 Months at the time of taking and rollover. “Ab-initio: from the beginning”

      Trade Credit Extended Upto 5 Years for Infrastructure Firms

      2. Extended period means period between 3 to 5 years.

    1. Major difference between Letter of Undertaking (LOU) & Letter of Comfort (LOC) is their legal enforceability. Not getting into technicality of it, from buyers credit perspective, Indian Bank provides LOU to other banks and provides LOC to own overseas branches.

      For Example: If buyers credit is taken by a SBI Client from SBI Tokyo. SBI India can provide Letter of Comfort, Where as if the funding are arranged from say Bank of India Singapore, they will have to provide LOU.

      Reason: For every guarantee a bank issues, bank have to set aside funds as per capital adequacy requirement. Provisioning requirement is low in case of LOC as it is inter branch transaction in comparison to LOU. Thus incase of inter branch transaction LOC is used instead of LOU.

      For detailed understanding LOU and LOC one can refer: Lucent Technologies Inc. vs Icici Bank Limited & Ors. on 13 October, 2009

  25. Since Foreign Trade Policy allows imports in INR also. What are the regulations related to buyer’s credit in respect of an import invoice which is in INR ?

  26. We have opened two separate Import LC’s : one for technical consultancy services and the other for Shipment of Capital goods . Can we have both the LC’s converted into Buyers credit ? Could you Please Clarify and the process involved for documentation.

  27. We are a Offshore Logistic/ shipping Pvt Ltd company, Purchasing a Platform Support Vessel to Charter ONGC, Work order in Hand, We Aproached to Bank of India for Term Loan of Rs.__ Amount. BOI alone not agreed for entire, they suggested go into consortium with another two bank i.e, PNB & BOB, Now all the Bank Sanctioned Term Loan in INR with provision to convert in FCL, the interest rate in INR is 13.75% and in FCL is about 6%, Bank is agreeing to disburse in FC but we like to take LOU to obtain Buyers credit facility. Kindly suggest is it workable? Process time and interest rate?
    Your early reply will be highly appreciable.

  28. We take BC on import of goods for 90 days. We have also CC facility from our bank.
    Now we have sufficient fund to repayment of BC. Can we pay back for used BC before due date?
    If it is advisable?

  29. When buyer’s credit is paid back then which LIBOR will be applicable. Libor at the issuance of buyer credit or at the payment of it.

    1. At the time of disbursal, Buyers Credit providing bank will send a swift message (MT799) informing LOU issuing bank about the due date as well as interest amount calculated using Libor on the date of taking buyers credit.

  30. We have imported raw material on open credit. Is there any provision wherein payment can be extended beyond 360 days. And if yes what is the procedure and what is the maximum time remittances can be done.

    1. Yes it can be extended subject to below provisions been satisfied. Please find below relevant extract from RBI Master Circular for Import of Goods and Services.

      B.5. Time Limit for Settlement of Import Payments

      B.5.1. Time limit for normal imports

      (i) In terms of the extant regulations, remittances against imports should be completed not later than six months from the date of shipment, except in cases where amounts are withheld towards guarantee of performance, etc.

      (ii) AD Category – I banks may permit settlement of import dues delayed due to disputes, financial difficulties, etc. Interest in respect of delayed payments, usance bills or overdue interest for a period of less than three years from the date of shipment may be permitted in terms of the directions in para C.2 of Part III below.

      C.2. Interest on Import Bills

      (i) AD – Category – I bank may allow payment of interest on usance bills or overdue interest for a period of less than three years from the date of shipment at the rate prescribed for trade credit from time to time.

      (ii) In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance at the rate at which interest has been claimed or LIBOR of the currency in which the goods have been invoiced, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances may beallowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.

      * As of now cap on interest for Trade Credit is 6 Month Libor + 350 bps (As per RBI Master Circular on External Commercial Borrowing and Trade Credit)

    1. Incase of query is related to Initial Limit set up than you will have to refer:
      Procedure for Buyers Credit in India

      Incase it is for transaction related documentation than,

      Documents at the time of taking Fresh / Rollover of Buyers Credit

      1. A1 Form (Principal amount)
      2. ECB Form
      3. Offer Letter from overseas bank, Letter of Undertaking format & Swift Address
      4. Import Documents & Bill of Entry (In Case of Direct Documents)
      5. Request Letter and along with it authority to debit charges

      Documents at the time of Repayment of Buyers Credit

      1. A2 Form (for Interest payment)
      2. Form 15CA and Form 15CB (Incase of Foreign Bank)

  31. i want the following clarifications relating to Buyers credit-

    X Ltd is involved in execution of a power project and has obtained a term loan facility from bank – rupee term loan . Buyers credit / LC limits are sublimits with in this term loan facility (term loan repayable over a period of 15 years from project commencement).

    Buyers credit in foreign currency has been taken for import of machinery to take advantage of interest arbitrage. Buyers credit is typically contracted for a period of 6 months after which it is rolled over,ultimately Buyers credit will be settled by debiting the term loan account.

    How should the buyers credit facility be classifed – short term (since it is contracted for a period of 6 months only) or long term.

    1. Whereas Buyers Credit Suppliers Credit and Unpaid LC taken for less than 1 year shall be disclosed under the sub-head ‘Short Term Borrowings’ under the Head of ‘Current Liabilities’ under Equity and Liabilities.

  32. Sir, whether we are required to give TRC & No permenant establishment certificate for Form 15 CA/15 CB at time of remmittance against import of goods..
    Also tell me when TRC & No permenant establishment certificate is mandatory in case of foreign remmittance..

  33. one of our customers who is enjoying cash credit facility with us has come up with a request.

    Company Activity : Trader in Chemical.

    They are going to close the one crore Cash Credit account and they want a one crore buyers credit as a facility. just buyers credit. nothing else.

    My Queries are :

    1) In our bank i have never heard anyone having a pure buyers credit facility.its unprecedented.all we do is sanction LC and on that buyers credit will be given with approval of appropriate authority.

    2) If i am going to give, then is it possible to give it as facility. The company wants usance for 180 days . right now their LC usance assessment is 120 days.Right now they get a credit period of 6 months from the German supplier. Now they are planning to buy stock at sight so that they get a appreciable discount.

    3) If at all we give them buyers credit, as a banker there is very little income to my branch. In what way can i justify giving them this facility ?

    4) in what way can I classify it. Fund based or Non-fund based, will it be considered in the same lines of Foreign Bill Discounting (Non-LC) limit ?

    Sir, the company wants to take advantage of interest arbitrage. I do find their intention reasonable as it is totally a trading unit.

    Please advice on me this Sir. All i want to know is can i proceed with working on the proposal. and how this facility will be implemented in post-sanction point of view.

    1. 1. Yes, you can give pure buyers credit facility. But better way is to make it 100% interchangeable to CC limit.

      2. Tenure of buyers credit will depend on Operating Cycle of importer. I am assuming that you have arrived at 120 days for LC usance based on Net Operating Cycle. Thus cannot be given for more than 120 days.

      3. Only way to justify is that some income is better than no income. Also it keep option for future requirement of the client.

      4. It will classified as Fund Based Limit

      5. Post Sanction: It will remain same as existing process. Take monthly stock statement and calculate DP (Drawing Power) of the client. Client to be given buyers credit with in DP

      1. I have some queries (again)

        1) IF buyers credit is given under CC, then the period of buyers credit will be that of the operating cycle ?
        2) is operating cycle and LC usance are connected or not. as i am new to pre-sanction. i could not understand it. Are they one and the same or different ?
        3) Regarding hedging buyers credit risk from bank’s point of view, what are the measures could be taken other than Forward contract, cash margin etc
        4) will this CC limit given in INR, should it market to market or something like that in connection with forex fluctuations.

        1. 1. It will be Net Operating Cycle (Debtor Days + Stock Days – Creditor Days)

          2. They are different. Any tenure sanctioned for client will depend on Net Operating cycle. Once operating cycle is arrived at, buyers credit tenure, LC usance tenure etc. is sanctioned to client in his limits.

          3. A. Making forward booking mandatory for client
          B. Options
          C. Booking forward contract on NSE / BSE

          4. Limits has to be marked to Market. Whenever there is a difference, that would result into client bring in more margin money.

  34. The over all exposure from the Bank should be with Mpbf. The Fund based and non fund based limits should be within mpbf? As few Banks internal policy says it should be within mpbf and other provide non fund based limits above mpbf. what does RBI says on this?

  35. Can we transfer the trade credit to a newly incorporated entity/company, for an example if our company is shifting its assets and liabilities to a new entity, so can the existing trade credit can also be transferred to the new entity or not ?? and what would be the circumstances if the company is unable to pay off the sellers credit on time, as it is very clear that we cannot get extension of sellers credit.

    1. 1. Query: company is shifting its assets and liabilities to a new entity: My revert: I have not come across such case, thus my revert on this query is more of guess. You will have to take an NOC from existing banker for shifting of assets from company A to Company B. For limits under Trade Credit, company will either have to prepay the amount or wait till these buyers credit tenure are exhausted. This practise is followed by bank at of take over of limits.

      2. Sellers Credit question is incomplete. Whether it is capital goods or raw material. Whether funds are provided by Overseas Bank or Supplier.

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