Buyers credit Process

1. Importer imports the goods either under DC / LC, DA / DP or Direct Documents.
2. Importer requests the Buyer's Credit Consultant before the due date of the bill to avail buyers credit quote.
3. Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
4. If pricing is acceptable to importer, overseas bank issue's 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 bank's Nostro account or pays the supplier's 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.

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, which enables importers to take a favourable view of a particular currency.

Cost Involved -

• Interest is charged by overseas bank. 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%. LIBOR varies depending on tenure. For example as on today for 3 month LIBOR is 0.62430% and 6 Month LIBOR is 0.85775%.
• 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 buyer's credit for importer.
• Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges etc.
• Withholding Tax(WHT): For funds arranged from Foreign Bank, Importer has to pay WHT on the interest amount.

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

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

Documents at the time of Repayment of Buyers Credit -

• A2 Form (for Interest payment)
• Form 15CA and Form 15CB (Incase of Foreign Bank)

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 For Supplier
• Realize at-sight payment
• Avoid the risk of importer's credit by making settlement with LC.

Process Flow of Transaction -

1. With transaction details importer approaches arranger to get suppliers credit for the transaction
2. Arranger get an offer from overseas bank on the transaction.
3. Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses.
4. Suppliers ships the goods and submits documents at his bank counters.
5. Suppliers Bank sends the documents to Supplier's Credit Bank.
6. Supplier's Credit Bank post checking documents for discrepancies sends the document to importers bank for acceptance.
7. Importer accept documents. Importer's Bank provides acceptance to Supplier's Credit Bank LC guaranteeing payment on due date.
8. Supplier's Credit Bank based on acceptance, discounts the bill and makes payment to Supplier.
9. On maturity, Importer makes the payment to his bank and Importer's bank makes payment to Supplier's Credit Bank.

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
• Reimbursement Charges
• Cost for the usance (credit) tenure. (Indian Bank Cost)

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).

Other Factors -

At times foreign bank may insist on adding confirmation which would result into additional cost.

RBI Regulations -

Over the years there has been many changes in norms. Summary of current rules are given below and for further details please refer article "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

Reference -

• Master Direction - External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016.
• RBI Master Direction - Import of Goods and Services: Dated: 31-03-2016.