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MECKLAI INTERNATIONAL FINANCE

1.STAND BY LETTER OF CREDIT (SBLC)


&
2.ADVANCE PERFORMANCE
GUARANTEE(APG)/EXPORT PERFORMANCE BANK
GUARANTEE(EPBG)
1.STAND BY LETTER OF CREDIT(SBLC)

SBLC is similar to Bank Guarantee issued by Indian bankers of parent company


infavoring subsidiary for offshore day to day working capital. Foreign/offshore banks
finances against the SBLC of Indian banks.

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

Goods exported directly


Subsidiary to Parent Co. in India
where as documents will
Offshore Bank routed from Singapore
Subsidiary

Shipping Docs
SBLC/Bank
Guarantee

Indian Bank

Parent Company
SBLC Procedure

 Indian banks issues SBLC in favoring Subsidiary for working capital


purpose.

 Based on this SBLC/Guarantee offshore bank finances to the subsidiary.

 Subsidiary buys goods on behalf of parent company

 Goods will be exported to india directly from seller

 Documents will be routed through subsidiary.

 SBLC again rolled over and it continues.


Overseas Investment

Overseas Investment - Guarantee on behalf of Wholly Owned Subsidiaries (WOSs)/Joint Ventures


(JVs) abroad Overseas Investment should be within the present ceiling of 400% of the net worth of the
Indian Party as on the date of the last audited balance sheet.
Indian Party can offer any form of guarantee provided that: • All financial commitments including all
forms of guarantees are within the overall ceiling of 400% of net worth prescribed for overseas
investment.
• No guarantee should be 'open ended' i.e. the amount and period of the guarantee should be
specified upfront. In the case of performance guarantee, time specified for the completion of the
contract shall be the validity period of the related performance guarantee;
• In case the ceiling of 400% of net worth exceeds due to invocation of guarantee, the Indian Party
shall seek the prior approval of the Reserve Bank before remitting funds from India, on account for such
invocation.
• Issuance of corporate guarantees (including performance guarantee) is required to be reported to
RBI, etc.
2. ADVANCE PAYMENT AGAINST LONG TERM EXPORTS
(MAXIMUM UP TO 10 YEARS)

It is also called Export Performance Bank Guarantee(EPBG)/Export


Securitization/Export Credit

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

Such advances should be adjusted through future exports


Firm Irrevocable supply orders and contracts should be in place
Double financing for working capital for execution of export orders should be
avoided.
BG/SBLC may be issued for a term not exceeding two years at a time and
further rollover of not more than two years at a time.
BG/SBLC issued by from India in favour of overseas buyer shouldn’t be
discounted by the overseas branch /subsidiary of bank in India.
BG/SBLC should cover only the advance on reducing balance basis.
AD bank should ensure compliance with AML/KYC Guidelines and rigorously
evaluate like credit proposal.
Interest shouldn’t exceed Libor+200 bps pa
Ultimate Buyers

Export realizations
Subsidiary/any offshore buyer adjusted against
advance

Advance Payment Trade Advance


Guarantee

Exporter
APG/EPBG Procedure

Subsidiary / offshore buyer enters into long-term supply/offtake agreement with


exporter.
Exporter issues BG/SBLC/Advance Payment Guarantee/Export performance bank
guarantee from his banker infavor of subsidiary/offshore buyer.
Buyer arranges advance to the exporter (foreign bank finances against the
guarantee)
All export realizations will go into foreign bank and adjusted against advance

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.
THANK YOU

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