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)
- Agree on LOU Charges
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:
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
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.
Buyer's Credit & Supplier's Credit 
A company has imported coal against sight L/C on FOB basis. Now for making payment of freight charges to overseas shipping company it wants buyers’ credit for 172 days. Is it allowed to extend buyers’ credit to importer only for making payment of freight. The payment of merchandise shall be at sight.
Buyers Credit is not allowed for import of services, thus mentioned transaction cannot be done under buyers credit.
As per my knowledge buyers credit issue only for the payment of purchase of raw material & companies capex (capital expenditure). so i want to know during m purchasing d raw material for the company can i avail this facility only to the extent of purchase cost of raw material or in also include other charges life freight, loading etc the duration for buyers credit for raw material is 1 year (bcoz of commodity in nature) & capex max to max 3 years.. is it true in all company or differ to the nature of co.
Revert on each of your queries as given below
1. On query of Freight or loading charges:
For this you will have to first understand under what incoterms (FOB, CIF etc) this goods are been importer. In international market with pricing is quoted it would pricing of goods is FOB based or CIF or any other term. For example in case of FOB, price quoted for goods by supplier is till goods gets shipped on board, rest cost (freight, insurance) has to be bared by importer. In such case, buyers credit cannot be taken on insurance and freight amount as they have to be paid separately. Incase of CIF pricing of goods quoted by supplier includes freight, carriage and insurance. In such given case buyers credit would include such cost. But things to be noted is, it is included in price of goods.
But if the same has to be remitted separately, in that case buyers credit cannot be done for such services.
Thus in summary, buyers credit funding can be done against only cost of raw material or machinery. And in case of import of services it is prohibited.
2. Tenure of Buyers Credit.
Yes there is a differences based on nature of goods.
For Non Capital Goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc) : upto 360 days (from shipped on board date on BL)
For Capital Goods: 3 years
For Rough, Cut and Polished Diamonds, Gold, Silver, Platinum, Palladium, Rhodium, : upto 90 days (from shipped on board date on BL)
3. Notes or Circular.
You can refer to various articles which provides on this site for more details. And for circular, you refer to below link.
Useful Links
What if I use Buyers Credit for Interest Arbitrage? i.e all imports against FDRs. What are the latest guidelines for this?
Technically, Buyers Credit can be used for Interest Arbitrage. As per my understanding, RBI does not want buyers credit to be used as just Interest Arbitrage. Thus, buyers credit has been restricted to underlying transaction with imports (either non capital goods or capital goods). Secondly even with this transaction, banks would give letter of comfort for the underlying transaction based on the working capital cycle of the client. Say an imports working capital cycle gets completed in 90 days than bank would provide you a sanction for buyers credit / Lc limits only for that tenure. There is no specific guidelines on this. You can refer RBI Master Circular on External Commercial Borrowing and Trade Credit & Master Circular on Loan and Advances
What does rollover actuall means. If the importer of machinery makes the payment of defined amount on each rollover.At the end of 3 years does entire amount (including all that has been paid gets converted to Term loan.
1. On what is rollover, you can refer https://buyerscredit.wordpress.com/2011/07/24/rollover/
2. To revert on your second query, every time a customer makes a part payment at the time of rollover, the same get converted to term loan and buyers credit is taken only for the rest of the amount.
I wish to understand the cost for hedging .i.e. booking a forward cover for the Buyers credit transaction.
Hedging of foreign currency exposure can be done either in OTC Market (Through Banks) or through secondary market (NSE, BSE etc). Cost of Hedging through Banks from importers perspective are
1. Forward Premium in case of forwards and Option Premium in case Call or Put Option.
2. On the market running forward premium, bank add their margin and than quote to customer.
3. Forward Contract charges. It is a processing fee which is charged every time one enter’s into a forward contact. Normally in range Rs. 500 to 1500.
Please refer to Stage 3 of the process outlined above….”Overseas Bank to fund your existing bank nostro account for the required amount”.Is it necessary?Can’t the overseas Bank directly make the payment to Overseas supplier/Supplier’s Bank as per the instruction in their forwarding letter accompanying the import bill & confirm the same to LUT/LOC issuing Bank(practice in SBI)?Why do some Banks insist on funding to their own nostro account by the Overseas Bank & then remit fund to Overseas supplier/Supplier’s Bank themselves(practice in some private banks)?
1. Technically, yes, overseas bank can directly funds supplier’s bank of the importer if the same get instructed to them in lou by lou issuing bank.
2. On second part of your question, below are the reason
A. As per internal process of some of these bank, they would not fund directly to supplier.
B. Regulartory Reason: KYC requirement as per the funding location country.
C. Easy of collecting funds on maturity. Some of these banks in their lou format has condition that they would directly debit their bank nostro of the lou issuing bank on the due date.
If the Buyers Credit is taken from a foreign Bank against a sub-limit issued by an Indian Bank. The sub limit says it is for 3 years. But the buyers credit is taken fro 180 days approx and then rolled forwarded, though not automatically.
Then in this case, shall the BC be classified as current or non-current ?
In cases where the buyers credit is taken for a period less than a year, in your case for 180 days, it is to be treated as current.
Whereas in cases of buyers credit taken at a time for a period more than a year, underlying capital goods, then it is to be treated as non current.
Can we “prepay” Buyers credit with ECB?.
Only for infrastructure firms there is an option where they can initially take buyers credit (Bridge Finance) and then can replace it with ECB. Below article provides further details.
Infrastructure Companies – Bridge Finance before availing ECB
I wanted to know how much percentage value of bank guarantee do we have to give for buyers credit.
For example If a new company wants a 1 million dollar buyers credit for what value should it give a letter of comfort like is 30% of value enough like 3 lakh dollars or do we have to give a letter of comfort for 100% of the buyers credit value. What would be the margin money for the Letter of comfort as a new company. Generally how much percentage collateral do banks take for issuing letter of comfort and getting sanction of buyers credit if the company has no exisitng limits with any bank as it is a new company. I also wanted to know whether we can give a corporate guarantee for letter of comfort?
1. 100% value of Letter of Undertaking / Comfort has to be provide.
2. Margin money & Collateral to be provided to Indian bank will depend terms agreed with them.
3. Corporate Guarantee would not be acceptable.
can the Bank opening LC demand payment of Installment on arrival and commissioning of Capital Goods
Further details will required to answer above question.
for buyers credit which have been availed for Import of capital goods, can i make a FD of the hedging cost charged by the bank instead of actually paying for the hedging cost, does a bank accept such kind of arrangements or are there any RBI circular of such means?
RBI has left the decision on hedging on foreign exchange exposure below $25 Million on Bank’s Board of Director. Whatever policy is framed by Board is will be applicable for customer of that bank.
For example, SBI for their client has been insisting for Hedging incase of buyers credit transaction. Without it buyers credit is not allowed.
Thus there might be many combination will can be workable, like on which suggested by you, but it will allowed by bank as per their board of director decided policy on hedging.
Please refer below articles for further details.
Banks Insisting of Forward Booking for Buyers Credit Exposure
Comprehensive Guidelines on Foreign Exchange Derivatives
Thank you so much for such a good articles. Request you to please clarify that can done BC rollover for both the amount (Principal +interest) or only of BC Principal amount.
Only on Principal Amount.
Is the conversion of BC into Term Loan still allowed under RBI revised circular dated March 13, 2019?
Buyers Credit can be converted to Term Loan any time by making payment toward BC. Revised circular is about availing BC and not related to conversion of BC to term loan.