Buyers’s Credit and Suppliers Credit

Dr Navneet Gera

1 Dr Navneet Gera
Trade Credit for Import
 Trade credits (TC)refers to credits extended for imports
directly by the overseas supplier, bank and financial
institution for maturity of less than 3 years.

 Depending on the source of finance, such trade credits will

include suppliers credit or buyers credit.

 If time duration is more than 3 years the same shall be

covered under ECB (External commercial borrowings)

2 Dr Navneet Gera
Amount
 AD may approve trade credits for imports into India upto
USD 20 million per import transaction for import of all
items (permissible under the FTP) with a maturity period
(from the date of shipment)upto one year.

 Ads may approve trade credits upto USD 20 million per

import transaction with a maturity period of more than one
year and less than 3 years.

 If more than 20 Mn USD than permission of RBI is

required.

3 Dr Navneet Gera
 Buyers’s Credit

4 Dr Navneet Gera
 Buyers Credit
 Buyer’s Credit refers to loans
for payment of imports into
India arranged on behalf of the
importer through an overseas
bank. The offshore branch
credits the nostro of the bank
in India and the Indian bank
uses the funds and makes the
payment to the exporter’ bank
as an import bill payment on
due date. The importer reflects
the buyers’ credit as a loan on
the balance sheet.

NOTE- Nostro Account is an account of an Indian Bank with a Bank Outside India In foreign Currency. The
counter Part of It is Vostro Account, which means the account
Dr that the Gera
Navneet foreign bank has with Indian bank.
Benefits of Buyer’s 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,
6
which enables importers to take a
Dr Navneet Gera
favorable view of a particular currency .
Buyers Credit

7 Dr Navneet Gera
Buyers Credit

8 Dr Navneet Gera
 Buyers Credit Process flow
 Indian customer imports the goods either under DC / LC, DA / DP or Direct
Documents.
 Indian customer requests the Buyer’s Credit Consultant before the due date of the
bill to avail buyers credit finance.
 Consultant approaches overseas bank for indicative pricing, which is further quoted
to Importer.
 If pricing is acceptable to importer, overseas bank issue’s offer letter in the name of
the Importer.
 Importer approaches his existing bank to get letter of undertaking / comfort (LOU
/ LOC) issued in favour of overseas bank via swift. A Letter of Comfort is a letter
issued to lending institution by a parent company acknowledging the approval of a
subsidiary company’s attempt for financing.It
doesn’t guarantee the loans approval for the subsidiary company.
 On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will
either funds existing bank’s Nostro account or pays the supplier’s bank directly
 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).
 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.
Dr Navneet Gera 9
 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
0.33561% and 6 Month LIBOR is 0.50161%

LIBOR

The London Interbank Offered Rate is the average interest rate estimated by
leading banks in London that they would be charged if borrowing from other banks.
Libor rates are calculated for ten currencies and 15 borrowing periods and are
published daily at 11:30 am. LIBOR initially fixed rates for three currencies. (London
time) by Thomson Reuters. Australian dollar (AUD), Canadian dollar (CAD), Swiss
franc, Danish krone (DKK), Euro (EUR), British pound sterling (GBP), Japanese yen
(JPY), New Zealand dollar (NZD), Swedish krona (SEK), U.S. dollar (USD).Current
LIBOR Rate is
10
Dr Navneet Gera
 Letter of Comfort / Undertaking: Importers
existing bank would charge this cost for issuing letter of
comfort / Undertaking
 Arrangement fee: Charged by Buyers Credit Agents /
Brokers how is arranging buyer’s credit for you.


11 Dr Navneet Gera
Suppliers Credit
 Supplier’s Credit relates to credit for imports into India
extended by the overseas suppliers or financial
institutions outside India.
 Usance Bills under Letter of Credit (LC) issued by Indian
bank branches on behalf of their importers are
discounted by Indian bank overseas branches or Foreign
bank. Paying your suppliers at sight against Usance bills
under letter of credits.

12 Dr Navneet Gera
Why Required ?

 Suppliers would ask for sight payment where as you want

credit on the transaction.
 At times, in capital goods, banks would insist on using
term loan instead of buyer’s credit. By this way you can
avail cheap LIBOR rate funds and your supplier would
also not mind as he is getting funds at sight.

13 Dr Navneet Gera
Benefits / Advantages For Importer

 Availability of cheaper funds for import of raw materials

and capital goods
 Ease short-term fund pressure as able to get credit
 Ability to negotiate better price with suppliers
 Able to meet the Suppliers requirement of payment at
sight

14 Dr Navneet Gera
Benefits / Advantages For Supplier
 Realize at-sight payment
 Avoid the risk of importer’s credit by making settlement
with LC


15 Dr Navneet Gera
Process Flow of Transaction

 With transaction details importer approaches arranger to

get suppliers credit for the transaction
 Arranger get an offer from overseas bank on the
transaction
 Importer confirms on pricing to overseas bank and gets
LC issued from his bank, restricted to overseas bank
counters with other required clauses
 Suppliers ships the goods and submits documents at his
bank counters


16 Dr Navneet Gera
Process Flow of Transaction
 Suppliers Bank sends the documents to Supplier’s Credit Bank.
 Supplier’s Credit Bank post checking documents
for discrepancies sends the document to importers bank for
acceptance
 Importer accept documents. Importer’s Bank provides
acceptance to Supplier’s Credit Bank LC guaranteeing payment
on due date.
 Supplier’s Credit Bank based on acceptance, discounts the bill
and makes payment to Supplier.
 On maturity, Importer makes the payment to his bank and
Importer’s bank makes payment to Supplier’s Credit Bank

17 Dr Navneet Gera
Cost Involved (may vary bank to bank)

 Foreign bank interest cost

 Foreign Bank LC Confirmation Cost (Case to Case basis)
 LC advising and or Amendment cost
 Negotiation cost (normally in range of 0.10%)
 Postage and Swift Charges
 Reimbursement Charges
 Cost for the usance (credit) tenure. (Indian Bank Cost)

18 Dr Navneet Gera
Requirement

 Import transaction under LC

 Incoterms : FOB/CIF/C&F
 Arrangement has to be done before LC gets opened.
Incase of LC already opened, relevant amendment has to
done.
 LC to be restricted to suppliers credit providing bank
under 41D clause of LC
 Under Payment Term: 90 days Usance payable at Sight
(mention tenure according to tenure and offer received)

19 Dr Navneet Gera
RBI Trade Credit (Buyers Credit /
Suppliers Credit) Circular Extract“
 “
 Maximum Amount Per transaction : $20 Million
 Above $20 Million, RBI Approval required.
 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 or operating Cycle whichever is less.
 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
 All-in-cost Ceilings: 6 Month Libor + 350 bps

20 Dr Navneet Gera
 THANK YOU

21