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Buyers Credit refers to loans for payment of imports into India arranged by the importer from a
bank or financial institutions outside India. Based on letter of undertaking of Importers bank,
Overseas bank credits the nostro of the importers bank which in turn uses the funds to make
payment to the Suppliers bank against the import bill.
Benefits of Buyers Credit:
The exporter gets paid on due date; whereas importer gets extended date for making an import
payment as per the cash flows
The importer can deal with exporter on sight basis, negotiate a better discount and use the
buyers credit route to avail financing.
The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of
the customer.
The importer can use this financing for any form of trade viz. open account, collections, or LCs.
The currency of imports can be different from the funding currency, which enables importers to
take a favourable view of a particular currency.
Cost Involved:
Interest cost: This is charged by overseas bank as a financing cost. Normally it is quoted as say
3M L + 350 bps, where 3M is 3 Month, L is LIBOR, & bps is Basis Points (A unit that is equal to
1/100th of 1%). To put is simply: 3M L + 3.50%. One should also check on what tenure LIBOR is
used, as depending on tenure LIBOR will change. For example as on day, 3 month LIBOR is
0.23560% and 6 Month LIBOR is 0.33350%
Letter of Comfort / Undertaking: Importers Bank will charge this cost for issuing letter of
comfort / Undertaking
Forward / Hedging Cost: In few banks it is mandatory for importers to book for forwards and
few leave the option of deciding on importers.
Arrangement fee: Charged by Buyers Credit Agents / Brokers how is arranging buyers credit for
importer.
Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank
charges etc.
Withholding Tax(WHT): When funds are arranged from Foreign Bank, Importer has to pay WHT
on the interest amount remitted to the Indian tax authorities.
Regulatory Framework:
RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management
Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for
short-term credit for financing by way of either suppliers credit or buyers credit of import
of goods into India, based on uniform criteria.
Over the years there has been changes in norms. Current norm as per RBI Master
Circular on External Commercial Borrowing (ECB) and Trade Finance 2014 are
A. Amount and Maturity
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
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.
Reference
RBI Master Circular on External Commercial Borrowing (ECB) and Trade Credit: Dated: 01-072014
RBI Master Circular on Import of Goods and Services: Dated: 01-07-2014
What is a Buyers Credit: In Simplest terms, A Buyers Credit is a foreign fund made available
to an importer by a Bank to meet the payment of the importer to his exporter.
As per Wikipedia , Buyers credit is the credit availed by an importer (buyer) from overseas
lenders, i.e. banks and financial institutions for payment of his imports on due date. The overseas
banks usually lend the importer (buyer) based on the letter of credit (a bank guarantee) issued by
the importers bank. Importers bank or Buyers Credit Consultant or importer arranges Buyers
credit from international branches of a domestic bank or international banks in foreign countries.
For this service, importers bank or Buyers credit consultant charges a fee called an arrangement
fee.
The importer can avail cheaper funds compared to INR denominated term loan or cash credit
Limits
Importer can make the payment at sight to the exporter and command a better price in terms of
cash discount
Importer can take a view on the currency rates & on Interest rates by keeping the retirement
(repayment) of the Buyers Credit unhedged. (best when the client is of the view that INR will
appreciate against the funding currency and importer will be able to buy funding currency
cheaper)
Importer can avail an extended period of credit as against the tenure of a letter of credit
Importer can roll over the liability of the Buyers Credit to gain extended period of credit
Any form of trade is available to the importer viz. open account, collection or LCs.
Importer imports the goods using either LC, collections or open account
Importer approaches the LOU issuing bank or the Buyers Credit arranger to arrange for a Buyers
Credit quote
LOU issuing Bank or the arranger of the quote arranges for a Buyers Credit offer letter at the
best possible rates from the funding bank
LOU issuing bank issues the LOU in the favour of the funding bank
Funding bank on receipt of the LOU, credits the NOSTRO account of LOU issuing bank with the
funds
LOU issuing bank makes the payment to the exporter and thus settles the liability of the
importer towards the exporter
On the due date, the importer either requests for the rollover of the buyers credit or recovers
the funds from the importer and retires the liability of the importer towards the bank against
the LOU.
LIBOR : as per the existing rate at the time of funding charged by the funding bank
Spread over LIBOR : Interest charged over and above the LIBOR by the funding bank to lend the
funds to the importer
LOU Issuance charges : charged by the working capital banker for issuing the LOU (Letter of
Undertaking / Letter of comfort / Bank Guarantee)
Withholding tax(WHT) : Withholding tax is applicable when the funding bank is a foreign bank
branch in a country not having a DTAA agreement with Government of India. In effect, all the
branches of Indian banks are excluded from WHT
Hedging Charges: In case when the importer wants to freeze the liability of the Buyers Credit in
INR, he can do so by booking a forward contract / option / Swap on the same and the forward
premium / option cost / swap Charges to be added to the total cost of availing Buyers Credit
If the Importer decides to keep the repayment liability unhedged and INR has depreciated
against the funding currency on the repayment date, the Importer may incur a currency Loss
If the importer changes the banking arrangement and a LOU has to be changed, it creates
operational problems
If the Importer wants to retire the liability before the maturity, it may create operational hazard
and the LOU issuing bank might not allow the same
If the importer has availed the buyers credit with interest reset and the interest rate increases
and the client has not hedged the same, it may result into increased interest cost
What is a Suppliers Credit: As per Wiki answers, Suppliers Credit is A financing arrangement
under which an exporter extends credit to a foreign importer to finance his purchase. Usually the
importer pays a portion of the contract value in cash and issues a Promissory note or accepts a
draft as evidence of his obligation to pay the balance over a period of time. The exporter thus
accepts a deferred payment from the importer, and may be able to obtain cash payment by
discounting or selling the draft or promissory notes created with his bank.
Why Suppliers credit as against normal INR denominated working capital limits: Suppliers
credit helps local importers gain access to cheaper foreign funds close to LIBOR rates as against
local sources of funding which are costly compared to LIBOR rates.
Maximum Tenure of Suppliers Credit: As per the circular on trade guidelines published time
to time by the Reserve Bank of India, a capital goods importer can avail a Suppliers Credit for
the maximum tenure of 3 years and a revenue goods importer can avail a Suppliers Credit for the
maximum tenure of 360 days. However, where the client has used LC, the total tenure cannot
exceed 3 years or 360 days respectively.
Terminologies in a Suppliers Credit: The Suppliers Credit is quoted in L+Spread format
where L is London InterBank Offer Rate commonly known as LIBOR and Spread is interest cost
over and above the Libor cost.
The importer can avail cheaper funds compared to INR denominated term loan or cash credit
Limits
Importer can make the payment at sight to the exporter and command a better price in terms of
cash discount
Importer can take a view on the currency rates & on Interest rates by keeping the retirement
(repayment) of the Buyers Credit unhedged. (best when the client is of the view that INR will
appreciate against the funding currency and importer will be able to buy funding currency
cheaper)
Importer can roll over the liability of the Suppliers credit to gain extended period of credit
Importer approaches the bank or the suppliers arranger with the transaction details
Bank or arranger arranges for a Suppliers credit quote
Importer on agreeing upon the quote, requests a formal offer letter
Importers bank opens an LC according to the terms of the funding bank
On opening the LC in the favour of the exporter, the exporter ships the goods to the importer
and submits the documents to their banker
Exporters bank in turn submits the documents to the funding bank
Funding bank post checking the documents, sends the same to the importers bank for
acceptance
Importers bank advices the documents to the importer for verification
Post verification, importer gives the consent to the bank and based on the consent, the
importers bank accepts the documents and provides confirmation to the funding bank for the
payment on the due date
On receipt of the acceptance, the funding bank discounts the Suppliers Credit and credits the
funds to the exporters bank
on due date, the importer makes the payment to his bank who in turn makes the payment to
the funding bank
LIBOR : as per the existing rate at the time of funding charged by the funding bank
Spread over LIBOR : Interest charged over and above the LIBOR by the funding bank to lend the
funds to the importer
LC Opening Charges: charged by the working capital banker for opening the LC
Hedging Charges: In case when the importer wants to freeze the liability of the Supplier Credit in
INR, he can do so by booking a forward contract / option on the same and the forward premium
/ option cost to be added to the total cost of availing Suppliers Credit
Funding Bank LC Confirmation Cost
LC Advising and/or amendment cost
Negotiation Cost
Postage and Swift Charges
Reimbursement Charges