Buyer's Credit

Buyer’s credit is facility available for Indian importers, to borrow in foreign currency against their import liability. Import can be against documents or LC with at sight or usance based payment terms. Same can be availed for maximum period up to 360 days in case of Raw Material and 3 years in case of capital goods from bill of lading date. The lender can be foreign bank or foreign branches of Indian bank, which agrees to lend at Libor based interest rate based on Letter of Undertaking (LOU) or Letter of Comfort (LOC) provided by Importer’s Bank. In LOC/LOU, the importer’s bank will undertake to repay the loan on maturity with interest to lending bank

Advantages of Buyer’s Credit

Importers get sufficient time for payment so their cash flow is not affected. Exporter gets payment on due date.

In adverse market movement can buy time by taking buyer’s credit, and wait for favourable currency rate to hedge the same.

The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.

Advantages

The importer can use this financing for any form of trade viz. open account, collections, or LCs.

Since exporter is getting early payment, Importer can negotiate terms with him.

The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.

Process Flow

Buyer's Credit
Decide to take Buyer's Credit

Once import has been done, the Indian importer may decide to avail buyer’s credit facility before the due date of LC/ DA/ DP bills.

Send Query
Send Query to FinByz

The importer before the due date of the bill or LC, request FinByz Consulting to avail buyer’s Credit, specifying currency, amount and tenor of borrowing required.

Quote Letter
Get Quote Letter from Funding Bank

Based on confirmation on tentative quote from customer, FinByz Consulting will arrange the quote letter at lowest possible interest rate from overseas bank/branches (Funding bank).

Request your Banker
Request your Banker for LOU

The importer will give this quote letter to his Indian banker requesting them for providing guarantee called Letter of Undertaking or Letter of Comfort (LOU/LOC) of his credit worthiness to funding bank.

Bank Sends LOU
Your Bank Sends LOU

Generally 1/2 day/s before the due date of bill/LC importer’s bank will send Letter of Undertaking(LOU) to funding bank through swift message.

Funding Done
Funding Done!

Based on the undertaking of repayment given by the importer’s bank, the overseas bank will fund the importer’s account on the date mentioned in LOU (Which will be due date of bill/LC), and send the importer’s bank interest advise specifying maturity date of buyer’s credit as per terms mentioned in quote letter and with interest amount that need to be paid by importer.

Payment to Supplier
Payment to Supplier

This fund will be utilized by importer’s bank to make import payment. (Generally the currency of borrowing is same as invoice currency so there is no need of currency conversion on this date)

Repayment
Repayment

On maturity date the importer’s bank will recover the buyer’s credit amount with interest from importer and remit it to funding bank.

Costing

Interest Cost

Interest Cost

Cost to be paid to funding

Generally quoted as Libor + Spread. Eg. 6M Liobr + 120bps. Here if 6 month libor is 0.70% than total interest cost going to be 0.70% + 1.20% = 1.90% p.a.

financial risk

LOU Charges

Charges levied by importer's bank

These guarantee charges depend upon credit worthiness and are highly negotiable. These charges mostly vary between 0.1% to 3% p.a.

financial risk

Hedging Cost

Filter out the noise to get the information which matters.

As USD is trading at premium the same should be considered as additional cost. Its market quoted and has been ranging between 5-7% p.a.

RBI Regulations

RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorized dealers (Banks) 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. There has been some revisions in interest rate ceiling for the buyer’s credit transactions, according to latest guidelines criteria for availing buyer’s credit revised as below.

Amount of credit should not exceed $20 million, per import transaction; the `all-in-cost’ per annum. 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 .
Maximum allowed tenor for non-capital goods is 1 year from the date of shipment and in case of Capital goods the credit can be taken for 3 years from the date of shipment.
Maximum all in cost interest for any such credit should not exceed 6M LIBOR + 350bps. All cost ceiling includes arranger fee, upfront fee, management fee, handling and processing charges, out-of-pocket and legal expenses, if any.

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Mukesh Variyani

About the Author: Mukesh Variyani

A result oriented professional with of experience in Forex Risk Management and Debt Syndication. Having insights of both Corporate and Banking side of Treasury management I help corporates to optimise the strategies of financial risk management and debt syndication through FinByz Consulting.