To Avail Buyer’s/Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186
Definition / Meaning of Supplier’s Credit
Supplier’s Credit relates to credit for imports into India extended by the overseas suppliers or financial institutions outside India.
Usance 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. Paying your suppliers at sight against Usance bills under letter of credits.
Why Required ?
- Suppliers would ask for sight payment where as you want credit on the transaction.
- At times, in capital goods, banks would insist on using term loan instead of buyer’s credit. By this way you can avail cheap LIBOR rate funds and your supplier would also not mind as he is getting funds at sight.
Benefits / Advantages
For Importer
- Availability of cheaper funds for import of raw materials and capital goods
- Ease short-term fund pressure as able to get credit
- Ability to negotiate better price with suppliers
- Able to meet the Suppliers requirement of payment at sight
For Supplier
- Realize at-sight payment
- Avoid the risk of importer’s credit by making settlement with LC
Process Flow of Transaction
- With transaction details importer approaches arranger to get suppliers credit for the transaction
- Arranger get 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
- Suppliers ships the goods and submits documents at his bank counters
- Suppliers Bank sends the documents to Supplier’s Credit Bank.
- Supplier’s Credit Bank post checking documents for discrepancies sends the document to importers bank for acceptance
- Importer accept documents. Importer’s Bank provides acceptance to Supplier’s Credit Bank LC guaranteeing payment on due date.
- Supplier’s Credit Bank based on acceptance, discounts the bill and makes payment to Supplier.
- On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank
Cost Involved (may vary bank to bank)
- Foreign bank interest cost
- 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. (Indian Bank Cost)
Requirement
- Import transaction under LC
- Incoterms : FOB/CIF/C&F
- Arrangement has to be done before LC gets opened. Incase 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)
Other Factors
At times foreign bank may insist on adding confirmation which would result into additional cost
RBI Regulations
Suppliers credit is governed by RBI Circular “Master Circular on External Commercial Borrowings and Trade Credits” Dated 01-07-2011
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 Ceiling
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 all-in-cost ceiling include arranger fee, unfront 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.
Sanjay Mandavia
Can you tell me the situation when one should opt for buyers credit and when suppliers credit.
As said in article, it is requires LC to use suppliers credit, where as buyers credit can be done for any type of payment mode. Thus discussion point on whether to use a buyers credit or suppliers credit should be
A. In large transaction case, it is better to close on financial of getting funds booked by way suppliers credit instead waiting till documents comes at banker counter and than we go out scouting for funds. This is highly relevant in the current market scenario where there is short supply of bank lines and funds.
B. At time of taking sanction of term loans in capital goods, many a times client miss out getting structure of using buyers credit in first 3 years and than convert to term loan. Thus when actual transaction customer up, banker do not allow using buyers credit. Suppliers credit can help solving this issue, as normally in term loan sanction, for import of machinery, provision is Lc is kept by bank. Thus instead for going for sight Lc, one can go for long tenure LC and thus use cheaper funds which is the purpose for using either of the products.
Does credit risk insurance premium form part of the All in cost?
To go by RBI circular, the type of cost which are mention are related to buyers credit. Where as Credit Insurance is for different purpose and thus as per my understanding of circular, it will not form part of all in cost.
Whether a client can take both suppliers and buyers credit?
Customer can utilize suppliers credit and buyers credit for the same transaction subject to RBI provision for tenure, where in case of raw material total tenure should not be more than 360 days and in case of capital goods total tenure is not more than 3 years.
For Example: Customer opens an LC under which he uses suppliers credit for 180 days initially and on the due day of making the payment of suppliers credit, arranges buyers credit from fresh tenure of 90 days.
what are the merits and demerits of buyers credit and suppliers credit??????
What would happen if buyer promises to pay at a later date and creates a charge on the goods supplied by the seller? Would ECB and Trade credits apply. Because going by the stipulation in import of goods and services guidelines Deferred Payment includes supplier’s and buyer’s credit and are dealt under ECB + TC guidelines???
1. ECB and Trade Credit Guidelines will become applicable in above case if deferred payment is greater than 6 Months and less than 3 years.
2. And as per my understanding, an entity not registered in India can to create charge on assets. It would have to use a product called Security Trustee Services offered by various financial institution