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Buyers Credit

What is Buyers Credit?

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 benefits of buyers credit for the importer is as follows:

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.

Buyers Credit Process flow:


1. Importer imports the goods either under DC / LC, DA / DP or Direct Documents.
2. Importer requests the Buyers Credit Consultant before the due date of the bill to avail buyers
credit.
3. Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
4. If pricing is acceptable to importer, overseas bank issues offer letter in the name of the
Importer.
5. Importer approaches his existing bank to get letter of undertaking / comfort (LOU / LOC) issued
in favour of overseas bank via swift.
6. On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will either funds
existing banks Nostro account or pays the suppliers bank directly (using only MT202 payment
mode).
7. 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)
8. On due date existing bank to recover the principal and Interest amount from the importer and
remit the same to Overseas Bank on due date.

Cost Involved:

The cost involved in buyers credit is as follows:

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.

Documents at the time of taking Fresh / Rollover of Buyers Credit

A1 Form (Principal amount)


ECB Form
Offer Letter from overseas bank, Letter of Undertaking format & Swift Address
Import Documents & Bill of Entry (In Case of Direct Documents)
Request Letter and along with it authority to debit charges

Documents at the time of Repayment of Buyers Credit

A2 Form (for Interest payment)


Form 15CA and Form 15CB (Incase of Foreign Bank)

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 Amount Per transaction : $20 Million

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

Upto 1 year : 6 Month Libor + 350 bps


Upto 5 years: 6 Month Libor + 350 bps

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

Buyers Credit Meaning & Process


TOPICS COVERED

What is a Buyers Credit


Why Buyers Credit as against normal INR denominated working capital limits
Maximum tenure of a Buyers Credit
Terminologies in a Buyers Credit
Benefits to importer availing a Buyers Credit
Steps Involved in a Buyers Credit (Buyers Credit Process)
Costs Involved in a Buyers Credit
Restriction on quantum of Buyers Credit
All in cost Ceiling of a Buyers Credit
Probable De-merits of a Buyers Credit(Situational)

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.

As per Wiki answers , A financial arrangement in which a bank or financial institution, or an


export credit agency in the exporting country, extends a loan directly to a foreign buyer or to a
bank in the importing country to pay for the purchase of goods and services from the exporting
country also known as financial credit. This term does not refer to credit extended directly from
the buyer to the seller (for example, through advance payment for goods and services). The
Practical example is that foreign Bank makes payment to exporter based on either Letter of
Undertaking from the Importer bank or based on their risk on Importer. Letter of Undertaking is
simply confirmation by a bank here in importer country to pay to exporter bank thus exporter
bank risk get reduced. The Letter of undertaking is issued by Importer bank on the basis of risk
on Importer. Simply, Importer Bank takes risk on Importer, This bank sends LOU to exporter
bank which in turn takes risk on Importer bank and makes payment. On final day Importer bank
recover money from importer and makes payment to exporter bank. This all exercise is done to
exploit existence of interest rate arbitrage.
Why Buyers credit as against normal INR denominated working capital limits: Buyers
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 a Buyers 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 Buyers Credit for the
maximum tenure of 3 years and a revenue goods importer can avail a Buyers 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.(Click here for the circular)
Terminologies in a Buyers Credit: The Buyers Credit is quoted in L+Spread format where L
is London Inter-Bank Offer Rate commonly known as LIBOR and Spread is interest cost over
and above the LIBOR cost.
Benefits to importer availing a Buyers Credit:

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.

Steps Involved in a Buyers Credit (Buyers Credit Process) :

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.

Costs Involved in a Buyers Credit:


Part 1: Mandatory Costs

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)

Part 2 : Optional Costs

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

Restriction on quantum of Buyers Credit:


AD banks are permitted to approve trade credits for imports into India up to USD 20 million per
import transaction for imports permissible under the current Foreign Trade Policy of the DGFT
with a maturity period up to one year (from the date of shipment). For import of capital goods as
classified by DGFT, AD banks may approve trade credits up to USD 20 million per import
transaction with a maturity period of more than one year and less than three years (from the date
of shipment). No roll-over/extension will be permitted beyond the permissible period.(Click here
for the RBI Circular)
All in cost Ceiling of a Buyers Credit:
All in cost of the Buyers Credit is fixed at 350 bps over and above the respective LIBOR. The
all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing
charges, out of pocket and legal expenses, if any. The existing all-in-cost ceiling is applicable
upto September 30, 2012 and would be subject to review thereafter.(Click here for the RBI
Circular)
Probable De-merits of a Buyers Credit (Situational):

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

Suppliers Credit Explained


TOPICS COVERED

What is a Suppliers credit


Why Suppliers credit as against normal INR denominated working capital limits
Maximum Tenure of Suppliers Credit
Terminologies in a Suppliers Credit
Benefits to importer availing a Suppliers Credit
Steps Involved in a Suppliers Credit
Costs Involved in a Suppliers Credit
Restriction on quantum of Suppliers Credit
All in cost Ceiling of a Suppliers Credit

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.

Benefits to importer availing a Suppliers Credit:

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

Steps Involved in a Suppliers 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

Costs Involved in a Suppliers Credit:


Part 1: Mandatory Costs

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

Part 2 : Optional Costs

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

Restriction on quantum of Suppliers Credit:


AD banks are permitted to approve trade credits for imports into India up to USD 20 million per
import transaction for imports permissible under the current Foreign Trade Policy of the DGFT
with a maturity period up to one year (from the date of shipment). For import of capital goods as
classified by DGFT, AD banks may approve trade credits up to USD 20 million per import
transaction with a maturity period of more than one year and less than three years (from the date
of shipment). No roll-over/extension will be permitted beyond the permissible period.
All in cost Ceiling of a Suppliers Credit:
All in cost of the Suppliers Credit is fixed at 350 bps over and above the respective LIBOR. The
all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing
charges, out of pocket and legal expenses, if any. The existing all-in-cost ceiling is applicable
upto September 30, 2012 and would be subject to review thereafter.

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