Buyer’s Credit version : 2013

Many Indian companies which require import of materials for their production/manufacturing activities have to provide Letter of Credit to the supplier.  On expiry of LC, the importer avails Buyer’s Credit (BC) which in simplest words is a type of credit/loan made available to the importer by a bank to meet the payment of the importer to his exporter.

 

In case BC is not available, the importer will need to utilize its INR line of fund based working capital limit for the import (non capital goods) payments or a term loan for capital goods import payments. Generally, the cost of such INR funding is much higher than the cost of BC. Therefore, the importers prefer to use BC as long as such sanctioned limit is available from its bankers i.e. we can say that the BC is kind of exercise to exploit existence of interest rate arbitrage. This helps importers in reducing the finance cost. Generally, the banks in India, while assessing the fund based Working Capital (WC) needs of a borrower, also assess his needs for Letter of Credit and Buyer’s Credit based on his projected import requirements. Based on such assessment, LC/BC lines are sanctioned to the borrower. Further, sometimes when the foreign currency (FC) funds are not available with the WC banker or the rate of interest charged by WC banker on FC funds is higher than the rates offered by other banks in the market, in that situation, instead of availing BC from its WC bank (through overseas branch of the bank), the borrower avails Letter of Undertaking(LuT) (a bank guarantee) from its WC bank issued in favour of a overseas funding bank (willing to offer BC at lower rate based on the security of LuT issued by the WC bank of the borrower). Importer’s bank or importer or a BC consultant arranges BC from international branches of a domestic bank or international banks in foreign countries. For this service, importer’s bank or BC consultant charges a fee called an Arrangement Fee.

 

In regulatory terms Buyers’ Credit is defined as loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. Authorized Dealer Banks are permitted to approve trade credits for imports into India up to USD 20 million per import  (non capital goods) transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year i.e. 360 days  (from the date of shipment). Recently, in July 2013 RBI has issued modification which prohibits banks to extend Buyers Credit beyond the Operating Cycle and Trade Transaction.

 

For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years (from the date of shipment).  For Infrastructure sector, the maturity period is allowed upto 5 years for import of capital goods subject to minimum trade credit period of 15 months from the beginning and not in nature of short term roll-over.

 

No roll-over/extension will be permitted beyond the permissible period.

AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, platinum, Rodium, silver etc.) and up to three years for import of capital goods. For Infrastructure companies as mentioned above, the banks are not permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) beyond a period of three years.

 

RBI has prescribed the maximum All-in-Cost ceiling (includes arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any) for the Buyer’s Credit. The present ceiling rate is Six Months Libor plus 350 basis points and is subject to review from time to time.