Supplier’s Credit India – Meaning & Process

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

  1. With transaction details importer approaches arranger to get suppliers credit for the transaction
  2. Arranger get an offer from overseas bank on the transaction
  3. Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses
  4. Suppliers ships the goods and submits documents at his bank counters
  5. Suppliers Bank sends the documents to Supplier’s Credit Bank.
  6. Supplier’s Credit Bank post checking documents for discrepancies sends the document to importers bank for acceptance
  7. Importer accept documents. Importer’s Bank provides acceptance to Supplier’s Credit Bank LC guaranteeing payment on due date.
  8. Supplier’s Credit Bank based on acceptance, discounts the bill and makes payment to Supplier.
  9. 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 01-07-2014

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.

About these ads

15 thoughts on “Supplier’s Credit India – Meaning & Process”

    1. 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.

    1. 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.

    1. Customer can utilize suppliers credit and buyers credit for the same transaction subject to RBI provision for tenure, where in case of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc) 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.

  1. 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. 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

  2. What is difference between supplier’s credit and normal l/c discounting by beneficiary as both functions in similar way in which exporter gets fund before due date.

    1. Difference between normal LC discounting and Suppliers Credit are

        1. Incase of normal LC discounting exporter gets the LC discounted through his bank and interest also borne by exporter (in most of the cases). Incase of suppliers credit importer arranges to get the lc discounted through a third party bank (other than his own bank) and interest is borne by importer.
        2. Incase of normal LC, exporter can also get pre-shipment funding from his working capital banker, where as in case of suppliers credit it can be post shipment funding only.
    1. Yes, prepayment can be made to Usance LC subject to below condition is satisfied.

      Extract from RBI Master Circular on Import of Goods and Services
      (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 be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s