To avail Buyer’s / Supplier’s Credit…E: sanjaymandavia@gmail.com, M: +919825560186
One of the important factor in Buyer’s Credit is the tenure for which one can avail Buyer’s Credit. From RBI Regulation perspective, RBI allows buyer’s credit on import of raw material (non capital goods) upto 360 days from Shipped On Board on Bill of Lading (BL) and on Capital Goods upto 3 years.
From the point of view of Importer’s Working Capital Bank, Non-Fund Based Limit are sanctioned based on your working capital cycle and your requirement. At the same time they decide a cap upto which tenure they would issue Letter of Credit (LC) / Bank Gaurantee (BG) / Letter of Comfort (LOC).
This is where the problem starts, when you decide on taking a buyers credit for 180 days but your bank has a sanction letter say permissible for 90 days. Solution is
- Either get your limits revised for 180 days which might take around 15 days to a month depending upon the banks internal approval system.
- Or you initially take it for 90 days and than rollover for another 90 days to meet your requirement. So, when you take it for second time, your buyer’s credit gets rolled over
To explain rollover with an example. Say, you have taken $1,00,000 buyers credit for tenure of 90 days and now you want to extend it for another 90 days. There are two things that you can do.
- Go to your existing buyer’s credit provider Bank (Foreign Bank or Indian Bank Overseas Branch) and get the extended tenure offer and ask your bank to send the swift for the same.
- Get fresh quote issued from a bank which is giving further competitive pricing than existing bank. Ask your bank to send new LOU to new bank. When funds are received from the new bank in the nostro of your bank, your bank will pay your existing buyers credit bank and your buyer’s credit will get rolled over
Other Factors
- If you have time, prefer to get your tenure changed in your sanction instead of taking buyers credit and than rollover
- Cost factor. Every time you roll over LIBOR will change, Margin might change, LOU charges (like nationalized bank charges some fixed amount for issuance of LOU plus usance charges. Because of this overall cost would go up)
- Incase of non capital goods transaction, bank may not provide LC/BG/LOU limits for not more than 180 days. Thus for using Buyers credit for more than 180 days, you will have to rollover in such cases.
Documentations
- Fresh offer letter, LOU format and Swift address.
- Form A2, Form 15CA and Form15CB for interest payment of earlier buyers credit. Most of the lou issuing bank do not allow interest payment included in rollover buyers credit amount. There is noting prescribed by RBI on the subject, but its depends on bank internal polices.
- Any other document are required by bank.
Sanjay Mandavia
Respected Sir,
In this current market there are rumours that rbi is coming up with circulars on disallowing the rollovers on buyers credit on raw material the tenor of which is already 360 days. That is can one extend the buyers credit which are booked for 180 days now and can further be extended on maturty for furter 180 days which is total arnd 1 year max.
Please reply at earliest.
During worst of economic times, there are always lot of rumors which keep on moving around. As the situations stands today, I do not foresee above happening because of below reasons:
1. Indian Corporate Dollar liability is around $137 Billion (source: various newspapers) till June 12. Because of which, there is already lot of strain on forex reserve of India and above move would worsen the situation.
2. Most of the importers are currently sitting at un-hedged position of their dollar liabilities including that of buyers credit, which has resulted into notional loss and if the above measure is put in place, it will get converted into actual loss in their books.
3. Above point 2, will also affect the books of banks, as their account would get converted to non standard assets. Banks are already under pressure of rising NPA, which inturn results into increased provisioning and thus requirement of more capital. PSU banks which are depended on Government of India (GOI) for their capital requirement being a major stake holder. Because of the current fiscal situation, GOI is not in position to provide additional funds by way of subscribing to rights issue of these banks. Most written about for such situation is SBI which is not been able to raise capital for some time.
4. Under the current provision, there are already enough safeguards in place. RBI in circular mentions that AD can approve buyers credit upto 360 days on raw material without approaching it. Now this does not mean that default buyers credit tenure is 360 days. Banks based on their judgment of working capital cycle of the customers (Importers) would decide what is the maximum tenure till which it will allow buyers credit for each of its customer.