Buyer’s Credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institutions outside India. Based on letter of undertaking of Importer’s bank, Overseas bank credits the nostro of the importer’s bank which in turn uses the funds to make payment to the Suppliers bank against the import bill.
Benefits of Buyer’s Credit:
The benefits of buyer’s credit for the importer is as follows:
- The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows
- The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
- The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
- The importer can use this financing for any form of trade viz. open account, collections, or LCs.
- The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.
Buyers Credit Process flow:
- Importer imports the goods either under DC / LC, DA / DP or Direct Documents.
- Importer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit.
- Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
- If pricing is acceptable to importer, overseas bank issue’s offer letter in the name of the Importer.
- Importer approaches his existing bank to get letter of undertaking / comfort (LOU / LOC) issued in favour of overseas bank via swift.
- On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will either funds existing bank’s Nostro account or pays the supplier’s bank directly (using only MT202 payment mode).
- 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 existing bank to recover the principal and Interest amount from the importer and remit the same to Overseas Bank on due date.
The cost involved in buyers credit is as follows:
- Interest cost: This is charged by overseas bank as a financing cost. Normally it is quoted as say “3M L + 350 bps”, where 3M is 3 Month, L is LIBOR, & bps is Basis Points (A unit that is equal to 1/100th of 1%). To put is simply: 3M L + 3.50%. One should also check on what tenure LIBOR is used, as depending on tenure LIBOR will change. For example as on day, 3 month LIBOR is 0.23560% and 6 Month LIBOR is 0.33350%
- Letter of Comfort / Undertaking: Importers Bank will charge this cost for issuing letter of comfort / Undertaking
- Forward / Hedging Cost: In few banks it is mandatory for importers to book for forwards and few leave the option of deciding on importers.
- Arrangement fee: Charged by Buyers Credit Agents / Brokers how is arranging buyer’s credit for importer.
- Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges etc.
- Withholding Tax(WHT): When funds are arranged from Foreign Bank, Importer has to pay WHT on the interest amount remitted to the Indian tax authorities.
Documents at the time of taking Fresh / Rollover of Buyers Credit
- Request Letter giving complete import details and along with it authority to debit charges
- ECB Form
- Offer Letter from overseas bank, Letter of Undertaking format & Swift Address
- Import Documents & Bill of Entry (In Case of Direct Documents)
Documents at the time of Repayment of Buyers Credit
RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for short-term credit for financing — by way of either suppliers’ credit or buyers’ credit — of import of goods into India, based on uniform criteria.
Over the years there has been changes in norms. Current norm as per RBI Master Circular on External Commercial Borrowing (ECB) and Trade Finance 2014 are
A. Amount and Maturity
- Maximum Amount Per transaction : $20 Million
- Maximum Maturity in case of import of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc): upto 1 year from the date of shipment
- Maximum Maturity in case of import of capital goods : upto 5 years from the date of shipment (Beyond 3 years banks are not allowed to provide Letter of Undertaking / comfort)
- No Rollover / Extension will be permitted beyond permissible limits
- Trade Credit should be linked to the operating cycle and trade transaction.
B. All-in-cost Ceilings
- Upto 1 year : 6 Month Libor + 350 bps
- Upto 5 years: 6 Month Libor + 350 bps
All applications for short-term credit exceeding $20 million for any import transaction are to be forwarded to the Chief General Manager, Exchange Control Department, Reserve Bank of India, Central Office, External commercial Borrowing (ECB) Division, Mumbai.
- RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-07-2014
- RBI Master Circular on Import of Goods and Services: Dated: 01-07-2014
Author: Sanjay Mandavia