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
- 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
- Realize at-sight payment
- Avoid the risk of importer’s credit by making settlement with LC
Process Flow of Transaction
- With transaction details importer approaches arranger to get suppliers credit for the transaction
- Arranger get an offer from overseas bank on the transaction
- Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses
- Suppliers ships the goods and submits documents at his bank counters
- Suppliers Bank sends the documents to Supplier’s Credit Bank.
- Supplier’s Credit Bank post checking documents for discrepancies sends the document to importers bank for acceptance
- Importer accept documents. Importer’s Bank provides acceptance to Supplier’s Credit Bank LC guaranteeing payment on due date.
- Supplier’s Credit Bank based on acceptance, discounts the bill and makes payment to Supplier.
- On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank
Cost Involved (may vary bank to bank)
- Foreign bank interest cost
- Foreign Bank LC Confirmation Cost (Case to Case basis)
- LC advising and or Amendment cost
- Negotiation cost (normally in range of 0.10%)
- Postage and Swift Charges
- Reimbursement Charges
- Cost for the usance (credit) tenure. (Indian Bank Cost)
- 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)
At times foreign bank may insist on adding confirmation which would result into additional cost
Suppliers credit is governed by RBI Circular “Master Circular on External Commercial Borrowings and Trade Credits” Dated 01-07-2015
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: 01-07-2015
- RBI Master Circular on Import of Goods and Services: Dated: 01-07-201r