Should Importer accept Buyers Credit Quote including LOU charges

In earlier article we have discussed about costing of buyers credit, list of which is given below.

Quote for buyers credit are arranged by consultants or LOU issuing banks for importers.

Off late few LOU issuing banks have started a practise of giving quote to importer including LOU Charges (L+Margin+LOU Charges). Example: L + 300 bps including LOU Charges

Question is “Should Importers prefer it ?”

Answer is NO

Of above two cost, LOU charges is fixed cost whereas Overseas Bank  interest is variable cost and both are charged by separate entity. By showing both these charges together, LOU issuing bank convert LOU charges to variable cost. And whenever Overseas Bank cost are down, instead of passing the benefit to importer, they would increase LOU charges.

Example:  Transaction Details: $50000, 90 Days, LOU: XYZ Bank

Buyers Credit Quote including LOU Charges: 3 Months Libor + 350 bps

Where both  cost are charged separately:

  • LOU Charges: 2.00% ,
  • Overseas Bank Quote: 3 Months Libor + 100 bps.
  • Total Cost: 3 Months Libor+300 bps

Thus instead of 2.00%, lou issuing bank increased lou charges to 2.50% because of non existing of break up. At times, instead of LOU charges it may also be adjusted towards arrangement fee.

What should importer do ?

In order to avoid such instance,

  • Importer should negotiate LOU charges separately at the time of sanction of limits.
  • Case where quote is arranged by LOU issuing bank, importer should insist on getting copy of offer letter provided by overseas bank.

With above details, importer will be able arrive at actual transaction cost.

Note: This will hold true in most cases when such clubbing of charges are done by LOU issuing bank but there can be exceptions too.

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2 thoughts on “Should Importer accept Buyers Credit Quote including LOU charges”

  1. Hi,

    at the time of sanction of loan;
    bank gave me welcome/sanction letter mentioned charges for buyers credit as Libor + 350 basis points.So does it include all charges from Overseas bank as well as my own bank charges?

    So while calculations should I calculate like this?

    For 100000$ For 90 days All charges for borrowing will be

    0.60 Libor +350 basis points= 4.10% Per annum (0.34% Monthly)
    So interest will be 1024 $ for 90 days for 100000$.

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