Professional Documents
Culture Documents
Most Indian companies with imports use buyers’ credit to try and reduce their interest
cost of post-shipment finance. Over the past few years, several large Indian companies
have been extending this to pre-shipment finance (effectively working capital) by using
a Stand-By Letter of Credit (SBLC).
The company opens a SBLC through its bankers favoring the company’s overseas
subsidiary; the Indian parent company uses this facility to raise USD funds in the global
market remitted as a loan to the subsidiary for use as working capital or, in the case of
trading operations, to purchase goods globally and sell them anywhere.
STAND BY LETTER OF CREDIT(SBLC) Contd..
Depending on market conditions, the cost for such a facility for amounts ranging
from $ 1 to $ 10 million for 1 to 2 years works out to about 4 to 5% p.a. (inclusive of
arrangement fees). It generally takes about 3 to 4 weeks for getting an in principle
offer letter against an SBLC, subject to submission of all required documents in timely
fashion.
Domestic bankers generally charge about 0.75-1.25% p.a. for issuing the SBLC,
and it requires a separate SBLC limit, which would be carved out of the company’s
overall bank limits.
Thus, the company’s total cost of USD working capital would work out to about 4.75
to 6.25%.
Sellers/Exporters
Shipping Docs
SBLC/Bank
Guarantee
Indian Bank
Parent Company
SBLC Procedure
As per the latest RBI master circular, exporters allowed to receive long term export
advance up to maximum of 10 years (earlier one year) to be utilized for execution of
long term supply contracts for exports of goods subject to the conditions.
AD bankers allowed the receipt of export advance payment for export of goods
which would take more than one year to manufacture & ship subject to conditions.
The extended duration of loans will enable exporters to access capital to fulfill long
term contractual obligations. This may help turn around many turnkey projects which
were hitherto stuck due to lack of funds
EPBG STRUCTURE
Export realizations
Subsidiary/any offshore buyer adjusted against
advance
Exporter
APG/EPBG Procedure
Note: Only Foreign Banks are allowed to finance against APG/EPBG issued by Indian
banks. Ex: Alok Industries & Essar raised more than $1 bn through EPBG route for
paying off their high cost term loan debt.
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