Supplier’s Credit India – Meaning & Process

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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 01-07-2011

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.

Suppliers’ Credit or Buyers’ Credit is not available for Merchanting Trade

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What is Merchanting Trade?

The supplier of goods will be resident in one foreign country. The buyer of goods will be resident in another foreign country. The merchant or the intermediary will be resident in India. He will book the order from the buyer, place the order with the supplier, supervise and coordinate the shipment of goods from the supplier’s country and deliver the same in buyer’s country. He will be receiving payment from the overseas buyer and making payment to the overseas supplier through an authorised dealer in foreign exchange in India. The difference between the inward remittance and the outward remittance will be the profit for the merchant. Some times goods may be imported by a buyer in India from a seller in one country and exported to a buyer in another country. such imports will be kept in bond and then exported. It is also possible that repacking may be done under customs supervision and then exported. This is basically to avoid the foreign buyer to know the source from which goods are being bought and supplied to them. Such transactions are known as Merchanting Trade as per the Indian Foreign Exchange Management Regulations.

RBI Regulations

RBI under Master Circular of Import of Goods and Services, has given norms to be followed in case of all Merchanting Transactions.  Extract of the relevant section is given below.

C.17. Merchanting Trade

AD Category – I bank may take necessary precautions in handling bonafides merchanting trade transactions or intermediary trade transactions to ensure that:

1. Goods involved in the transactions are permitted to be imported into India and all the rules, regulations and directions applicable to export (except Export Declaration Form) and import (except Bill of Entry) are complied with for the export leg and import leg, respectively.
2. The entire merchant trade transaction is completed within a period of 6 months.
3. The transactions do not involve foreign exchange outlay for a period exceeding three months.
4. Payment is received in time for the export leg.
5. Where the payment for export leg of the transaction precedes the payment for import leg, AD Category – I banks should ensure that the terms of payment are such that the liability for the import leg of the transaction is extinguished by the payment received for the export leg of the transaction, without any delay. 

AD Category – I banks may note that short-term credit either by way of suppliers’ credit or buyers’ credit is not available for merchanting trade or intermediary trade transactions

IMO Number and Its importance in case of Buyers Credit

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What is IMO Number ?

The IMO ship identification number is made of the three letters “IMO” followed by the seven-digit number assigned to all ships by IHS Fairplay when constructed. This is a unique seven digit number that is assigned to propelled, sea-going merchant ships of 100 gross tons and above. It serves the purpose of identifying ships. It is a Unique number which does not change, even if when the ship’s owner, country of registry or name changes.

What is the Use of IMO Number ?

Banks are using Lloyd’s Register for checking ship details using IMO Number. Details such as owners of the ship till date, current owners, which countries flag this ship had used and  is currently using etc.

Purpose of doing this is to comply with US government sanctions on various countries under OFAC and other law. IMO check is done at the time of every transaction, so as to avoid any violation of these laws.

Many buyers credit funding are done through US based bank branches (quoting specifically US, others might also be using it), they check for IMO number of the vessel before buyers credit funding.

Issue which can arise in case of Buyers Credit

1. Bank may refuse to fund the buyers credit transaction in case there is no IMO number available of the shipping vessel.
2. In case of MultiModal Bill of Lading (B/L), there are more than one ship used either on international water or incase of part on international water and part on exporter’s country. Banks calls for all vessel name and BL details used during the transport of the goods, which is then further checked with Lloyd’s Register. In most of the cases ship moving on inland water of the country do not have IMO number, but some registration number given by local body of that country. In such a given case, funding will not happen.

• Example: In one of such cases, which I had come across, goods were shipped from China to India. Part of shipment from exporter’s place to port was handled by local transport ship which did not have IMO number. An Indian Bank’s overseas branch in U.S. had refused to fund such transaction.

Precautions

At the time of entering into a contract with exporters, it can be clearly specified that transport document should be either an Ocean B/L or incase of Multimodal B/L, goods to shipped with an IMO number.

Reference:

IMO Search by Vessel Name

Country-wise Double Taxation Summary Chart on Interest

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Below Country-wise double taxation summary chart provides Tax rate and Article reference number applicable on interest payment to beneficiary outside India. Same will be useful at the time of filling up Form 15CA and Form 15CB

Notes:

• To use DTAA rates, beneficiary should have an Indian PAN Card
• As per DTAA rate of TDS should not exceed tax rate given in DTAA. Which means, where rate as per DTAA is applicable, Surcharge and Education Cess shall not apply.

SR. NO.	COUNTRY OF RESIDENCE OF RECEIPIENT OF REMITTANCE	ARTICLE REFERENCE	APPLICABLE TDS RATES
1	Armenia	Clause 2 of Article 11	10%
2	Australia	Clause 2 of Article XI	15%
3	Austria	Clause 2 of Article 11	10%
4	Bangladesh	Clause 2 of Article XII	10%
5	Belarus	Clause 2 of Article 11	10%
6	Belgium	Clause 2 (a) of Article 11	15% (10% if any loan granted by bank)
7	Botswana	Clause 2 of Article 11	10%
8	Brazil	Clause 2 of Article 11	15%
9	Bulgaria	Clause 2 of Article 12	15%
10	Canada	Clause 2 of Article 11	15%
11	China	Clause 2 of Article 11	10%
12	Czech Republic	Clause 2 of Article 11	10%
13	Cyprus	Clause 2 of Article 11	10%
14	Denmark	Clause 2 (a) of Article 12	15% (10% if any loan granted by bank)
15	Finland	Clause 2 of Article 11	10%
16	France / French Republic	Clause 2 of Article 12	10%
17	Georgia	Clause 2 of Article 11	10%
18	Germany	Clause 2 of Article 11	10%
19	Greece	Article IX	20%(plus surchage)
20	Hashemite Kingdom of Jordan	Clause 2 of Article 11	10%
21	Hungary	Clause 2 of Article 11	10%
22	Iceland	Clause 2 of Article 11	10%
23	Indonesia	Clause 2 of Article 11	10%
24	Ireland	Clause 2 of Article 11	10%
25	Israel	Clause 2 of Article 11	10%
26	Italy	Clause 2 of Article 12	15%
27	Japan	Clause 2 of Article 11	10%
28	Jordan	Clause 2 of Article 11	10%
29	Kazakstan	Clause 2 of Article 11	10%
30	Kenya	Clause 2 of Article 12	15%
31	Korea (South)	Clause 3 (a) of Article 12	15% (10% if any loan granted by bank)
32	Kuwait	Clause 2 of Article 11	10%
33	Kyrgyz Republic	Clause 2 of Article 11	10%
34	Libyan Arab Jamahiriya	Article 10	20%(plus surchage)
35	Luxembourg	Clause 2 of Article 11	10%
36	Malaysia	Clause 2 of Article 11	10%
37	Malta	Clause 2 of Article 11	10%
38	Mauritius	Clause 3 (c) of Article 11	20% (Nil in case of bank carrying on a bonafide banking business)
39	Mongolia	Clause 2 of Article 11	15%
40	Montenegro	Clause 2 of Article 11	10%
41	Morocco	Clause 2 of Article 11	10%
42	Mozambique	Clause 2 of Article 11	10%
43	Myanmar	Clause 2 of Article 11	10%
44	Namibia	Clause 2 of Article 11	10%
45	Nepal	Clause 2 of Article 11	15%(10% if any loan granted by bank)
46	Netherlands	Clause 2 of Article 11	10%
47	New Zealand	Clause 2 of Article 11	10%
48	Norway	Clause 2 of Article 12	15%
49	Oman	Clause 2 of Article 12	10%
50	Philippines	Clause 2 (a)of Article 12	15% (10% if interest is received by financial institution or insurance company)
51	Poland	Clause 2 of Article 12	15%
52	Portugal / Portuguese Republic	Clause 2 of Article 11	10%
53	Qatar	Clause 2 of Article 11	10%
54	Romania	Clause 2 of Article 12	15%
55	Russian Federation/ Russia	Clause 2 of Article 11	10%
56	Saudi Arabia / Kingdom of Saudi Arabia	Clause 2 of Article 11	10% (Income from debt-claims)
57	Serbia	Clause 2 of Article 11	10%
58	Singapore	Clause 2 (a) of Article 11	15% (10% if any loan granted by bank)
59	Slovenia	Clause 2 of Article 11	10%
60	South Africa	Clause 2 of Article 11	10%
61	Spain	Clause 2 of Article 12	15%
62	Sri lanka	Clause 2 of Article 11	10%
63	Sudan	Clause 2 of Article 11	10%
64	Sweden	Clause 2 of Article 11	10%
65	Switzerland / Swiss Confederation	Clause 2 of Article 11	10%
66	Syria	Clause 2 of Article 12	7.5%
67	Syrian Arab Republic	Clause 2 of Article 11	10%
68	Tanzania	Clause 2 of Article 12	12.50%
69	Tajikistan	Clause 2 of Article 11	10%
70	Thailand	Clause 2 (a) of Article 11	25% (10% if any loan granted by bank)
71	Trinidad and Tobago	Clause 2 of Article 11	10%
72	Turkey	Clause 2 (a) of Article 11	15% (10% if any loan granted by bank)
73	Turkmenistan	Clause 2 of Article 11	10%
74	U.A.E	Clause 2 (a) of Article 11	12.5% (5% if any loan granted by bank)
75	UAR (Egypt)	Clause 1 of Article XII	20% (plus surchage)
76	United Kingdom	Clause 3 (a) of Article 12	15% (10% if any loan granted by bank)
77	United Mexican States (Mexico)	Clause 2 of Article 11	10%
78	Uganda	Clause 2 of Article 11	10%
79	Ukraine	Clause 2 of Article 11	10%
80	USA	Clause 2 (a) of Article 11	15% (10% if any loan granted by bank)
81	Uzbekistan	Clause 2 of Article 11	15%
82	Vietnam	Clause 2 of Article 11	10%
83	Zambia	Clause 2 of Article 11	10%

Consequence of Non Deduction of Withholding Tax (WHT / TDS)

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

As with other TDS defaults the consequences for Non deduction of Withholding Tax (WHT) may be broadly classified as under:

1. Disallowance of the amounts paid under Section 40 (a) (i). It should be noted that the scope of the section dealing with payments to non residents is wider than that of 40 (a) (ia) which deals with residents.
2. Simple Interest at 12 % p.a.  u/s 201A (which is on a month to month basis after the Finance Act 2007). As per amendment w.e.f. July 1, 2010, the rate of Interest is 1 % per month or part thereof, from the date on which tax was deductible to the date on which tax is actually deducted. The rate of Interest is 1.5 % per month or part thereof, from the date on which tax was actually deducted to the date on which tax is actually paid.
3. Penalties for non deduction (u/s 271C) (Minimum Penalty is the amount of tax which such person has failed to deduct or pay) and failure to pay the deducted tax to the government (u/s 221) (Minimum Penalty is any such amount as the Assessing Officer may impose and maximum Penalty is upto tax in arrears)
4. Prosecution u/s 276B

Note:  Section 195 A provides for the grossing up of payments in case of Net 0f Tax Payments.

Form 15CA and 15CB under Section 195 of Income Tax

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

Finance Act, 2008 inserted a new sub section (6) to section 195 effective from April 1, 2008, which requires the person responsible for making payment to a non-resident to furnish information relating to such payments in forms to be prescribed. The Central Board of Direct Taxes (“CBDT”) has now, by notification No 30/2009 dated March 25, 2009, prescribed a new rule 37BB in the Income Tax Rules, 1962 (“the rules”) prescribing Form 15CA and Form 15CB to be filed in relation to remittances to non-residents under section 195(6) of the Income Tax Act, 1961 (“the Act”). This new rule is effective from July 1, 2009 and shall apply to all remittances being made after July 1, 2009. The process that will have to be followed, before any remittance can be made, is as under—

Step 1 : Obtain a certificate from a Chartered Accountant in Form No 15CB

Step 2: Electronically fill Form 15CA on NSDL site and submits it.

Step 3:Take Print out of Form 15CA with system generated acknowledgement number.  The same must be signed by person authorised to sign the return of income of the remitter or a person so authorised by him in writing

Step 4: Submit in duplicate Form 15CA and Form 15CB along with Form A2 to Remitting Bank (Authorised Dealer)

Step 5:  Bank makes the remittance

Step 6: Bank forwards a copy of undertaking (Form 15CA) and certificate of Accountant ( Form 15CB) to Assessing Officer

CBDT Notification no. 30/2009 :-

In exercise of the powers conferred by section 295 read with sub-section (6) of section 195 of the Income-tax Act, 1961, the Central Board of Direct Taxes hereby makes the following rules further to amend the Income-tax Rules, 1962, namely:-

1.a These rules may be called the Income-tax (Seventh Amendment) Rules, 2009.

1.b They shall come into force with effect from 1st July, 2009.

2. In the Income-tax Rules, 1962, after rule 37BA, the following rule shall be inserted, namely:-  “Furnishing of information under sub-section (6) of section 195.

37BB. (1) The information under sub-section (6) of section 195 shall be furnished by the person responsible for making the payment to a non-resident, not being a company, or to a foreign company, after obtaining a certificate from an accountant as defined in the Explanation to section 288 of the Income-tax Act, 1961.

(2) The information to be furnished under sub-section (6) of section 195 shall be in Form No. 15CA and shall be verified in the manner indicated therein and the certificate from an accountant referred to in sub-rule (1) shall be obtained in Form No. 15CB.

(3) The information in Form No. 15CA shall be furnished electronically to the website designated by the Income-tax Department and thereafter signed printout of the said form shall be submitted prior to remitting the payment.

(4) The Director-General of Income-tax (Systems) shall specify the procedures, formats and standards for ensuring secure capture, transmission of data and shall also be responsible for the day-to-day administration in relation to furnishing the information in the manner specified.

Reference

1. Form 15CA – Online
2. Form 15CB
3. Income Tax Circular : Remittances to non-residents
4. Procedure for furnishing information in Form 15CA and Form 15CB
5. Form A2

OFAC Countries & Implication on Buyers Credit

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What is OFAC Sanctions ?

• The Office of Foreign Assets Control (OFAC) is an office of the Treasury Department of United States of America (US).
• OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, organizations, entities, and individuals.
• Regulations issued under Trading With the Enemy Act (50 U.S.C. App.§§ 1-44) or by the US President under authority delegated under the International Emergency Economic Powers Act.
• The OFAC sanctions programs are implemented through restrictions on imports and exports, prohibitions on financial transactions, freezing of assets, and other means.

OFAC Sanction Program

The several OFAC sanctions programs can be grouped into two general categories:

Comprehensive programs: These programs target trade, investment, and commercial activities with certain geographic regions and governments.

In general, OFAC comprehensive sanction programs prohibit:

• Exports from the United States (direct or indirect)
• Imports into the United States (direct or indirect)
• Other related transactions or dealings

The comprehensive sanctions programs apply to transactions involving most goods, technology and services. However, OFAC may authorize otherwise prohibited transactions, either by a general license contained within the regulations for a particular program, or by a specific license issued by OFAC.

Such programs currently apply to:

• Cuba
• Iran
• Sudan
• Burma (Myanmar)

Non-Comprehensive Programs:

1. Limited country-specific programs;
2. Programs targeting groups or individuals who have contributed to conflicts in or undermined democratic process in certain countries, and
3. Programs targeting individuals or entities involved in or supporting terrorism, drug trafficking and other activities

Such programs currently apply to:

• Western Balkans
• Belarus
• Cote d’Ivoire
• Democratic Republic of the Congo
• Iraq
• Liberia (Former Regime of Charles Taylor)
• Persons Undermining the Sovereignty of Lebanon
• Libya
• North Korea
• Somalia
• Syria
• Zimbabwe
• Counter-Terrorism Sanctions Program
• Non-Proliferation Sanctions Program
• Counter-Narcotics Trafficking Sanctions Program
• Diamond Trading Sanctions Program

Implications of OFAC Regulations for Financial Institutions

Financial institutions must monitor all financial transactions performed by or through them to detect those that involve any entity or person subject to the OFAC laws and regulations.

For most situations, a financial institution should accept deposits and funds subject to OFAC regulations, but freeze the funds and accounts, so that absolutely no funds can be withdrawn (this is called “blocking”). However, there are a few situations that require the financial institution to reject the transaction or funds instead of accepting and blocking them. Exact regulations vary, in accordance with requirements imposed by the eight federal statutes and the specific sanctions. A detailed description of specific regulations for each program is available on the official OFAC web site: www.treas.gov/ofac.

In general, OFAC rules prohibit financial institutions from engaging in transactions with the governments of, or individuals or entities associated with, foreign countries against which federal law imposes economic sanctions. Federal law also imposes sanctions against certain countries associated with terrorists and narcotics traffickers and their front organizations. OFAC rules prohibit transactions with these entities as well. OFAC maintains a list of entities and individuals against whom these restrictions apply. You will need this list, known as the “SDN list” (Specially Designated Nationals) in order to comply.

Transactions Subject to OFAC Santions

Every type of financial transaction should be reviewed for OFAC compliance including, without limitation, the following:

• Deposit accounts (checking, savings, etc.)
• Loans
• Lines of credit
• Letters of credit
• Safety deposit boxes
• Wire transfers
• ACH transfers
• Currency exchanges
• Depositing or cashing checks
• Purchase of money orders or cashiers checks
• Loan payments
• Guarantors and collateral owners
• Trust accounts
• Credit Cards

Moreover, the names of all parties to a transaction should be checked against the list of names of individuals, entities, geographical locations or countries that have been identified by OFAC. This includes, but is not limited to the following (as applicable):

• Beneficiaries
• Collateral Owners
• Guarantors / Cosigners
• Receiving Parties
• Sending Parties

Summary Chart Countrywise

These regulations are complex, and vary widely with respect to different countries. Below Chart provides a general guide, but note the references in the chart to guides published by OFAC that reflect that office’s official position. Also note that OFAC issued a Final Rule titled “Economic Sanctions Enforcement Guidelines” on 11/9/2009, effective immediately, that affects how OFAC sanctions are applied to financial institutions and other parties.

Sanctions Program	Summary of Sanctions/Penalties	Licenses, Special Notes Resource Links
Balkans - Blocking Property of Persons Who Threaten International Stabilization Efforts in the Western BalkansGet the details	BLOCKING. All property and assets of designated persons are BLOCKED and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.Prohibited activity. The making or receiving by a U.S. person of any contribution or provision of funds, goods, or services to or for the benefit of a designated person is prohibited. In addition, any transaction by a U.S. person that evades or avoids or has the purpose of or attempts to violate these prohibitions and any conspiracy to violate the prohibitions is prohibited.Penalties: Criminal fines for violating the Executive Order or regulations to be issued pursuant to the Executive Order may range up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years for a criminal violation. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively.	Executive Order (EO) 13219 (6/27/2001), modified by EO 13304 (5/29/2003).Licenses: Western Balkans General License (No. 1) - Legal Representation in Matters Pending before the International Criminal Tribunal for the former YugoslaviaLast program update: 5/30/2011
Belarus - Blocking Property of Certain Persons Undermining Democratic Processes or Institutions in BelarusGet the details	Assets Blocked As of June 19, 2006, all property and interests in property of persons listed in the OFAC SDN lists with a [BELARUS] designation are blocked, “and may not be transferred, exported, withdrawn, or otherwise dealt in.Donations to or for the benefit of those same persons are prohibited.	EO 13405 (6/19/2006)Licenses: All prior licenses have expired.Last program update: 2/10/2011
Burma (Myanmar)Get the details	Prohibited Activity:  New investment in Burma by U.S. persons and U.S. persons’ facilitation of new investment in Burma by foreign persons.Prohibited: - With certain exceptions, the exportation or reexportation of financial services to Burma is prohibited. The term exportation or reexportation of financial services to Burma is defined broadly to mean: (i) the transfer of funds, directly or indirectly, from the United States or by a U.S. person, wherever located, to Burma; or (ii) the provision, directly or indirectly, to persons in Burma of insurance services, investment or brokerage services, banking services, money remittance services; loans, guarantees, letters of credit or other extensions of credit; or the service of selling or redeeming traveler’s checks, money orders and stored value. This defined term is unique to the Burma sanctions program. Although there are limited exceptions to the ban on the exportation of financial services, under no circumstances can payments be made from blocked accounts on the books of a U.S. bank. Blocked: All property and interests in property of the persons listed [in SDN lists citing the BURMA sanction program].Allowed: - U.S. financial institutions can operate accounts for an individual ordinarily resident in Burma, provided that the individual is not a blocked person and further provided that each transaction processed through the account is of a personal nature and not for use in supporting or operating a business, is not otherwise prohibited, and does not involve a transfer directly or indirectly to Burma or for the benefit of individuals ordinarily resident in Burma unless authorized pursuant to General License No. 15. Pursuant to General License No. 15, certain noncommercial, personal remittances to Burma are authorized. U.S. depository institutions, U.S. registered brokers or dealers in securities, and U.S. registered money transmitters are authorized to process transfers of funds to or from Burma or for or on behalf of an individual ordinarily resident in Burma in cases in which the transfer involves a noncommercial, personal remittance, provided that the transfer is not by, to, or through a person whose property and interests in property are blocked. Such transfers of funds are authorized even though they may involve transfers to or from an account of a financial institution whose property and interests in property are blocked, provided that the account is not on the books of a financial institution that is a U.S. person. Noncommercial, personal remittances do not include charitable donations to or for the benefit of any entity or funds transfers for use in supporting or operating a business. However, U.S. persons may make charitable donations to nongovernmental organizations in support of certain activities in Burma, provided that the donations are made pursuant to Amended General License No. 14-B.Prohibited: The importation into the United States of products of Burma and the exportation or reexportation to Burma of financial services from the United States or by U.S. persons, wherever located. The importation of jadeite and rubies mined or extracted from Burma (and of articles of jewelry containing such jadeite and rubies) is prohibited, and there are conditions for the importation of jadeite and rubies mined or extracted from a country other than Burma (and of articles of jewelry containing such jadeite and rubies).Penalties: Criminal conviction may result in a fine of not more than $1,000,000, or if a natural person, imprisonment for not more than 20 years, or both. A civil penalty of $250,000, or twice the amount of the transaction, whichever is greater, may be assessed for each violation. Imported articles in violation may be forfeited.	Beginning May 6, 2008, largely in response to losses of life and property damage in the wake of Cyclone Nagris, OFAC has issued a series of Licenses (Nos. 14, 14-A and 14-B) authorizing certain financial transactions in support of humanitarian or religious activities in Burma. The latest of the series has no time limit.Also on May 9, 2008, OFAC issuedGeneral License No. 15, to allow U.S. financial institutions to process transfers of funds, unlimited in amount, for noncommercial, personal remittances to or from Burma, or for or on behalf of an individual ordinarily resident in Burma, subject to certain conditions. Prior to the issuance of this general license, noncommercial, personal remittances to Burma were permitted only insofar as total remittances did not exceed $300 per Burmese household in any consecutive three-month period. This new general license includes no such limitation.Guidance: Burmese Origin ImportsLast program update: 9/10/2010
Congo, Democratic Republic of the - Sanctions Against Persons Contributing to the Conflict in the Democratic Republic of the CongoGet the details	Blocked. Any property of any [DRCONGO] SDN is blocked.Penalties: - Criminal fines for willful violations of the E.O. or the Regulations range, upon conviction, up to $1,000,000; individuals may also face imprisonment up to 20 years. In addition, civil penalties of up to the greater of $250,000 or twice the amount of the underlying transaction may be imposed administratively for violations of the E.O. or the Regulations.	EO 13413 of 10/27/2006, effective 10/30/2006.Licenses: No general licenses have been issued.Last program update: 2/11/2011
Côte d’Ivoire(Ivory Coast)Get the details	Blocked:  Transactions are prohibited with persons designated in OFAC’s list of SDNs and Blocked Persons with a descriptor of [COTED], and others. Includes money, checks, drafts, bank accounts, securities and other financial instruments, letters of credit, bills of sales, bills of lading and other evidences of title, wire transfers, merchandise and goods. Blockable property also includes any property in which there is any interest of a Côte d’Ivoire SDNs, including direct, indirect, future or contingent, and tangible or intangible interests.Penalties: Criminal fines up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively.	EO 13396 - 2/7/2006No licenses.Last program update: 1/6/2011
Counter Narcotics TraffickingGet the detailsThis program includes persons designated under the 1999 Foreign Narcotics Kingpin Designation Act (“Kingpin Act”) as SDNTKs and those designated under EO 12978 (10/21/1995) as SDNTs.	Blocking. Blocks all property subject to U.S. jurisdiction in which there is any interest of a person designated as an SDNT or SDNTK.Prohibition: U.S. persons are prohibited from engaging in any transaction or dealing in property or interests in property of [SDNTK]s and from engaging in any transaction that evades or avoids the prohibitions of the Kingpin Act. These prohibitions affect trade transactions as well as accounts, securities, and other assets.Penalties, Kingpin Act violations: Corporate criminal penalties for violations of the Foreign Narcotics Kingpin Designation Act range up to $10,000,000; individual penalties range up to $5,000,000 and 30 years in prison. Civil penalties of up to $1,075,000 may also be imposed administratively.Penalties, violation of EO 12978:  Corporate criminal penalties for violations of the International Emergency Economic Powers Act range up to $500,000; individual penalties range up to $250,000 and 20 years in jail. Civil penalties of up to $50,000 may also be imposed administratively.	Kingpin Act EO 12978No licenses issued.Last program update: 7/25/2011
Counter TerrorismGet the detailsIncludes Specially Designated Global Terrorist [SDGT], Foreign Terrorist Organization [FTO] and Specially Designated Terrorist [SDT] designations.	Blocked: All property and interests in property of the designated persons that are in the United States or that hereafter come within the United States, or that hereafter come within the possession or control of United States persons.Prohibited: To assist in, sponsor, or provide financial, material, or technological support for, or financial or other services to or in support of, acts of terrorism or those persons listed; and being otherwise associated with designated persons, including the making of donations to persons designated under the Order.Penalties: Corporate criminal penalties for violations range up to $500,000; individual penalties range up to $250,000 and/or 20 years in jail. Civil penalties of up to $50,000 may also be imposed administratively.	EO 12947, 1/23/1995EO 13099, 8/21/1998EO 13224, 9/24/2001EO 13268, 7/2/2002EO 13372, 2/16/2005Guidelines on Transactions with the Palestinian AuthorityLicenses: Several licenses have been issued, relating to international organizations; certain transactions with the Palestinian Authority; in-kind donations of medicine, medical devices and services, etc. See the individual licenses listed on theSanctions Details page for further information and links.Last program update: 6/23/2011
CubaGet the details.NOTE: OFAC’s Program Summary is currently under revision to reflect the January 2011 policy changes.	Blocking. Cuban assets, both government and private, are BLOCKED.Financial dealings with Cuba are BLOCKED.All property of Cuba, all Cuban nationals, and all Specially Designated Nationals (SDNs) of Cuba are BLOCKED.An estate account becomes BLOCKED whenever a Cuban national is an heir or is the deceased.Access to a safe deposit box is BLOCKED whenever a Cuban has an interest in the contents of the box.Life insurance proceeds are blocked if the deceased is a Cuban resident.Notes: On 9/4/2009, OFAC announced a final rule amending the Cuban Assets Control Regulations (CACR), relaxing rules on family visits, family remittances and telecommunications. On 1/28/2011, OFAC published another final rule further relaxing its regulations to continue efforts to reach out to the Cuban people in support of their desire to freely determine their country’s future. These amendments allow for greater licensing of travel to Cuba for educational, cultural, religious, and journalistic activities and expand licensing of remittances to Cuba. These amendments also modify regulations regarding authorization of transactions with Cuban national individuals who have taken up permanent residence outside of Cuba, as well as implement certain technical and conforming changes.	Authorized Travel, Carrier, and Remittance Forwarding Service Providers (8/26/2011)Last program update: 8/26/2011; under revision by OFAC to reflect January 2011 policy changes.
IranGet the detailsIncludes SDN designations as IRAN, IRGC, IFSR, IRAN-HR and ISA.	BLOCKED. Per an Executive OrderBlocking the Property and Interests in Property of the Government of Iran and Iranian Financial Institutions (2/5/2012), U.S. persons are required to block all property and interests in property of the Government of Iran (including the Central Bank of Iran), of all Iranian financial institutions, and of all persons determined by the Secretary of the Treasury to be owned by, controlled by, or acting for or on behalf of any of those parties, when that property comes within the United States or within the possession or control of U.S. persons. New General License A and General License B were issued under the E.O. of February 5, and modify the effect of certain pre-existing licenses.An FAQ has been published to provide details on how the 2/5/12 EO affects transactions involving Iranian banks and the Government of Iran.OFAC also added a question about the impact of the 2/5/12 EO to its general FAQ on sanctions programs. An excerpt:”As a result, transactions involving entities bearing the [IRAN] tag on OFAC’s List of Specially Designated Nationals and Blocked Persons (“SDN List”) will now need to be blocked unless exempt or authorized by OFAC. Going forward, the [IRAN] tag will connote that a person or entity meets the definition of the term “GOI” or “Iranian Financial Institution”. OFAC will continue to update the SDN List and may add, delete, or edit existing entries as appropriate. “The E.O. of Feb. 5 blocks the property and interests in property of any individual or entity that comes within its definition of the term “Government of Iran” regardless of whether it is listed on the SDN List, and similarly it blocks the property and interests in property of all Iranian financial institutions as defined in the order regardless of whether the Iranian financial institution is listed on the SDN List.”Transactions not previously authorized by OFAC that involve property or interests in property of the Government of Iran, including the Central Bank of Iran, or of Iranian financial institutions must be blocked.U.S. Affiliates. U.S. persons (including financial institutions) with foreign affiliates may not permit the affiliate to do anything with regard to Iran that the U.S. person is prevented from doing directly.Penalties: Criminal penalties for violations of the Iranian Transactions Regulations may result in a fine up to $1,000,000, and natural persons may be imprisoned for up to 20 years. Civil penalties, which are not to exceed the greater of $250,000 or an amount that is twice the amount of the transaction that is the basis of the violation with respect to which the penalty is imposed may also be imposed administratively.	Effective 11/10/2008, U.S. depository institutions may NO LONGER handle “U-turn transactions” that cover payments involving Iran.Banks may handle non-commercial family remittances involving Iran and non-commercial remittances involving humanitarian relief, provided the transfers are routed to or from non-U.S., non-Iranian offshore banks.The institution must determine prior to processing any payment orders that they do not involve prohibited transactions.Donations of articles intended to relieve human suffering are permitted.A list of banks owned or controlled by the Government of Iran is provided.Iran Sanctions Act: Implementation of Certain Sanctions Imposed on Seven Persons (11/14/2011)Designated IRGC Affiliates and Iran-Linked Financial Institutions - Extracted from SDN list.Executive Order Blocking the Property and Interests in Property of the Government of Iran and Iranian Financial Institutions (2/5/2012) FAQ regarding the 2/5/2012 Executive Order Guidance on Iran Sanctions in National Defence Authorization Act for FY 2012 (2/14/2012) EO 13590 - Iran Sanctions (11/21/2011) EO 13574 - Implementation of certain sanctions in Iran Sanctions Act of 1996, as amended (eff. 5/23/2011)EO 13553 - Blocking property of certain persons with respect to human rights violations by the Government of Iran (Eff. 9/29/2010)EO 13059 - Prohibiting certain transactions with respect to Iran (8/20/1997)EO 12959 - Prohibiting certain transactions with respect to Iran (5/7/1995)EO 12957 - Prohibiting certain transactions with respect to the development of Iranian petroleum resources (3/16/1995)EO 12613 - Prohibiting imports from Iran (10/29/1987)Last program update: 2/14/12
IraqGet the details.Iraq Stabilization and Insurgency Sanctions Regulations (ISISR) – [IRAQ] designations	All transactions previously prohibited are now authorized, with certain exceptions.Exceptions:All property and interests in property blocked as of May 23, 2003 are still blocked.The export or re-export from a third country to Iraq of goods or technology must be authorized by the Department of Commerce.Transactions dealing with Iraqi cultural property illegally removed since August 6, 1990 are not authorized.Financial transactions with Iraq are allowed, except for those involving individuals and entities on OFAC’s SDN list. The opening of correspondent accounts for Iraqi financial institutions is permitted.Penalties: Civil penalties of up to $250,000 or twice the amount of the underlying transaction may be imposed administratively against any person who violates, attempts to violate, conspires to violate, or causes a violation of the ISISR. Upon conviction, criminal penalties of up to $1,000,000, or imprisonment for up to 20 years, or both, may be imposed on any person who willfully attempts to commit, or willfully conspires to commit, or aids or abets in the commission of a violation of the ISISR.	Absent an authorization from OFAC, any accounts, assets, investments, or any other property of any kind owned by, belonging to, or held by the Central Bank of Iraq or the Development Fund of Iraq, are immune from attachment, judgment, execution, or other judicial process in the United States. Iraqi petroleum and petroleum products and interests are immune from attachment, judgment, execution, or other judicial processes until title passes to the initial purchaser of those products.Latest program update: 5/25/2011
LebanonGet the details	BLOCKED:The assets of “persons undermining the sovereignty of Lebanon or its democratic processes” are blocked. Donations to these persons are forbidden.Such assets may not be transferred, paid, exported, withdrawn or otherwise dealt in. Assets of individuals who are determined to be spouses or dependent children of such persons are also blocked.On 7/30/2010, OFAC issued regulations at 31 CFR Part 549 implementing an 8/1/2007 Executive Order.Section 549.505 of that regulation authorizes entries in blocked accounts for certain types of “normal service charges.”The block on assets bars the making of any contribution or provision of funds, goods, or service by, to, or for the benefit of any person whose property is blocked.Penalties: Criminal conviction can result in a fine of up to $1 million, and for natural persons imprisonment for up to 20 years. Civil penalties of up to the greater of $250,000 or an amount twice the amount of the transaction involved.	EO 13441 Blocking Property Of Persons Undermining The Sovereignty Of Lebanon Or Its Democratic Processes And Institutions – August 1, 2007
LiberiaGet the detailsFormer Liberian Regime of Charles Taylor Sanctions Regulations [LIBERIA]	BLOCKED:The assets of certain persons involved with the former Liberian regime headed by Charles Taylor are blocked. Donations to these persons are forbidden.The importation of any rough diamonds from Liberia, regardless of origin, is forbidden. This prohibition will be lifted if the Secretary of State posts a notice in theFederal Register that Liberia has become a Kimberley Process Certification Scheme participant.Penalties: Criminal fines for violating the Regulations range, upon conviction, up to $500,000 for an entity and $250,000 for an individual; individuals may also face imprisonment of up to 20 years. In addition, civil penalties of up to $50,000 per violation may be imposed administratively.	On 5/23/2007, OFAC issuedregulations at 31 CFR Part 593 implementing the 7/22/2004 Executive Order targeting the regime of Charles Taylor.Section 593.510 of that regulation includes a general license for the importation of round log or timber products originating in Liberia, except in a transaction with any of the blocked parties related to the Taylor regime.EO 13348, Blocking Property of Certain Persons and Prohibiting the Importation of Certain Goods from Liberia (Effective Date – July 23, 2004)Latest program update: 12/14/2010
LibyaGet the details	BLOCKED: Property and interests in property of [LIBYA] designated persons, generally senior officials of the Qadhafi Government of Libya; Colonel Muammar Qadhafi and members of his family and associates; persons who have materially assisted them.Prohibited: All transactions with [LIBYA]-designated persons, except for transactions for the conduct of the official business of the U.S. government.	EO 13566 – Blocking Property and Prohibiting Certain Transactions Related to Libya (Effective Date – February 25, 2011) General License No. 4 with Respect to Investment Funds in Which There Is a Blocked Non-Controlling, Minority Interest of the Government of Libya General License No. 5Authorizing Transactions Related to Certain Oil, Gas, or Petroleum Products Exported from Libya General License No. 6 Guidance and General License with Respect to the Transitional National Council of Libya as the Legitimate Governing Authority for Libya General License No. 7a with Respect to the Libyan National Oil Corporation and its Subsidiaries General License No. 8a with Respect to the Government of Libya, its Agencies, Instrumentalities, and Controlled Entities, and the Central Bank of Libya General License No. 9 with Respect to the General National Maritime Transport Company General License No. 10, unblocking all property and interests in property of Arab Turkish Bank and North African International Bank. Latest program updates: 12/1/2011
Nonproliferation (Weapons)Get the details[NPWMD]	Prohibited activity. Any transaction by a U.S. person to finance or otherwise participate in the importation into the U.S. of goods, technology, or services produced or provided by foreign persons found by the Secretary of State to have engaged in activities related to the proliferation of nuclear, biological, or chemical weapons is prohibited.Except where otherwise provided by regulations, orders, directives, ruling or licenses, all property and interests in property in the U.S. of persons listed in the SDN lists with the identifier NPWMD are blocked, and may not be transferred, paid, exported or withdrawn. This prohibition extends to charitable contributions to the blocked person, and to any credit agreement with the blocked party, except those specifically licensed.The sanctions also affect any U.S. person financing or otherwise participating in the importation into the U.S. of goods, technology, or services produced or provided by foreign persons found by the Secretary of State to have engaged in activities related to the proliferation of nuclear, biological, or chemical weapons.Penalties: Criminal penalties for willful violations of E.O. 13382, or of any license, rule or regulation issued under it, range up to 20 years in prison, $500,000 in fines for a corporation and $250,000 for an individual. In addition, civil penalties of up to $50,000 per violation may be imposed administratively.	EO 13382, Blocking Property of Weapons of Mass Destruction Proliferators and Their Supporters (6/28/2005)EO 13159, Blocking Property of the Government of the Russian Federation Relating to the Disposition of Highly Enriched Uranium Extracted From Nuclear Weapons (June 22, 2000)EO 13094, Proliferation of Weapons of Mass Destruction (July 29, 1998)EO 12938, Proliferation of Weapons of Mass Destruction (November 14, 1994)31 CFR Part 544 - Weapons of Mass Destruction Proliferation Sanctions31 CFR Part 540 - Highly Enriched Uranium Assets Control Regulations31 CFR Part 539 - Weapons of Mass Destruction Trade Control RegulationsNonproliferation and Weapons of Mass Destruction Advisory General License No. 2, authorizing certain transactions related to the arrest, detention, and judicial sale of MV Dandle and MV DecretiveGeneral License No. 4: Exportation or reexportation of agricultural commodities, medicine, or medical devices to Iran through any Iranian port operated by Tidewater Middle East Company is authorized in certain circumstances.General License No. 5 - authorizing certain transactions related to the arrest, detention, and judicial sale of the MV Dianthe (f.k.a. Horsham, f.k.a. Iran Bam, IMO No. 9323833).Latest program update: 11/3/2011
North KoreaGet the details[NORTH KOREA], [DPRK]	Blocked.Property and interests in property of North Korea or a North Korean national that were blocked as of 6/16/2000, remain blocked.Property and interests of SDNs under the [NORTH KOREA] or [DPRK] programs are blocked. U.S. persons, with limited exceptions, are prohibited from transferring, paying, exporting, withdrawing, or otherwise dealing in the property and interests in property of an entity or individual named on such SDN lists, or of entities owned directly or indirectly 50 percent or more by a person on such lists.U.S. persons are prohibited from registering vessels in North Korea, obtaining authorization for a vessel to fly the North Korean flag, and owning, leasing, operating, or insuring any vessel flagged by North Korea.Goods, services, and technology from North Korea may not be imported into the United States, directly or indirectly, without a license from OFAC. This broad prohibition applies to goods, services, and technology from North Korea that are used as components of finished products of, or substantially transformed in, a third country.Treasury prohibitions on exporting goods to North Korea specifically relate to sales involving parties whose property and interests in property are blocked under E.O. 13551.PENALTIES: Criminal fines for violating the E.O.s range up to $1,000,000; individuals may also face imprisonment up to 20 years. In addition, civil penalties of up to the greater of $250,000 or twice the amount of the underlying transaction may be imposed administratively for each violation.	EO 13570 Prohibiting Certain Transactions With Respect To North Korea (Effective date – April 18, 2011)EO 13551 Blocking Property of Certain Persons With Respect to North Korea (Effective date – August 30, 2010)EO 13466 Continuing Certain Restrictions With Respect to North Korea and North Korean Nationals (June 26, 2008)LATEST PROGRAM UPDATE: 6/20/2011
SomaliaGet the detailsSANCTIONS AGAINST PERSONS CONTRIBUTING TO THE CONFLICT IN SOMALIA[SOMALIA]	BLOCKED: EO 13536 imposes targeted sanctions only; it does not impose any broad-based sanctions against the people or the country of Somalia. However, property and property interests of specific individuals and entities listed as SDNs with the [SOMALIA] designation are blocked.	FAQ on Providing Humnaitarian Assistance in Somalia (8/4/2011)NEWEO 13536 - Blocking Property of Certain Persons Contributing to the Conflict in Somalia (Effective Date – April 13, 2010)Information on Persons Listed in the Annex to E.O. 13536 of April 12, 2010 (September 22, 2010)31 CFR Part 551 (Abbreviated Somalia Sanctions Regulations)LATEST PROGRAM UPDATE: 8/4/2011
SudanGet the details[SUDAN] [DARFUR]	Blocked. All property and interests in property of the Government of Sudan that are in the United States, that come within the United States, or that are or come within the possession or control of U.S. persons, including their overseas branchesProhibited activity. No U.S. bank may finance or arrange offshore financing for, third-country trade transactions where Sudan is known to be the ultimate destination of, or the Government of Sudan is the purchaser of, the goods.Prohibited Activity. Prohibits U.S. persons from engaging in any transactions involving such property or interests in property. It also prohibits all transactions by U.S. persons relating to Sudan’s petroleum or petrochemical industries, including, but not limited to, oil field services and oil or gas pipelines.Note: In an Executive Order effective 4/27/06, President Bush directed that assets of certain persons named as threatening the peace process in Darfur, The Sudan, be blocked.All dealings in property in which an SDN has an interest must be authorized by OFAC unless they are exempt. Any bank subject to U.S. jurisdiction that receives instructions to make an unlicensed funds transfer involving a direct or indirect interest of the Government of Sudan (including any transfer routed through a Sudanese Government-controlled bank) is required to place such funds into a blocked interest-bearing account on its books and to notify OFAC. Such funds may only be unblocked after receipt of a specific authorization from OFAC. Setoffs against blocked accounts are prohibited.There are import and export restrictions affecting most of Sudan. Specified portions of Southern Kordofan/Nuba Mountains State, Blue Nile State, Abyei, Darfur and designated areas in and around Khartoum are exempted from those import and export restrictions. For details, contact OFAC.Restrictions on Financial transactions with Sudan are complex. Interested banks should consult the documents available on the OFAC web site for details, and contact OFAC with questions.PENALTIES: Criminal fines for violating the Regulations range, upon conviction, up to $1,000,000; individuals may also face imprisonment of up to 20 years. In addition, civil penalties of up to $250,000 or twice the amount of the underlying transaction may be imposed administratively for each violation.	Guidance Regarding the Application of the Sudanese Sanctions Regulations to the New State to be Formed by the Secession of Southern SudanGuidance on the Donations of Food and Medicine to Iran and the Non-Specified Areas of SudanGeneral License Related to Personal Communication Services (March 2010)Amendment to Sudanese Sanctions Regulations (31 CFR 538.529) - General License for Publishing Activities (December 2004)Amendment to Sudanese Sanctions Regulations (31 CFR 538) - General License expanding the scope of an existing authorization of certain imports for diplomatic or official personnel (June 2009)Amendment to Sudanese Sanctions Regulations (31 CFR 538) - General License Authorizing Agricultural Commodities, Medicine and Medical Devices to the Specified Areas of Sudan (September 2009)EO 13412 Blocking Property and Prohibiting Transactions With the Government of Sudan (October 13, 2006)EO 13400 Blocking Property of Persons in Connection With the Conflict in Sudan’s Darfur Region (Effective Date – April 27, 2006)EO 13067 Blocking Sudanese Government Property and Prohibiting Transactions With Sudan (Effective Date – November 4, 1997)31 CFR Part 538 - Sudanese Sanctions Regulations31 CFR Part 546 - Darfur Sanctions RegulationsLATEST PROGRAM UPDATE: 6/20/2011
SyriaGet the details.[SYRIA]	Exports to Syria are limited. With limited exceptions, BLOCK property and interests in property of persons designated by State and Treasury Departments as contributing to Syria’s provision of safe haven to various terrorist organizations; involved in Syria’s military presence in Lebanon; involved in Syria’s pursuit of WMD; involved in steps taken by Syria to undermine U.S. and international efforts toward stabilization and reconstruction of Iraq; owned or controlled by or acting on behalf of any person whose property or interests in property are blocked by the order; or involved in certain terrorist acts in Lebanon The BLOCK order covers contributions on behalf of persons whose property is blocked. As of 8/18/11, all property and property interests of the Government of Syria within the U.S. are BLOCKED, and new investment in Syria by U.S. persons is prohibited. Also prohibited is the importation of petroleum or petroleum products of Syrian origin. See Licenses at right. PENALTIES: Criminal penalties for violating the sanctions range up to 10 years in prison, $500,000 in corporate fines and $250,000 in individual fines. In addition, civil penalties of up to $11,000 per violation may be imposed administratively.	Executive Order 13582 Blocking Property of the Government of Syria and Banning Import of Petroleum Producsts of Syrian Origin (8/18/11)FAQ with Regard to Syria Executive Order 13582 EO 13573 Blocking Property Of Senior Officials Of The Government Of Syria (May 18, 2011) EO 13572 Blocking Property of Certain Persons with Respect to Human Rights Abuses in Syria (April 29, 2011) EO 13460 Blocking Property of Additional Persons in Connection With the National Emergency With Respect to Syria (February 15, 2008) EO 13399 Blocking Property of Additional Persons in Connection With the National Emergency With Respect to Syria (Effective Date – April 26, 2006) EO 13338 Blocking Property of Certain Persons and Prohibiting the Export of Certain Goods to Syria (Effective Date – May 12, 2004)31 CFR Part 542 - Syrian Sanctions RegulationsGeneral Licenses related to Syria. There are currently 14 General Licenses relating to the Syrian Sanctions program. See OFAC’sSyria Sanctions page for details.LATEST PROGRAM UPDATE: 10/4/11
Transnational Criminal OrganizationsGet the details[TCO]	“All property and interests in property that are in the United States, that hereafter come within the United States, or that are or hereafter come within the possession or control of any United States person, including any overseas branch, of the … persons [designated as ‘TCO’ SDNs] are blocked and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.” Donations to such persons are also prohibited.PENALTIES:  To be determined.	EO - Blocking Property of Transnational Criminal OrganizationsLATEST PROGRAM UPDATE: 7/25/2011
Zimbabwe - Persons that undermine democratic process or institutions in ZimbabweGet the details[ZIMBABWE]	BLOCKING. All property and assets of designated persons are BLOCKED and may not be transferred, paid, exported, withdrawn, or otherwise dealt in.Prohibited activity. The making or receiving by a U.S. person of any contribution or provision of funds, goods, or services to or for the benefit of a designated person is prohibited.All persons or entities that would be affected by this sanctions program would be listed on the SDN list.In addition, any transaction by a U.S. person that evades or avoids or has the purpose of or attempts to violate these prohibitions and any conspiracy to violate the prohibitions is prohibited.PENALTIES:  Criminal fines for violating the Executive Order or regulations to be issued pursuant to the Executive Order may range up to the greater of $500,000 or twice the pecuniary gain per violation for an organization, or up to the greater of $250,000 or twice the pecuniary gain per violation for an individual. Individuals may also be imprisoned for up to 10 years for a criminal violation. Knowingly making false statements or falsifying or concealing material facts when dealing with OFAC in connection with matters under its jurisdiction is a criminal offense. In addition, civil penalties of up to $11,000 per violation may be imposed administratively.	EO 13469 Blocking Property of Additional Persons Undermining Democratic Processes or Institutions in Zimbabwe (July 25, 2008)EO 13391 Blocking Property of Additional Persons Undermining Democratic Processes or Institutions in Zimbabwe (Effective Date – November 23, 2005) EO 13288 Blocking Property of Persons Undermining Democratic Processes or Institutions in Zimbabwe (Effective Date – March 7, 2003)31 CFR Part 541 - Zimbabwe Sanctions RegulationsLAST PROGRAM UPDATE: 6/21/2011

Review of all-in-cost ceiling – Trade Credit

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

In its circular dated 30/03/2012, RBI has decided to continue with the enhanced all-in-cost ceiling for Trade Credit for further period of six months.

1. Maximum Cap on Interest Rate for tenure Upto 3 years : 6 Month LIBOR + 350 bps
2. Applicable Upto: 31/09/2012 (Subject to review there after) 

RBI Circular Copy

Buyers Credit All-In-Cost Ceiling may move back to L+200bps from 01/04/2012

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

In its Circular dated 15/11/2011, RBI had increased the all-in-cost ceiling for Buyers Credit  from 6 Month L+ 200 bps to 6 Month L + 350 bps subject to condition that is only upto 31/03/2012 and after subject to review there after.

As of yesterday evening, there is no fresh circular from RBI on Trade Credit. If this situation remains, effective from 01/04/2012

1. Maximum Cap will come down to 6 Month Libor + 200 bps
2. Internationally price for < $100000 is already above 6 Month Libor + 200 bps. Thus, for SME it will get difficult to arrange funds.

RBI Circular on Trade Credit Dated 15/11/2012

Buyers Credit for Imports Under Direct Documents

RBI Circular of External Commercial Borrowing and Trade Credit gives information about buyers credit. But with specific type of transaction, inference has to taken from other related circulars. For example, for Buyers Credit in case of import against direct documents received by importers, RBI Circular on Import of Goods and Services has to be referred along with Trade Credit Circular. RBI has put in various criteria under which such transactions are allowed.

Import of documents directly by importers are bifurcated into two parts:

A. Receipt Regular Import documents by the importer directly from Overseas Suppliers

Import bills and documents should be received from the banker of the supplier by the banker of the importer in India. AD Category – I bank should not, therefore, make remittances where import bills have been received directly by the importers from the overseas supplier, except in the following cases:

1. Where the value of import bill does not exceed USD 300,000.
2. Import bills received by wholly-owned Indian subsidiaries of foreign companies from their principals.
3. Import bills received by Status Holder Exporters as defined in the Foreign Trade Policy, 100% Export Oriented Units / Units in Special Economic Zones, Public Sector Undertakings and Limited Companies.
4. Import bills received by all limited companies viz. public limited, deemed public limited and private limited companies.

B. Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors

Receipt of import documents by the importer directly from overseas suppliers in case of specified sectors. As a sector specific measure, AD Category – I banks are permitted to allow remittance for imports up to USD 300,000 where the importer of rough diamonds, rough precious and semi-precious stones have received the import bills / documents directly from the overseas supplier and the documentary evidence for import is submitted by the importer at the time of remittance. AD Category – I banks may undertake such transactions subject to the following conditions:

1. The import would be subject to the prevailing Foreign Trade Policy.
2. The transactions are based on their commercial judgment and they are satisfied of the bonafides of the transactions.
3. AD Category – I banks should do the KYC and due diligence exercise and should be fully satisfied about the financial standing / status and track record of the importer customer.
4. Before extending the facility, they should also obtain a report on each individual overseas supplier from the overseas banker or reputed overseas credit rating agency.

Based on the above information, check with your bank, under which criteria an import transaction is getting classified and whether given criteria are getting  fulfilled. Based on  this the amount permitted for buyers credit for import against direct documents can be derived.

Also, for cases falling under category B, please refer (ii) carefully. Even if all conditions are getting satisfied, banks should be satisfied about the bonafides of the transaction. Thus banks have discretion under that point. In such cases, it is advised to provide all information and documents related to transaction, to make the bank comfortable about the transaction.

Difference between Buyers Credit and Letter of Credit (LC)

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

1. LC is one of the payment mode used in the International Trade between importer and exporter to cover third-party credit risk. Meaning if the importer defaults, his bank will have to pay on his behalf. Where as, Buyers credit is a funding mechanism used by importer to funds his transaction.

2. Parties involved during the transaction.

Under Letter of Credit (LC) : Importer, Importer’s Bank, Exporter, Exporters Bank

Under Buyers Credit: Importer, Importer’s Bank, Foreign Bank funding the transaction

3. Under LC, there is movement of goods between export and import, movement of documents and funds between importers bank and exporters bank. Where as in buyers credit there is only movement of money.

4. Bank charges LC commission and usance charges (mainly with PSU). In case of buyers credit your bank charges letter of comfort / undertaking charges and foreign bank which will charge it interest cost.

5. LC is governed by UCP600 issued by International Chamber of Commerce (ICC). Every lc has a mention of the same. Incase of any dispute between importer’s bank and exporter’s bank, norms given in UCP600 needs to be referred to. Normally Letter of comfort does not mention of any specific rules under ICC which needs to be referred.

Comprehensive Guidelines on Foreign Exchange Derivatives

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

RBI via circular dated 28/12/2010 revised the extant guidelines on OTC (Over the Counter) Foreign  Exchange Derivatives and which became effective from 1st February 2011. Below is the extract of the guidelines related to importers and exporters.

Facilities to Persons resident in India are detailed in following three sub heads

1) Contracted Exposures

AD Category I banks have to evidence the underlying documents so that the existence of underlying foreign currency exposure can be clearly established. AD Category I banks, through verification of documentary evidence, should be satisfied about the genuineness of the underlying exposure, irrespective of the transaction being a current or a capital account. Full particulars of the contracts should be marked on the original documents under proper authentication and retained for verification. However, in cases where the submission of original documents is not possible, a copy of the original documents, duly certified by an authorized official of the user, may be obtained. In either of the cases, before offering the contract, the AD Category I banks should obtain an undertaking from
the customer and also quarterly certificates from the statutory auditor (for details refer section B para II (b) for General Instructions). While details of the underlying have to be recorded at the time of booking the contract, in the view of logistic issues, a maximum period of 15 days may be allowed for production of the documents. If the documents are not submitted by the customer within 15 days, the contract may be cancelled, and the exchange gain, if any, should not be passed on to the customer. In the event of non-submission of the documents by the customer within 15 days on more than three occasions in a financial year, booking of permissible derivative contracts in future may be allowed only against production of the underlying documents, at the time of booking the contract.

The products available under this facility are as follows:

i) Forward Foreign Exchange Contracts Participants

Market-makers – AD Category I banks
Users – Persons resident in India

Purpose
a) To hedge exchange rate risk in respect of transactions for which sale and /or purchase of foreign exchange is permitted under the FEMA 1999, or in terms of the rules/ regulations/directions/orders made or issued there under.
b) To hedge exchange rate risk in respect of the market value of overseas direct investments (in equity and loan).

i) Contracts covering overseas direct investment (ODI) can be cancelled or rolled over on due dates. However, AD Category I banks may permit rebooking only to the extent of 50 per cent of the cancelled contracts.
ii) If a hedge becomes naked in part or full owing to contraction ( due to price movement/impairment) of the market value of the ODI, the hedge may be allowed to continue until maturity, if the customer so desires. Rollovers on due date shall be permitted up to the extent of the market value as on that date.

c) To hedge exchange rate risk of transactions denominated in foreign currency but settled in INR, including hedging the economic (currency indexed) exposure of importers in respect of customs duty payable on imports.

i) Forward foreign exchange contracts covering such transactions will be settled in cash on maturity.
ii) These contracts once cancelled, are not eligible to be rebooked.
iii) In the event of any change in the rate(s) of customs duties, due to Government notifications subsequent to the date of the forward contracts, importers may be allowed to cancel and/or rebook the contracts before maturity.

Operational Guidelines, Terms and Conditions

General principles to be observed for forward foreign exchange contracts.

a) The maturity of the hedge should not exceed the maturity of the underlying transaction. The currency of hedge and tenor, subject to the above restrictions, are left to the customer. Where the currency of hedge is differentfrom the currency of the underlying exposure, the risk management policy of the corporate, approved by the Board of the Directors, should permit such type of hedging.
b) Where the exact amount of the underlying transaction is not ascertainable, the contract may be booked on the basis of reasonable estimates. However, there should be periodical review of the estimates.
c) Foreign currency loans/bonds will be eligible for hedge only after final approval is accorded by the Reserve Bank, where such approval is necessary or Loan Registration Number is allotted by the Reserve Bank.
d) Global Depository Receipts (GDRs)/American Depository Receipts (ADRs) will be eligible for hedge only after the issue price has been finalized.
e) Balances in the Exchange Earner’s Foreign Currency (EEFC) accounts sold forward by the account holders shall remain earmarked for delivery and such contracts shall not be cancelled. They are, however, eligible for rollover, on maturity.
f) All non-INR forward contracts can be rebooked on cancellation subject to condition (h) below. Forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, may be allowed to be cancelled and rebooked subject to condition (h) below. This relaxation of cancellation and rebooking will not be available to forward contracts booked on past performance basis without documents as also forward contracts booked to hedge transactions denominated (or indexed) in foreign currency but settled in INR.
g) The facility of cancellation and rebooking is not permitted for forward contracts, involving Rupee as one of the currencies, booked by residents to hedge capital account transactions for tenor greater than one year. These forward contract(s) if cancelled with one AD Category I bank can be rebooked with another AD Category I bank, subject to the following conditions:

(i) the switch is warranted by competitive rates on offer, termination of banking relationship with the AD Category I bank with whom the contract was originally booked;
(ii) the cancellation and rebooking are done simultaneously on the maturity date of the contract; and
(iii) the responsibility of ensuring that the original contract has been cancelled rests with the AD Category I bank who undertakes rebooking of the contract.

h) The facility of rebooking should not be permitted unless the corporate has submitted the exposure information as prescribed in Appendix B.
i) Substitution of contracts for hedging trade transactions may be permitted by an AD Category I bank on being satisfied with the circumstances under which such substitution has become necessary. The AD Category I bank may also verify the amount and tenor of the underlying substituted.

ii) Cross Currency Options (not involving Rupee) Participants

Market-makers – AD Category I banks as approved for this purpose by the RBI
Users – Persons resident in India

Purpose

a) To hedge exchange rate risk arising out of trade transactions.
b) To hedge the contingent foreign exchange exposure arising out of submission of a tender bid in foreign exchange.

Operational Guidelines, Terms and Conditions

a) AD Category I banks can only offer plain vanilla European options (A European option may be exercised only at the expiry date of the option, i.e. at a single pre-defined point in time)
b) Customers can buy call or put options.
c) These transactions may be freely booked and/ or cancelled subject to verification of the underlying.
d) All guidelines applicable for cross currency forward contracts are applicable to cross currency option contracts also.
e) Cross currency options should be written by AD Category I banks on a fully covered back-to-back basis. The cover transaction may be undertaken with a bank outside India, an Off-shore Banking Unit situated in a Special Economic Zone or an internationally recognized option exchange or another AD Category I bank in India. AD Category I banks desirous of writing options, should obtain a one-time approval from the Chief General Manager, Reserve Bank of India, Foreign Exchange Department, Forex Markets Division, Central Office, Amar Building 5th Floor, Mumbai, 400001, before undertaking the business.

iii) Foreign Currency – INR Options

Participants

Market-makers – AD Category I banks, as approved for this purpose by the RBI.
Users – Persons resident in India

Purpose

a) To hedge foreign currency exposures in accordance with Schedule I of Notification No. FEMA 25/2000-RB dated May 3, 2000, as amended from time to time.
b) To hedge the contingent foreign exchange exposure arising out of submission
of a tender bid in foreign exchange.

Operational Guidelines, Terms and Conditions

a) AD Category I banks having a minimum CRAR of 9 per cent, can offer foreign
currency– INR options on a back-to-back basis.
b) For the present, AD category I banks can offer only plain vanilla European
options.
c) Customers can buy call or put options.
d) All guidelines applicable for foreign currency-INR foreign exchange forward
contracts are applicable to foreign currency-INR option contracts also.
e) AD Category I banks having adequate internal control, risk monitoring/management systems, mark to market mechanism, etc. are permitted to run a foreign currency– INR options book on prior approval from the Reserve Bank, subject to conditions. AD Category I banks desirous of running a foreign currency-INR options book and fulfilling minimum eligibility criteria listed below, may apply to the Reserve Bank with copies of approval from the competent authority (Board/ Risk Committee/ ALCO), detailed memorandum in this regard, specific approval of the Board for the type of option writing and permissible limits. The memorandum put up to the Board should clearly mention the downside risks, among other matters.

Minimum Eligibility Criteria:
i. Net worth not less than Rs 300 crore
ii. CRAR of 10 per cent
iii. Net NPAs not exceeding 3 per cent of the net advances
iv. Continuous profitability for at least three years

The Reserve Bank will consider the application and accord a one-time approval at its discretion. AD Category I banks are expected to manage the  option portfolio within the Reserve Bank approved risk management limits.

f) AD banks may quote the option premium in Rupees or as a percentage of the
Rupee/foreign currency notional.
g) Option contracts may be settled on maturity either by delivery on spot basis or
by net cash settlement in Rupees on spot basis as specified in the contract. In case of unwinding of a transaction prior to the maturity, the contract may be cash settled based on market value of an identical off-setting option.
h) Market makers are allowed to hedge the ‘Delta’ of their option portfolio by accessing the spot and forward markets. Other ‘Greeks’ may be hedged by
entering into option transactions in the inter-bank market.
i) The ‘Delta’ of the option contract would form part of the overnight open position.
j) The ‘Delta’ equivalent as at the end of each maturity shall be taken into account for the purpose of AGL. The residual maturity (life) of each outstanding option contract can be taken as the basis for the purpose of grouping under various maturity buckets
k) AD banks running an option book are permitted to initiate plain vanilla cross
currency option positions to cover risks arising out of market making in foreign
currency-INR options.
l) Banks should put in place necessary systems for marking to market the portfolio on a daily basis. FEDAI will publish daily a matrix of polled implied volatility estimates, which market participants can use for marking to market their portfolio.
m) The accounting framework for option contracts will be as per FEDAI circular
No.SPL-24/FC-Rupee Options/2003 dated May 29, 2003.

iv) Foreign Currency-INR Swaps

Participants

Market-makers – AD Category I banks in India.

Users –

i. Residents having a foreign currency liability and undertaking a foreign currency-INR swap to move from a foreign currency liability to a Rupee liability.
ii. Incorporated resident entities having a rupee liability and undertaking a INR –foreign currency swap to move from rupee liability to a foreign currency liability, subject to certain minimum prudential requirements, such as risk management systems and natural hedges or economic exposures. In the absence of natural hedges or economic exposures, the INR-foreign currency swap (to move from rupee liability to a foreign currency liability) may be restricted to listed companies or unlisted
companies with a minimum net worth of Rs 200 crore. Further, the AD Category I bank is required to examine the suitability and appropriateness of the swap and be satisfied about the financial soundness of the corporate.

Purpose

To hedge exchange rate and/or interest rate risk exposure for those having long-term foreign currency borrowing or to transform long-term INR borrowing into foreign currency liability.

Operational Guidelines, Terms and Conditions

a) No swap transactions involving upfront payment of Rupees or its equivalent in any form shall be undertaken.
b) The term “long-term exposure” means exposures with residual maturity of one year or more.
c) Swap transactions may be undertaken by AD Category I banks as intermediaries by matching the requirements of corporate counterparties. While no limits are placed on the AD Category I banks for undertaking swaps to facilitate customers to hedge their foreign exchange exposures, a limit of USD 100 million is placed for net supply of foreign exchange in the market on account of swaps which facilitate customers to assume foreign currency liability. Positions arising out of cancellation of foreign currency-INR swaps by customers need not be reckoned within this cap.
d) With reference to the specified limits for swap transactions facilitating customers to assume a foreign currency liability, the limit will be reinstated on account of cancellation/ maturity of the swap and on amortization, up to the amounts amortized.
e) The swap transactions, once cancelled, shall not be rebooked or re-entered, by whichever mechanism or by whatever name called.
f) AD Category I banks should not offer leveraged swap structures. Typically, in leveraged swap structures, a multiplicative factor other than unity is attached to the benchmark rate(s), which alters the payables or receivables vis-à-vis the situation in the absence of such a factor.
g) The notional principal amount of the swap should not exceed the outstanding amount of the underlying loan.
h) The maturity of the swap should not exceed the remaining maturity of the underlying loan.

v) Cost Reduction Structures i.e. cross currency option cost reduction structures
and foreign currency –INR option cost reduction structures.

Participants

Market-makers – AD Category I banks

Users – Listed companies or unlisted companies with a minimum net worth of
Rs. 100 crore ( subsidiaries or affiliates of listed companies which follow AS 30/32, having common treasuries and consolidate the accounts with parent companies are exempted from the minimum net worth criteria), which are complying with the following:
• Adoption of Accounting Standards 30 and 32. Companies which are not complying fully with AS 30 and 32 should follow the accounting treatment and disclosure  standards on derivative contracts, as envisaged under AS 30/32.
• Having a risk management policy and a specific clause in the policy that allows using the type/s of cost reduction structures.

Purpose
To hedge exchange rate risk arising out of trade transactions and External Commercial Borrowings (ECBs).

Operational Guidelines, Terms and Conditions
a) Writing of options by the users, on a standalone basis, is not permitted.
b) Users can enter into option strategies of simultaneous buy and sell of plain vanilla European options, provided there is no net receipt of premium.
c) Leveraged structures, digital options, barrier options, range accruals and any other exotic products are not permitted.
d) The portion of the structure with the largest notional, computed over the tenor of the structure, should be reckoned for the purpose of underlying.
e) The delta of the options should be explicitly indicated in the term sheet.
f) AD Category I banks may, stipulate additional safeguards, such as, continuous profitability, higher net worth, turnover, etc depending on the scale of forex operations and risk profile of the users.
g) The maturity of the hedge should not exceed the maturity of the underlying transaction and subject to the same the users may choose the tenor of the hedge. In case of trade transactions being the underlying, the tenor of the structure shall not exceed two years.
h) The MTM position should be intimated to the users on a periodical basis.

vi) Hedging of Borrowings in foreign exchange, which are in accordance with the provisions of Foreign Exchange Management (Borrowing and Lending in Foreign Exchange) Regulations, 2000.

Products – Interest rate swap, Cross currency swap, Coupon swap, Cross currency
option, Interest rate cap or collar (purchases), Forward rate agreement(FRA)

Participants

Market-makers –
a) AD Category I banks in India
b) Branch outside India of an Indian bank authorized to deal in foreign exchange
in India
c) Offshore banking unit in a SEZ in India.

Users –
Persons resident in India who have borrowed foreign exchange in accordance
with the provisions of Foreign Exchange Management (Borrowing and Lending in
Foreign Exchange) Regulations, 2000

Purpose
For hedging interest rate risk and currency risk on loan exposure and unwinding from
such hedges Operational Guidelines, Terms and Conditions
a) The products, as detailed above should not involve the rupee under any circumstances.
b) Final approval has been accorded or Loan Registration Number allotted by the Reserve Bank for borrowing in foreign currency.
c) The notional principal amount of the product should not exceed the outstanding amount of the foreign currency loan.
d) The maturity of the product should not exceed the unexpired maturity of the underlying loan.
e) The contracts may be cancelled and rebooked freely.

2) Probable exposures based on past performance

Participants
Market-makers – AD Category I banks in India.
Users – Importers and exporters of goods and services

Purpose
To hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Probable exposure based on past performance can be hedged only in respect of trades in merchandise goods as well as services.

Products
Forward foreign exchange contracts, cross currency options (not involving the rupee), foreign currency-INR options and cost reduction structures [as mentioned in section B para I 1(v)].

Operational Guidelines, Terms and Conditions
a) Corporates having a minimum net worth of Rs 200 crores and an annual export and import turnover exceeding Rs 1000 crores and satisfying all other conditions as  stipulated in section B para I 1(v) may be allowed to use cost reduction structures.
b) The contracts booked during the current financial year (April-March) and the outstanding contracts at any point of time should not exceed the eligible limit i.e. the average of the previous three financial years’ actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher.
c) Contracts booked in excess of 75 per cent of the eligible limit will be on deliverable basis and cannot be cancelled.
d) These limits shall be computed separately for import/export transactions.
e) Higher limits will be permitted on a case-by-case basis on application to the Foreign Exchange Department, Central Office, Reserve Bank of India. The additional limits, if sanctioned, shall be on a deliverable basis.
f) Any contract booked without producing documentary evidence will be marked off against this limit. These contracts once cancelled, are not eligible to be rebooked.  Rollovers are also not permitted.
g) AD banks should permit their clients to use the past performance facility only after satisfying themselves that the following conditions are complied with:

i. An undertaking may be taken from the customer that supporting documentary evidence will be produced before the maturity of all the contracts booked.
ii. Importers and exporters should furnish a quarterly declaration to the AD Category I banks, duly certified by the Statutory Auditor, regarding amounts booked with other AD Category I banks under this facility, as per Appendix M.
iii. For an exporter customer to be eligible for this facility, the aggregate of  overdue bills shall not exceed 10 per cent of the turnover.
iv. Aggregate outstanding contracts in excess of 50 per cent of the eligible limit may be permitted by the AD Category I bank on being satisfied about the genuine requirements of their customers after examination of the following documents:

• A certificate from the Statutory Auditor of the customer that all guidelines have been adhered to while utilizing this facility.
• A certificate of import/export turnover of the customer during the past three years duly certified by their Statutory Auditor in the format given in Appendix K.

h) The past performance limits once utilised are not to be reinstated either on cancellation or on maturity of the contracts.
i) AD Category I banks must arrive at the past performance limits at the beginning of every financial year. The drawing up of the audited figures (previous year) may require some time at the commencement of the financial year. However, if the statements are not submitted within three months from the last date of the financial year, the facility should not be provided until submission of the audited figures.
j) AD Category I banks must institute appropriate systems for validating the past performance limits at pre-deal stage. In addition to the customer declarations, AD Category I banks should also assess the past transactions with the customers, turnover, etc.
k) AD Category I banks are required to submit a monthly report (as on the last Friday of every month) on the limits granted and utilised by their constituents under this facility as prescribed in Appendix J.

3) Special Dispensation

i) Small and Medium Enterprises (SMEs)

Participants
Market-makers – AD Category I.
Users – Small and Medium Enterprises (SMEs) 3

Purpose
To hedge direct and / or indirect exposures of SMEs to foreign exchange risk

Product
Forward foreign exchange contracts

Operational Guidelines: Small and Medium Enterprises (SMEs) having direct and /or  indirect exposures to foreign exchange risk are permitted to book / cancel / rebook/ roll over forward contracts without production of underlying documents to manage their exposures effectively, subject to the following conditions:

a) Such contracts may be booked through AD Category I banks with whom the
SMEs have credit facilities and the total forward contracts booked should be in alignment with the credit facilities availed by them for their foreign exchange requirements or their working capital requirements or capital expenditure.
b) AD Category I bank should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to the SME customers as per Para 8.3 of ‘Comprehensive Guidelines on Derivatives’ issued vide  DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007.
c) The SMEs availing this facility should furnish a declaration to the AD Category I bank regarding the amounts of forward contracts already booked, if any, with other AD Category I banks under this facility.

ii) Resident Individuals

Participants
Market-makers – AD Category I banks
Users: Resident Individuals

Purpose
To hedge their foreign exchange exposures arising out of actual or anticipated remittances, both inward and outward, can book forward contracts, without production of underlying documents, up to a limit of USD 100,000, based on self
declaration.

Product
Forward foreign exchange contracts

Operational Guidelines, Terms and Conditions

a) The contracts booked under this facility would normally be on a deliverable basis. However, in case of mismatches in cash flows or other exigencies, the contracts booked under this facility may be allowed to be cancelled and re- booked. The notional value of the outstanding contracts should not exceedUSD 100,000 at any time.
b) The contracts may be permitted to be booked up to tenors of one year only.
c) Such contracts may be booked through AD Category I banks with whom the resident individual has banking relationship, on the basis of an application- cum-declaration in the format given in Appendix G. The AD Category I banks should satisfy themselves that the resident individuals understand the nature of risk inherent in booking of forward contracts and should carry out due diligence regarding “user appropriateness” and “suitability” of the forward contracts to such customer.

B II. General Instructions for forex derivative contracts entered by Residents in India

While the guidelines indicated above govern specific foreign exchange derivatives, certain general principles and safeguards for prudential considerations that are applicable across the OTC foreign exchange derivatives, are detailed below. In addition to the guidelines under the specific foreign exchange derivative product, the general instructions should be followed scrupulously by the users (residents in India other than AD Category I banks) and the market makers (AD Category I banks).

a) In case of all forex derivative transactions [except INR- foreign currency swaps i.e. moving from INR liability to foreign currency liability as in section B para I(1)(iv)] is undertaken, AD Category I banks must take a declaration from the clients that the exposure is unhedged and has not been hedged with another AD Category I bank. The corporates should provide an annual certificate to the AD Category I bank certifying that the derivative transactions are authorized and that the Board (or the equivalent forum in case of partnership or proprietary firms) is aware of the same.
b) In the case of contracted exposure, AD Category I banks must obtain:

i) An undertaking from the customer that the same underlying exposure has not been covered with any other AD Category I bank/s. Where hedging of the same exposure is undertaken in parts, with more than one AD Category I bank, the details of amounts already booked with other AD Category I bank/s should be clearly indicated in the declaration. This undertaking can also be obtained as a part of the deal confirmation.
ii) Quarterly certificates from the statutory auditors of the users, that the contracts outstanding at any point of time with all AD Category I banks during the quarter did not exceed the value of the underlying exposures.

c) Derived foreign exchange exposures are not permitted to be hedged. However, in case of INR- foreign currency swaps, at the inception, the user can enter into one time plain vanilla cross currency option (not involving Rupee) to cap the currency risk.
d) In any derivative contract, the notional amount should not exceed the actual underlying exposure at any point in time. Similarly, the tenor of the derivative contracts should not exceed the tenor of the underlying exposure. The notional amount for the entire transaction over its complete tenor must be calculated and the underlying exposure being hedged must be commensurate with the notional amount of the derivative contract.
e) Only one hedge transaction can be booked against a particular exposure/ part thereof for a given time period.
f) The term sheet for the derivative transactions (except forward contracts) should also necessarily and clearly mention the following:

i) the purpose for the transaction detailing how the product and each of its components help the client in hedging;
ii) the spot rate prevailing at the time of executing the transaction; and
iii) quantified maximum loss/ worst downside in various scenarios.

g) AD Category I banks can offer only those products that they can price independently. This is also applicable to the products offered even on back to back basis. The pricing of all forex derivative products should be locally demonstrable at all times.
h) The market-makers should carry out proper due diligence regarding ‘user appropriateness’ and ‘suitability’ of products before offering derivative products (except forward contracts) to users as detailed in DBOD.No.BP.BC.86/21.04.157/2006-07 dated April 20, 2007.
i) AD Category I may share with the user the various scenario analysis encompassing both the possible upside as well as the downsides and sensitivity analysis identifying the various market parameters that affect the product.
j) The provisions of comprehensive guidelines on Derivatives issued vide DBOD.No.BP.BC. 86/21.04.157/2006-07 dated April 20, 2007 and as amended from time to time are also applicable to forex derivatives.
k) Sharing of information on derivatives between banks is mandatory and as detailed
vide circular DBOD.No.BP.BC.46/08.12.001/2008-09 dated September 19, 2008 and DBOD.No. BP. BC. 94/ 08.12.001/ 2008-09 dated December 8, 2008.

Source: RBI Circular

Recent Changes to India’s Currency Forward Contract Norms for Hedging

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

RBI via circular dated 15/12/2011 made changes in Foreign Exchange Derivative Contacts with immediate effect until further review. Below is the extract of the same related to importers and exporters.

1). Under contracted exposures, forward contracts, involving the Rupee as one of the currencies, booked by residents to hedge current account transactions, regardless of the tenor, and to hedge capital account transactions, falling due within one year, were allowed to be cancelled and rebooked.

It has now been decided to withdraw the above facility. Forward contracts booked by residents irrespective of the type and tenor of the underlying exposure, once cancelled, cannot be rebooked.

2). Under probable exposures based on past performance residents were allowed to hedge currency risk on the basis of a declaration of an exposure and based on past performance up to the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. Further, contracts booked in excess of 75 per cent of the eligible limit were to be on deliverable basis and could not be cancelled.

It has now been decided that

A. For importers availing of the above past performance facility, the facility stands reduced to 25 percent of the limit as computed above, i.e., 25 percent of the average of the previous three financial years’ (April to March) actual import/export turnover or the previous year’s actual import/export turnover, whichever is higher. In case of importers who have already utilised in excess of the revised / reduced limit, no further bookings may be allowed under this facility.

B. All forward contracts booked under this facility by both exporters and importers hence forth will be on fully deliverable basis. In case of cancellations, exchange gain, if any, should not be passed on to the customer.

3). All cash/tom/spot transactions by the Authorised Dealers on behalf of clients will be undertaken for actual remittances / delivery only and cannot be cancelled / cash settled.

RBI Circular

RBI Increase Buyers Credit All-in-Cost Ceiling

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

RBI reviewing the developments in global finance markets and the fact that domestic importers are experiencing difficulties in raising Trade Credit (Buyers Credit / Suppliers Credit) within the existing all-in-cost ceiling, RBI has made below changes in the existing policy.

1. Revision in Interest Rate for tenure Upto 3 years : From 6 Month LIBOR + 200 bps to 6 Month LIBOR + 350 bps
2. Effect From: Immediately
3. Applicable Upto: 31/03/2012 (Subject to review there after) 

RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling

Buyers Credit Accounting Entries

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

Buyers Credit Essential Accounting Entries and Disclosures in books of Accounts:

1. When raw material is purchased on credit

Purchases A/c Dr xxxxxx

To Party A/c Cr xxxxxx

2. When payment is made on our behalf to party

Party A/c Debit xxxxxx

To Bank A/c Cr xxxxxx

3. When Buyers Credit is availed against LC

Letter of Credit (name of bank) A/c Debit xxxxxx

To Buyers credit (name of bank) A/c Cr xxxxxx

4. When Buyers Credit is availed against Document at sight

Party A/c Debit xxxxxx

Buyers credit (name of bank) A/c Cr xxxxxx

5. When Buyers Credit rollovered

Buyers credit (name of bank) A/c Dr xxxxxx

To Buyers credit (name of bank) A/c Cr xxxxxx

6. When Buyers Credit is paid back

Buyers credit (name of bank) A/c Dr xxxxxx

To Bank A/c Cr xxxxxx

7. When due to Foreign Currency Fluctuation income or loss is booked

when gain is booked

Party A/c Dr xxxxxx

To Gain due to Foreign Currency Fluctuation A/c Cr xxxxxx

when loss is booked

Loss due to Foreign Currency Fluctuation A/c Dr xxxxxx

To Party A/c Cr xxxxxx

8. When LC issuance charges taken by bank

LC issuance charges A/c Dr xxxxxx

To Bank account Cr xxxxxx

9. When LoU issuance charges taken by bank

LoU issuance charges A/c Dr xxxxxx

To Bank account Cr xxxxxx

10. When Buyers Credit Commission charges taken by bank

Bank Commission A/c Dr xxxxxx

To Bank account Cr xxxxxx

11. When Term Loan Interest is paid to bank

Bank (Term Loan) Interest A/c Dr xxxxxx

To Bank Account Cr xxxxxx

Disclosure in Profit and Loss Statement and Balance Sheet

In Balance Sheet

Buyers Credit and Unpaid LC shall be disclosed under the Head of Secured liabilities under Sources of Funds.

In Profit and Loss Statement

LC issuance charges, LoU issuance charges, Bank Commission is considered as expenses as Bank Charges and Bank Interest is disclosed under the head of Finance Cost.

Gain due to Currency Fluctuation is considered as income as Exchange Gain and disclosed under the head of Other Income.

Infrastructure Companies – Bridge Finance before availing ECB

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

Considering the specific needs of the Infrastructure sector, RBI under its circular External Commercial Borrowing (ECB) – Bridge Finance for Infrastructure Dated 23-09-2011, reviewed the ECB policy. Brief summary is given below:

1. Allowed Indian companies which are in infrastructure sector to import capital goods by availing of short-term credit (including buyer’s credit and supplier’s credit) in the nature of “Bridge Finance” under the approval route, subject to following conditions

• The bridge finance shall be replaced with a long-term ECB
• The long-term ECB shall comply with all the extant ECB norms
• Prior approval shall be sought from Reserve Bank for replacing the bridge finance with a long-term ECB

2. The designated AD – Category I bank shall monitor the end-use of funds and banks in India will not be permitted to provide any form of guarantees. The designated AD – Category I bank shall evidence the import of capital goods by verifying the Bill of Entry. All other conditions of ECB, such as eligible borrower, recognized lender, all-in-cost, average maturity, prepayment, refinancing of existing ECB and reporting arrangements shall remain unchanged and should be complied with.

Note: As per RBI Circular on External Commercial Borrowing (ECB) and Trade Credit Dated 01-07-2011,  Infrastructure sector is defined as

1. Power
2. Telecommunication
3. Railways
4. Roads including bridges
5. Sea port and Airport
6. Industrial parks
7. Urban infrastructure (water supply, sanitation and sewage projects)
8. Mining, exploration and refining
9. Cold storage or cold room facility, including for farm level pre-cooling, for preservation or storage of agricultural and allied produce, marine products and meat

Ref: RBI Circular External Commercial Borrowing (ECB) – Bridge Finance for Infrastructure

Buyers Credit on Capital Goods

To Avail Buyer’s Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

Buyers Credit can be used both for Raw Material and Capital Goods. Below article gives complete detailed information along with process and sample sanction letters.

Process Flow of Buyers Credit for Capital Goods

Term Loan Sanction –> LC Issuance for import of Machinery –> On due date of payment of LC convert it to Buyers Credit and rollover for 3 year –> At end of 3 year convert to term loan

Stage 1: Bank’s Term Loan Sanction:

• Facility: Buyer’s Credit (capex) in lieu of Foreign L/C Capex (to be converted to Term loan after 3 years)
• Purpose: Purchase of Machinery
• Tenure : 36 months with rollover every 6 / 12 months till  Month / Year
• Repayment: The buyers credit is under roll over every 6 / 12 months subject to availability of funds (to be converted to Term loan after 3 years)
• % margin money
• The buyers credit is proposed to be retired through term loan and the same will be repaid in say 24 equal monthly installments (example of 5 year term loan), starting from Month / Year. In-case buyer credit is not available for further rollover at any point of time, the buyer credit will be converted to term loan and the repayment will start immediately from the next month of conversion, repayable in monthly installments  (starting from the next month of conversion) equal divided into the balance tenor.
• Pricing of the above term loan ; Base Rate + _____(margin)

Charges: Issuance of LOU / LOC Charges to overseas bank

Stage 2 : Based on the agreement with the supplier either a sight lc or usance lc get opened from bank. Based on this supplier will ship machinery.

Stage 3: 

• The Indian customer will import the goods either under DC, Collections or open account
• The Indian customer request the Buyer’s Credit Arranger before the due date of the bill to avail buyers credit financing
• Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer
• Overseas Bank to fund your existing bank nostro account for the required amount
• 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 (6 / 12 Month) it will again get rollover (Principal + interest)  with the same foreign bank or another bank based on the pricing and availability on that day. This will keep on happening till 3 years

Stage 4: Based on the sanction convert the buyers credit to term loan at the end of 3rd year.

RBI Regulation:

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

Costing

The cost involved in buyers credit is as follows: (Bold are the cost which will be part of Indian bank or through Indian Bank. And the margin requirements)

• Interest cost: This is charged by overseas bank as a financing cost (LIBOR+Margin)
• Letter of Comfort / Undertaking: Your existing bank would charge this cost for issuing letter of comfort / Undertaking. (In your case there are going to be multiple bank thus check their total cost)
• Forward / Hedging Cost
• Arrangement fee: Charged by person who is arranging buyer’s credit for you.
• Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges.
• WHT: The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities.

Sample Sanction Letter from Bank

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Buyers Credit Interest Rate (LIBOR + Margins)

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

Earlier articles on Buyer’s Credit have provided details on total cost involved like, Interest cost, libor, lou charges, forwarding booking cost, arrangement fee, and others.

This article provides details on how interest cost (margin) is arrived at by Indian Bank Overseas Branches or Foreign Bank.

L + Margin Rates

Factors which play important roles in Margin are

1. Availability of Funds: Whether sufficient funds are available (will be able to borrow) for the required amount of transaction.
2. Cost of Funds: The rate at which these banks gets to borrow funds from their local market (L + X).
3. Tenure: Tenure for which these funds are borrowed.
4. Banks Lines: For Example: When lines of a particular banks is running in scarcity, bank would ask for higher margin in comparison to other banks lines.
5. Internal Minimum Margin: Over an above cost of funds (L+X) bank adds their margin. There is minimum cut off margin decided by bank treasury or committee below which they are not able to offer pricing.
6. External Factors: Some recent examples are Market Volatility, US downgrade, Greece and Portugal debt crisis, etc.

Bankwise Letter of Comfort / Undertaking Charges

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

Below given are Letter of Undertaking (LOU) / Letter of Comfort (LOC) charges:       These charges detail information is as provided by respective bank’s website. These rates may vary from customer to customer, based on their negotiation with bank.

HDFC Bank

Guarantee Issuance: 1.8% p.a. or min 500

* Source: www.hdfcbank.com

Axis Bank

Buyers’ Credit against existing FB/NFB limits:

Arrangement of Buyers’ Credit, Issuance of a Guarantee/LOU/LOC, Payment to Supplier, Receipt of funding in Nostro :  2.50% p.a. subject to a minimum of Rs.1000/- or as per existing sanction terms for importer plus Swift charges as applicable/ actual courier charge

* Source: www.axisbank.com

State Bank of Hyderabad

Letters of Comfort – Service Charges

• Backed by 100 % discharge of liability (Viz., cash margin, sanctioned term loan, guarantee of First Class bank, 100 % lien on drawing power) : - 0.6875 % p.a.
• Others                         -  2.75 % p.a

Minimum charges for 3 months will be recovered

* Source: www.sbhyd.com 

Syndicate Bank

Other than Performance Guarantees: 100/- + 3.00% p.a.

* Source: www.syndicatebank.in

Allahabad Bank

Letter of Comfort in lieu of Letter of Credit or Buyers’ Credit or Standby L/C: @ 3% P.A. with minimum for 2 Quarters.

* Source: www.allahabadbank.com

State Bank of India (SBI)

As per existing customer, LOU / LOC charges of SBI is 2.75% p.a. Detail pricing on SBI website is not available.

Canara Bank

Guarantee issued including for availment of Buyer’s credit: 0.55% per quarter or part thereof for the specified period of liability calculated on the amount of liability under such guarantees at the beginning of every quarter.

* Source: www.canarabank.com

UCO Bank

Other Guarantees (Including issuance of letter of comfort for buyer’s credit: Rs.170 + 3.30% p.a. (Min. 170 + 1.65% charges for 2 quarters)

* Source: www.ucobank.com

Bank of Baroda (BOB): Letter of Comfort issued for availing Buyer’s Credit

Buyer’s Credit availed with BOB branches – 1.00% p.a.
Buyer’s credit availed with other banks      – 1.50% p.a.

* Source: www.bankofbaroda.com

Other Bank charges which will be updated shortly are: Bank of India (BOI), State Bank of India (SBI), Oriental Bank of Commerce (OBC), Indian Overseas Bank (IOB), Punjab National Bank (PNB), ICICI Bank, IDBI Bank, Yes Bank, Indusind Bank, & Union Bank of India (UBI)

Buyers Credit on Gold Import

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As per RBI Circular, Bank can open Letters of Credit and allow remittances on behalf of EOUs, units in SEZs in the Gem & Jewellery sector and the nominated agencies / banks, for direct import of gold, subject to the following

1. The import of gold should be strictly in accordance with the Foreign Trade Policy.
2. Suppliers’ and Buyers’ Credit, including the usance period of LCs opened for direct import of gold, should not exceed 90 days.
3. Banker’s prudence should be strictly exercised for all transactions pertaining to import of gold. Bank would ensure that due diligence is undertaken and all Know Your Customer (KYC) norms and the Anti-Money-Laundering guidelines, issued by Reserve Bank from time to time are  adhered to while undertaking such transactions. Bank would closely monitor such transactions. Any large or abnormal increase in the volume of business of the importer should be closely examined to ensure that the transactions are bonafide trade transactions.
4. In addition to carrying out the normal due diligence exercise, the credentials of the supplier should also be ascertained before opening the LCs. The financial standing, line of business and the net worth of the importer customer should be commensurate with the volume of business turnover. Apart from the above, in case of such transactions banks should also make discreet enquiries from other banks to assess the actual position. Further, in order to establish audit trail of import/export transactions, all documents pertaining to such transactions must be preserved for at least five years.
5. Bank would follow-up for submission of the Bill of Entry by the importers as stipulated.

Note: Extract from RBI Master Circular Import of Goods and Services issued on 01 July 2011

LIBOR Rates: Brief, History, Currencies, Maturities

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

LIBOR in brief

LIBOR stands for London InterBank Offered Rate. LIBOR is an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Although reference is often made to the LIBOR interest rate, there are actually 150 different LIBOR interest rates. LIBOR is calculated for 15 different maturities and for 10 different currencies. The official LIBOR interest rates (bbalibor) are announced once a day at around 11:45 a.m. London time by Thomson Reuters on behalf of the British Bankers’ Association (BBA).

The creation of LIBOR

At the start of the nineteen eighties there was a growing need amongst the financial institutions in London for a benchmark for lending rates. This benchmark was particularly needed in order to calculate prices for financial products such as interest swaps and options. Under the leadership of the BBA a number of steps were taken from 1984 onwards which led in 1986 to the publication of the first LIBOR interest rates (bbalibor).

LIBOR panel banks

As has already been indicated, LIBOR is an average interest rate at which a selection of banks will lend one another funds. These banks are called ‘panel banks’. The selection is made every year by the British Bankers’ Association (BBA) with assistance from the Foreign Exchange and Money Markets Committee (FX&MMC). A panel is made up for each currency consisting of at least 8 and a maximum of 16 banks which are deemed to be representative for the London money market. Banks are assessed on market volume, reputation and assumed knowledge of the currency concerned. Because the criteria applied are strict, the rates can generally be considered to be the lowest interbank lending rates on the London money market.

LIBOR calculation method

The LIBOR interest rates are not based on actual transactions. On every working day at around 11 a.m. (London time) the panel banks inform Thomson Reuters for each maturity at what interest rate they would expect to be able to raise a substantial loan in the interbank money market at that moment. The reason that the measurement is not based on actual transactions is because not every bank borrows substantial amounts for each maturity every day. Once Thomson Reuters has collected the rates from all panel banks, the highest and lowest 25% of value are eliminated. An average is calculated of the 50% remaining ‘mid values’ in order to produce the official LIBOR (bbalibor) rate.

The significance of the LIBOR interest rates

LIBOR is viewed as the most important benchmark in the world for short-term interest rates. On the professional financial markets LIBOR is used as the base rate for a large number of financial products such as futures, options and swaps. Banks also use the LIBOR interest rates as the base rate when setting the interest rates for loans, savings and mortgages. The fact that LIBOR is often treated as the base rate for other products is the reason why LIBOR interest rates are monitored with great interest by a large number of professionals and private individuals worldwide.

LIBOR Currencies

Originally (in 1986) LIBOR was published for 3 currencies: the US dollar, the pound sterling and the Japanese yen. Over the years that followed the number of LIBOR currencies grew to a maximum of 16. A number of these currencies merged into the euro in 2000. At the moment we have LIBOR rates in the following 10 currencies (click on the currency for the current interest rate for each maturity):

• American dollar – USD LIBOR
• Australian dollar- AUD LIBOR
• British pound sterling – GBP LIBOR
• Canadian dollar- CAD LIBOR
• Danish krone – DKK LIBOR
• European euro – EUR LIBOR
• Japanese yen – JPY LIBOR
• New Zealand dollar – NZD LIBOR
• Swedish krona – SEK LIBOR
• Swiss franc – CHF LIBOR

LIBOR Maturities

Because there are 15 different maturities there are 15 different LIBOR rates in total. There have not always been 15 maturities. Up until 1998 the shortest maturity was 1 month. In 1998 the 1 week rate was added, and only in 2001 were the overnight and 2 week LIBOR rates introduced.

• Overnight (1 day)
• 1 week
• 2 weeks
• 1 month
• 2 months
• 3 months
• 4 months
• 5 months
• 6 months
• 7 months
• 8 months
• 9 months
• 10 months
• 11 months
• 12 months

8.    Country-wise Holiday List

Reference Article

via LIBOR, detailed information about the London InterBank Offered Rate.

Transaction where Buyer’s Credit is Restricted

To Avail Buyer’s Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

Type of transaction where buyer’s credit cannot be done

• Incase of local trade
• Advance payment for Imports
• Merchanting Trade or Intermediary Trade Transaction
• Not allowed for import of services

Type of transaction where buyer’s credit can be done for limited amount

Case where import bill are directly received by importer from his overseas supplier, buyers credit amount is restricted upto $ 3,00,000. 

Except for

• Import bill received by wholly owned Indian subsidiary of foreign companies from their principal
• Import bill received by Status Holder Exporters as defined in the Foreign Trade Policy, 100% Export Oriented Units, Units in Special Economic Zones, Public Sector Undertakings and Limited Companies
• Import bills received by all limited companies viz. public limited companies, deemed public limited and private limited companies.

Type of transaction where buyer’s credit can be done for limited tenure

When below given goods / commodity are involved, buyer’s credit and suppliers credit cannot exceed 90 days from the date of shipment as per Reserve Bank of India (RBI) guidelines

• Rough, Cut and Polishes Diamonds
• Gold
• Silver, Platinum, Palladium, Rodhium

Related articles

• Buyer’s / Supplier’s Credit on Rough, Cut and Polished Diamonds (buyerscredit.wordpress.com)
• Import of Platinum, Palladium, Rhodium, Silver (buyerscredit.wordpress.com)

Sample format of Letter of Undertaking / Comfort (LOU / LOC)

To Avail Buyer’s Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

As mentioned in article “Procedure for Buyers Credit“,  Post receipt of offer letter from Indian Bank overseas branch or Foreign Bank, Indian Bank has to send Letter of Comfort / Undertaking (a type of Bank Guarantee) to overseas bank as security before funding the transaction.

Below link gives a sample format, to give an idea of the content of such LOU / LOC. Please note each bank and some times each bank branch has a different format. Thus, at every transaction, insist your buyers credit consultant to give you format of LOU / LOC along with offer letter to avoid any complication in the transaction.

LOU LOC FORMAT(LETTER OF UNDERTAKING)

Import of Platinum, Palladium, Rhodium, Silver

To avail Buyer’s / Supplier’s Credit…E: sanjaymandavia@gmail.com, M: +919825560186

Reserve Bank of India (RBI) in its circular dated 28-08-2008 had revised guidelines for Import of Platinum, Palladium, Rhodium and Silver. Extracts of the circular are given below.

Suppliers’ and Buyers’ credit, including the usance period of Letters of Credit opened for import of Platinum, Palladium, Rhodium and Silver should not exceed 90 days from the date of shipment. The revised directions will come into force with immediate effect. 

Banks are being advised to ensure that due diligence is undertaken and Know-Your-Customer (KYC) norms and Anti-Money Laundering (AML) guidelines, issued by the Reserve Bank are adhered to while undertaking import of these metals. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bonafide and are not intended for interest / currency arbitrage.  All other instructions relating to import of these metals shall continue.

Since the above circular, there is no change notification till date on the same.

RBI Circular

Buyer’s / Supplier’s Credit on Rough, Cut and Polished Diamonds

 

To avail Buyer’s / Supplier’s Credit…. E: sanjaymandavia@gmail.com M: +919825560186

Reserve Bank of India (RBI) in its circular dated 06-05-2011 has revised guidelines for import of Rough, Cut and Polished Diamonds. Extracts are given below.

Supplier’s Credit and Buyer’s Credit (Trade Credit) including the usance period of Letter of Credit (LC) opened for import of rough, cut and polished diamonds has been restricted to 90 days from the date of shipment from immediate effect.

Banks have been also advised to ensure that due diligence is undertaken and Know-Your-Customer (KYC) norms and Anti-Money Laundering (AML) standards, issued by RBI are adhered to while undertaking the import transactions. Further, any large or abnormal increase in the volume of business should be closely examined to ensure that the transactions are bona fide and not intended for interest / currency arbitrage. All other instructions relating to import of rough, cut and polished diamonds shall continue.

The earlier instruction issued for import of gold, import of platinum / palladium / rhodium / silver and advance remittance for import of rough diamonds shall remain unchanged.

RBI Circular

Buyer’s Credit Rollover

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.

Buyer’s Credit from Mauritius Based Foreign Bank

To avail Buyer’s / Supplier’s Credit…E: sanjaymandavia@gmail.com, M: +919825560186

Since last week or so, Foreign bank branches based out of Mauritius are either not able to quote or are quoting above the RBI prescribed ceiling for 6 months LIBOR + 200 bps.

Reason being, low liquidity has resulted into high cost of funds.

Above will affect those importers who used to arrange funds from Mauritius based Foreign Bank which were somewhat cheaper than Indian Bank overseas branches but did not want to get into withholding tax. As per Double Taxation Treaty with Mauritius, withholding tax on interest payment to Financial Institution is nil.

Now options with them are either to take funds from Indian bank overseas branches at higher cost or from Foreign bank and pay withholding tax on due date.

Buyer’s / Supplier’s Credit Consultants

To avail Buyer’s / Supplier’s Credit: Email: sanjaymandavia@gmail.com, Phone / Mobile: +919825560186

Who is Buyer’s / Supplier’s Credit Consultant ?

Person / Firm who co ordinates with Indian Overseas Branches or Foreign Bank and arranges best possible quote for transactions. They do not directly represent any of these bank. They are also known as Buyers Credit Brokers & Buyers Credit Agents

Scope of Activity

• Assisting you in technical aspect of transaction. (esp. RBI Provision)
• Arranging quote for the transaction
• Get funding done once Letter of Undertaking (LOU) is sent by Indian bank to Foreign bank.

Benefits of using Buyer’s Credit and Supplier’s Credit Consultants

1. A decent consultant would have around 50+ banks from where he arranges buyer’s credit quote, thus helps getting best possible quote for the transaction.
2. For an Importer doing this type of transaction for first time, consultant can help you with step by step process, thus your transaction goes smoothly.
3. Each bank have their own criteria depending on amount, type of transaction, tenure, bank giving letter of comfort etc for doing the transaction. It would reduce trouble of finding right bank with right pricing for each type transaction.
   Different factor affecting transaction are:

• Some bank would not funds <$50,000 transaction
• Some would give differential pricing in case it is <50000 and / or  <$100000
• Some would not fund less than 180 days transaction,
• Some would not funds EURO/GBP/JPY transaction,
• Some do not offer quote for capital goods
• Say all factors falls under criteria but the bank do not have lines (limits) on your bank or lines have exhausted and thus not able to funds.
• Reduce time in execution of transaction.
• Handling local banks technical queries.
• And many other such criteria.

Difference between Buyer’s Credit and Supplier’s Credit

To Avail Buyer’s / Supplier’s Credit….. E: sanjaymandavia@gmail.com, M:+919825560186

1. Supplier’s Credit can be arranged against LC transactions only, where as Buyer’s Credit can be arranged for any type of payment mode (LC Sight, LC Usane, DA and DP) except advance payment.
2. Clauses in the Lc would need amendment or few clauses will have to be incorporated as per the requirement of the supplier’s credit providing bank. In buyer’s credit, as the arrangement is after documents reaches your banks counter, no such clause are required to be incorporated.
3. Supplier’s Credit has to be arranged before shipment of the goods or at the time of LC opening where as Buyers Credit can be arranged only after documents come at your bank counter for payment or on due date.
4. There can a difference in time of your cash flow. Many banks are structuring the transaction where in overall pricing is divided between confirmation cost and discounting cost, where confirmation cost is payable upfront at the time of advising the Lc. Where as in buyers credit, as the payment is in form of interest and it is payable only on maturity.

Buyer’s Credit in Cross Currency

To Avail Buyer’s Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

Question of Buyers Credit in Cross Currency comes up in below cases.

1. International trade is carried out in USD, EUR, JPY and other currencies. But when it comes to arranging buyers credit, arranging buyers credit against USD and EUR is much easier, with better price range and more options of banks to choose from is  than in other currencies. But even with above understanding, at times it is not possible to transact in these currencies and thus cross currency buyers credit is required.
2. Possibility of arbitrage. Meaning move transaction from say Euro to USD because of difference in costing may result in  some cost saving. Has been explained in detail further in the article with example.

Process flow for doing Cross Currency

At the time of receipt of the document, importer will book a cross currency Spot+2 or forward as per his comfort with his bank, to get the exact conversion from one currency to other currency. Rest of the process is same as buyers credit which importers already carry out.

Example of Cross Currency from Arbitrage perspective

Cross currency can at times, lead to cost saving. An Example of  import payment due in Euro to buyer’s credit into Dollar  is given below.

Assumption

Transaction Value: EURO $100000
USD Value of Buyers Credit: $141713 (as per current market)
Tenure: 6 Months
Quote under both USD and EURO is L + 1.50%
LOU Charges are same for both transactions
Forward for both currency is booked (Rate taken from NSE India Website)

Market Rates – 15/07/2011

6 Month EURO Libor Rate: 1.79188%
6 Month USD Libor Rate: 0.41575%
6 Month EURO Forward Premium: 1.60 (64.64 – 63.07)
6 Month USD Forward Premium: 1.235 (45.73-44.49)

Calculations (LOU charges not are taken below, as per assumption that it is same in both transaction)

Currency Amount		LIBOR	Margin	L + M	180       days	INR Interest Cost	Forward Premium	In INR
EURO 100000		1.79	1.5	3.29	1646	106394	160000	266394
USD 141713		0.42	1.5	1.92	1357	62075	175016	237091
					Savings			29303

Other factor to be considered before taking decision

Cross currency Foreign Exchange margin charged by bank on such transaction

Letter of Comfort / Undertaking (LOC/LOU) Charges

To Avail Buyers Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

Letter of Comfort Charges

Normally one would tend to look at Interest Cost provided by Foreign bank (Indian bank overseas branches or Foreign bank) on deciding which offer to accept. But this is a wrong approach. One should look at overall cost. Overall cost would be Foreign bank interest cost and LOU charges of your bank.

For instance, a customer having limits with Bank of Baroda (BOB) and getting Letter of comfort or undertaking issued from them for buyer’s credit.

Letter of Comfort / Undertaking Charges of BOB

- Buyer’s Credit availed with BOB branches – 1.00% p.a
- Buyer’s credit availed with other banks  – 1.50% p.a

Link : Bank of Baroda Service Charges (Under Point 6 – Forex Service Charges, Sub clause 2.4(d))

Now let’s take an example.

XYZ Bank offer: L + 1.50. 

Overall cost in case of XYZ Bank BC : 0.25 + 1.50 + 1.50 = 3.25%

BOB Overseas Branch: L+1.75

Overall Cost if in case of BOB Overseas: 0.25 + 1.75 +1 = 3.00%

* Assumption: 90 days LIBOR is taken in above case

As you see in above example, even after BOB overseas branch cost was higher, overall transaction cost for you would be still cheaper.

Thus

• You should refer bank’s website or check with your banker or buyers credit consultant to find out LOU charges and check if there exist any such differential pricing as it exists for Bank of Baroda and compare overall cost.
• If it does, also check if the cost has been passed on to you.

Useful links in relation to Buyers Credit

To Avail Buyers Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

1. Current Exchange Rate

2. Future / Forward Rates of USD, EURO, GBP, JPY

Relevant RBI Circulars in Relation to Forward Contract

• Comprehensive Guidelines on Over the counter (OTC) Foreign Exchange Derivatives and Overseas Hedging of Commodity price and freight risk. (28th December 2010)
• Recent Charges in Forward Contract Booking Norms (15th December 2011)
• Foreign Exchange Management (Foreign Exchange Derivative Contracts) Regulation, 2000 (3rd May 2000)

3. DTAA, Withholding Tax, Income Tax Notification in Relation to Form 15CA, Form 15CB, Challan 281, Form 27Q and Filling Links / Format

• Remittances to non-residents
• Procedure for furnishing information in Form 15CA and Form 15CB
• Form 15CA (Online Filling)
• Form 15CB (Format for Certificate)
• Online payment of  TDS of Withholding Tax under Challan 281 ((nature of payment 195)
• Form No. 27Q : Format used to file return of withholding tax on quarterly basis
• India Mauritius Double Taxation Avoidance Agreement (DTAA)
• Country-wise Double Taxation Summary Chart
• Form A2

4. Relevant RBI Circulars in relation to Trade Finance

• RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling: Dated 15/11/2011
• RBI Circular: External Commercial Borrowing (ECB) – Bridge Finance for Infrastructure Sector Date: 23-09-11
• RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit Dated: 01-07-2011
• RBI Circular for Buyers Credit and Suppliers related to of import of Rough, Cut and Polished diamond. Dated: 06-05-2011
• RBI Mater Circular on  Import of Goods and Services Dated: 01-07-2011
• RBI Circular for Import of Platinum, Palladium, Rhodiu, and Silver Dated: 28/01/2008

5. LIBOR Currencies

• American dollar – USD LIBOR
• Australian dollar- AUD LIBOR
• British pound sterling – GBP LIBOR
• Canadian dollar- CAD LIBOR
• Danish krone - DKK LIBOR
• European euro – EUR LIBOR
• Japanese yen – JPY LIBOR
• New Zealand dollar - NZD LIBOR
• Swedish krona - SEK LIBOR
• Swiss franc - CHF LIBOR

7. LIBOR Maturities (Below link gives EURO Rate for different tenures. For other currencies, click on the above link)

• Overnight (1 day)
• 1 week
• 2 weeks
• 1 month
• 2 months
• 3 months
• 4 months
• 5 months
• 6 months
• 7 months
• 8 months
• 9 months
• 10 months
• 11 months
• 12 months

8.    Country-wise Holiday List

WHT (Withholding Tax) on interest on Buyers Credit

To Avail Buyers Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

What is WHT (Withholding Tax) ?

Tax levied on the interest paid by the Indian corporates to overseas lenders on the loans taken from them

Why is it a deterrent ?

Rates charged by overseas lenders are net of taxes; tax paid is the additional cost that needs to be borne by the borrower

Impact on you ?

• Withholding Tax is paid as per Income Tax Act, 1961 which varies from country to country as per DTAA (Double Taxation Avoidance Agreement) between India and the lender’s country. There 83 countries where India has DTAA. One of the condition to use DTAA rate is that lending institution should have an Indian Pan Card.
• When foreign bank quote for buyers credit they quote as net of withholding tax. Thus one needs to do grossing up ** interest at the time of calculating WHT (example given below).
• Nil Withholding tax on Interest payment on funds arranged from Banks based out Mauritius. (Refer India Mauritius Double Taxation Avoidance Treaty: Page 9, Article 11 3(C))
• No Withholding tax on loans raised from overseas branch of Indian bank

Process flow of payment of Withholding Tax

1. First check the country from which buyer’s credit is to be made available to finalize rate of TDS (Refer link: countrywise double taxation summary chart ).
2. Deposit the tax through challan no. 281 (nature of payment 195).
3. Get Form 15CB issued from Chartered Accountant (CA) for the buyers credit interest payment.
4. Submit online Form 15CA based using form 15CB provided by CA.
5. Along with Form A2 submit Form 15CA and Form 15CB to Authorised Dealer (AD Bank) on or before due date of making payment for buyers credit interest.
6. File Quarterly return of withholding tax through Form No. 27Q (Section Code: 195).
7. AD Bank forwards a copy of document to Assessing officer / Income Tax Department.

Note: 

1. If DTAA & PAN of buyers credit providing bank is available, then as per DTAA .
2. If no DTAA or PAN, then @ 20% (see section 206 AA of Income Tax Act).
3. As per DTAA, rate of TDS should not exceed tax rate given in DTAA. Which means, where rate as per DTAA is applicable, Surcharge and Education Cess shall not apply.

Important Related Links

• Income Tax Circular on Form 15CA and CB
• Procedure for furnishing information in Form 15CA and Form 15CB
• Form 15CA (Online Filling)
• Form 15CB (Format for Certificate)
• Online payment of  TDS of Withholding Tax under Challan 281 (nature of payment 195)
• Form No. 27Q : Format used to file return of withholding tax on quarterly basis
• India Mauritius Double Taxation Avoidance Agreement (DTAA)
• Country-wise Double Taxation Summary Chart
• Form A2

Example

For example: Withholding tax is 10% of the gross amount of the interest on loans made or guaranteed by a bank or other financial institution carrying on bonafide banking or financing business.

To explain you mathematically:

Buyers Credit Foreign Bank :  If WHT is 10% than,

BC Amount: $100000, Libor: 1%, Margin: 1% (net of WHT) , Tenure: 180 days, USD / INR:  50

Net Interest Amount = $ 1000 ($100000*2%*(180/360)

Gross Interest Amount = $1111 ($1000* (100/90)

Withholding tax = $ 111 = Rs. 5550

Grossed up margin in % : 1.22% pa ($1111 / $100000 * 2)

* Note: Above content is collected from various sources. Request to consult a tax expert before using the same.

** As per Income Tax Act 1961: Sec 195A. [In a case other than that referred to in sub-section (1A) of section 192, where under an agreement] or other arrangement, the tax chargeable on any income referred to in the foregoing provisions of this Chapter is to be borne by the person by whom the income is payable, then, for the purposes of deduction of tax under those provisions such income shall be increased to such amount as would, after deduction of tax thereon at the rates in force for the financial year in which such income is payable, be equal to the net amount payable under such agreement or arrangement.]

RBI Trade Credit (Buyers/Suppliers Credit) Circular Extract

To Avail Buyers Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

Trade Credits’ (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. 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.

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.

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Procedure for Buyers Credit in India

To Avail Buyers Credit….. Email: sanjaymandavia@gmail.com, M: +919825560186

Further to my earlier post, before proceeding for buyers credit below checks need to done

Internal Checks from your end:

1. Non Fund based Limit. In order to avail buyers credit, it requires to have non fund based limit with existing bank. Under banking terms, Non Fund based limits are defined as Letter of Credit (LC) limits, Bank Guarantee (BG) limits etc. Normally during sanction, bank tends to keep these limits inter changeable between LC / BG or fund based limits. If not, bank would not be able to issue Letter of Undertaking (LOU)/ Comfort (LOC) for buyers credit. Some nationalized bank insist on using word buyers credit in sanction before availing buyers credit. Thus as a first check, check if these limits are available in the sanction letter, if not get bank to add this limits or make it interchangeable.
2. Gap availability in Non fund based (NFB) limits: Incase, where you already have non fund based limits but it is fully utilized for say LC or BG than you might not be able to utilize it for buyers credit. Thus at the time of sanction of loan or at the time of renewal, make sure that there are enough limit available and interchange with fund based limit as well, if required, can convert Fund based (FB) limit to non fund based for that much amount.
3. Tenure of Buyers Credit: At the time of sanction, bank clearly mentions the tenure for which a LC or BG can be issued.  This needs to be checked, as maximum tenure for which buyers credit can be availed. Say you want buyers credit for 180 days whereas sanctioned tenure of the non funds based limits is for 90 days, than you can avail buyers credit for maximum of 90 days at a time and then roll it over afterwards.
4. Forward Booking: Bank may insist on booking forward cover for the currency risk upto the amount of buyers credit. So before moving into transaction, check on the approximate forward premium for the tenure.
5. Format of Letter of Comfort: Every Foreign bank offering buyers credit has their own format of letter of comfort / letter of undertaking. There might be a chance that your bank might not issue letter of comfort in that format or might insist on using their own format. Thus check with your bank on this before proceeding.
6. Operational Issue: Say each of the above issue is taken care off and you got the offer letter issued for buyers credit for a payment due in next couple of days. Now your bank has to issue letter of comfort which normally should not take more than few hours if the above points were already taken care off. But some nationalized bank branches would still take couple of days to issue letter of comfort. To avoid any delay payments keep provision of few days. Secondly some international bank might insist on getting Letter of comfort / undertaking to be sent by authenticated swift. Thus you might have to check if there is swift key arrangement between your bank and the foreign bank.

Initial requirement for getting quote issued

1. Amount and Currency of Transaction: Exact value as per invoice or LC has to be provided here.
2. Tenure for which buyers credit is required: Details of tenure for which buyers credit is required has to be provided here. As per RBI regulation, under non capital goods (Raw material etc) payment has to be made with 360 days from the shipped on board date of Bill of Lading (BL) and for Capital goods with 3 years. Thus according to requirement, RBI regulation and your sanction (as per point 3 of initial check), will decide what tenure to be mentioned.
3. Due date of transaction: Date on which Bill / LC / payment becomes due. Normally one should mention 1 day before due date. Also take care to if the same is not Saturday, Sunday or Currency holiday for that particular currency. Otherwise it would delay your transaction.
4. Bank which will give letter of comfort / undertaking: Mention your bank name. Every bank has line (limit) of credit on other bank. It might be possible that overseas bank from where you are arranging quote does not have line on your bank and thus would not be able complete your transaction
5. Underlying transaction (Goods involved): What goods are involved in the transaction? As per bank’s internal policy, they would not deal in funding for certain goods and thus would not offer funds for the transaction. For example, some banks does not give buyers credit if the underlying goods involves wood.
6. Country of Origin of Goods: Internationally few countries are under UN sanction or OFAC sanction and thus dealing under a particular currency is not allowed for that country. For example, import from Iran, Libya etc, international branches would not offer buyers credit on such transaction because of OFAC sanction.

Other than above, bank might ask for more information like, in case of LC transaction, LC number, issue date, expiry date, last date of shipment etc.

As seen above, there are many operational checks before entering into a buyers credit transaction. Thus is it suggested that to take help of consultant.

Buyer’s Credit – Definition & Meaning

To Avail Buyer’s / Supplier’s Credit: E: sanjaymandavia@gmail.com, M: +919825560186

News Flash: Buyers Credit all-in-cost ceiling of 6 Month L+350bps enhance for further 6 Months

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:

1. Indian customer imports the goods either under DC / LC, DA / DP or Direct Documents.
2. Indian customer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit finance.
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 funds existing bank’s Nostro account for the required amount
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 0.33561% 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>

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 2011 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

B. All-in-cost Ceilings

• Upto 1 year : 6 Month Libor + 350 bps *
• Upto 3 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.

* With effect from 15/11/2011 RBI has increased all-in-cost ceiling on trade credit (buyers credit / suppliers credit) to L + 350 bps. The same has been enhanced for further 6 Months till 30/09/2012. Summary of review

1. Revision in Interest Rate for tenure Upto 3 years : From 6 Month LIBOR + 200 bps to6 Month LIBOR + 350 bps
2. Effect From: Immediately
3. Applicable Upto: 30/09/2012 (Subject to review there after) 

RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling: Dated 30/03/2012

RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling: Dated 15/11/2011