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Buyer’s credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the letter of Comfort (a type of a Bank Guarantee) issued by the Importers Bank.
Buyers credit helps local importers access to cheaper foreign funds on LIBOR rates (London Inter Bank Offered Rates). The duration of Buyer's credit may vary from country to country, as per the local regulations. For example in India, Buyers credit can be availed for 1 year in case the Import is for trade-able goods (Raw Materials) and for 3 years if the Import is for Capital Goods (Machinery). Every six months the interest on Buyers credit may get reset.Benefits of Buyer's Credit to Importer
- The exporter gets paid on due date; whereas importer gets extension for making an import payment
- The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail finance.
- The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
- The importer has the option to hedge the currency at the time of availing buyers credit to cover its business from currency fluctuations.
- The currency of imports can be different from the funding currency, which enables importers to take a favorable view of a particular currency.
- The customer will import the goods either under LC, DP / DA or open account
- The customer requests the Buyer's Credit Arranger before the due date of the import payment to avail buyers credit.
- Arranger will then request overseas banks for buyers credit offer letter in the name of the importer. Best rate is quoted to importer.
- Importer’s Bank sends SWIFT (MT799) to overseas bank on the basis of the offer letter by blocking Non Fund Based limit (FLC Limit) of Importer
- Overseas Bank to fund Importers Bank’s nostro account for the requested amount
- Importers bank then makes the bill payment (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 overseas bank recovers the principal and interest amount from the importer’s bank.
- Interest cost: This is charged by overseas bank as a financing cost
- Letter of Comfort / Undertaking: Your existing bank would charges this cost for issuing letter of comfort / Undertaking
- Forward Booking Cost / Hedging Cost (Optional)
- Arrangement fee: Charged by person who is arranging buyer's credit for the company.
- Currency Risk Premium: Depending on the risk perceived on the transaction.
- Other charges: A2 payment on maturity, For 15CA and 15CB on maturity (where WHT is applicable), Intermediary bank charges
- WHT (Withholding Tax): The customer may have to pay WHT on the interest amount remitted overseas to the local tax authorities depending on local tax regulations. In case of India, the WHT is not applicable where funds are arranged from offshore offices of Indian banks.
We want the below details for arranging the quote.
- 1. Importer Name
- 2. Importer Bank and Branch
- 3. Exporter Name and country
- 4. Exporter Bank and Branch
- 5. Amount of the Transaction
- 6. LC Details
- 7. Date due for payment
- 8. Buyers credit required for : 90 / 120 / 180 days
Banks can provide buyer’s credit up to USD 2M per import transactions for a maximum maturity period of 1 year from date of shipment in case the type of goods imported are Raw Materials. Incase of import of capital goods banks can approve buyer’s credits up to USD 20M per transaction with a maturity period of up to 3 years. No roll over beyond this period is permitted.
RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorized dealers 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. Credit is to be extended for a period of less than three years; amount of credit should not exceed $20 million, per import transaction; the `all-in-cost' per annum, payable for the credit is not to exceed LIBOR + 50 basis points for credit up to one year, and LIBOR + 125 basis points for credits for periods beyond one year but less than three years, for the currency of credit.
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. Each credit has to be given `a unique identification number' by authorized dealers and the number so allotted should be quoted in all references. The International Banking Division of the authorized dealer is required to furnish the details of approvals granted by all its branches, during the month, in Form ECB-ST to the RBI, so as to reach not later than 5th of the following month. (Circular AP (DIR Series) No 24 dated September 27, 2002.
As per RBI Master circular on ECB and Trade Finance 2010, the all in cost ceiling for interest is now 6 month L + 200bps for buyer's credit arrange for tenure up to 3 years. All cost ceiling includes arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.