Moratorium Period Impact on Buyers Credit

As per RBI Master Direction on External Commercial Borrowing and Trade Credit banks are allowed to sanction buyers credit on import of capital goods for  3 years with Letter of Undertaking.

In order to avail above buyers credit, Importer will have to get term loan sanctioned with buyers credit as sub-limit with his bank. As seen in earlier article “Buyers Credit on Capital Goods“, moratorium period is one of the factor which importer needs to take care at time of sanctioning of term loan. This article explains

  • What is moratorium period ?
  • What types of situation may arise for importer at the time of sanctioning term loan which may impact buyers credit transaction?

What is Moratorium Period ?

moratorium-periodRepayment of a loan begins once loan is disbursed or post moratorium period. A moratorium period is a time during the loan period when the borrower is not required to make any repayment.

Borrower is provided with this cushion period so that project can be commissioned and the repayment begins only after project  starts generating cash flows.

Bank decides moratorium period based on the project and which is acceptable to importer.

  • Bank prefers shorter moratorium stating
    • Once project is commissioned, project would start generating cash flow, which can be used for repayment.
    • Also shorter period avoid diversion of funds.
  • Importer prefers longer moratorium period stating
    • It would give much need liquidity to get project going.
    • Importer can use funding structure like buyers credit or suppliers credit which would help him to bring his cost down.

scenario-newBelow are the few scenarios which may arise for importers during sanction process:

Situation 1: Bank Agrees for 3 years Moratorium Period.

Importer takes buyers credit for 3 years and post which convert it into Term Loan.

Cash outflow (Assuming Term loan is for 6 years)

  • First 3 years: Interest and LOU charges
  • Next 3 years: EMI of Rs. 200 for 3 years
  • Incase of no moratorium period : EMI of Rs. 100 for 6 years

Situation 2: Bank Agrees for 3 years Moratorium Period with condition of placing Fixed Deposit.

In this structure, importer will have to place a FD (under lien) every month for amount equal to monthly EMI. Thus importer will be able to enjoy buyers credit for whole tenure and after 3 years FD amount will be used to make repayment of buyers credit and rest amount will be converted to Term Loan.

Cash outflow

  • First 3 years: Interest and LOU charges
  • First 3 years: Month EMI amount of Rs. 100 kept as FD in Bank under lien.
  • After 3 years: EMI of Rs. 100 every month.

Banks may allow placing of FD after say 1 or 2 year depending on how it has been structured.

Situation 3: Bank Agrees for Moratorium period less than 3 years (Say  for example : 1 year) 

A. Import as a percentage of Total Project Cost : Less than 100%

After completion of 1 year of moratorium period, bank can start repayment  of term loan adjusting it towards locally procured machinery. Thus importer will still be able to take buyers credit for 3 years for imported machinery.

For example: Total Project cost is Rs. 1 Cr, out of which imported machinery is of Rs. 50 lakhs and locally procured machinery / land / building cost is of Rs. 50 lakhs. After one year of moratorium period, EMI amount is adjusted toward the locally procured capital asset and thus importer will be able to take buyers credit on imported amount.

Cash outflow

  • First 3 years: Interest and LOU charges
  • After 1 year: Monthly EMI amount of Rs. 100
  • After 3 years: EMI of Rs. 100 every month.

B. Import as a percentage of Total Project Cost : 100%

After completion of 1 year of moratorium period, equivalent of 6 months EMI is reduced and fresh buyers credit is taken for remaining amount.

For Example: Say initially buyers credit was taken for $100000 and next month EMI amount works out to $10000 equivalent, fresh buyers credit  is availed for balance $90000.

Cash outflow

  • First 3 years: Interest and LOU charges
  • After 1 years: Month EMI amount of Rs. 100
  • After 3 years: EMI of Rs. 100 every month.

Reference

Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016

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