New Article: Moratorium Period Impact on Buyers Credit
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 the due date of payment of LC convert it to Buyers Credit and rollover it for 3 years –> At end of 3 years convert to term loan
Stage 1: Bank’s Term Loan Sanction:
- Facility: Term Loan with Sub limit or interchangeable Limit for Buyer’s Credit (capex) and Capex LC (to be converted to Term loan after 3 years)
- Purpose: Purchase of Machinery
- Moratorium Period: Preferable 3 years. If not than on case to case basis structure needs to be worked out.
- Tenure : 36 months from the date of shipment. Either buyers credit can be taken for 36 months in one go or can be rollover every 6 / 12 months (or any other combination) till 36 months tenure.
- 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 buyers 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.
- 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.
Summary RBI Regulation is given below and for further details please refer article “RBI Trade Credit (Buyers Credit / Suppliers Credit) Circular Extract“
- Maximum Amount Per transaction : $20 Million
- Above $20 Million, RBI Approval required.
- 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 or operating Cycle whichever is less.
- 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
- All-in-cost Ceilings: 6 Month Libor + 350 bps
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.