Sort by :

Mechanism of Buyer’s Credit Rollover

Rollover Buyer’s credit is an extension of the tenure on Buyer’s credit availed by importers in India.This enables importers to extend the credit to 1 year for Non-capital goods and up to 5 years on capital goods.However, most of the banks in India restrict the total tenure to 3 years from the date of shipment.The funding for rollover Buyer’s credit is arranged on the basis of the payment guarantee (LoU) issued by importers banks to overseas financial institutions. While availing fresh buyer’s credit, the client has the option of choosing the tenure. It is, however, restrictedto the maximum of working capital gap identified.The client can choose to go for fresh Buyer's credit for the maximum tenure allowed, wherein the importers get an option to choose on LIBOR reset at 3M/6M or 12 M. Likewise, interest settlement will be made depending on the reset chosen by the importer. In this case, the margins are fixed for the tenure of Buyer's credit availed. When can Buyer’s Credit Rollovers happen? ●     To leverage on lowest interest rate and extend the credit to maximum tenure i.e., Operating cycle or 1 year in case of raw material import and 3 years in case of Capital goods imports. ●     Unfavourable Foreign exchange to settle Buyer’s credit on the due date which may influence for rollover ●     Insufficient working capital on the due date. Refer RBI Circular as appended:   https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10023&Mode=0 What is the Process to followed to avail Buyer’s Credit Rollover from the Existing Bank? ●     Importer will approach SaveDesk for availing Rollover quotes at least 2 days in advance from Due date which ensures timely settlement ●     Either before or on the due date, the local bank will issue a ‘Letter of Undertaking’ and make an interest payment of the already existing buyer’s credit. ●     On the required date, the overseas buyer’s credit will approve the rollover of existing buyer’s credit and confirm the local importer’s bank with MT799, which includes the new due date with interest along with the fresh maturity. If you have to opt for a rollover from other banks, one of the predominant reasons could be better pricing. Though it has better pricing, one should also consider other charges like swift charges, intermediary bank charges etc before opting for rollover from another financial institution. What is the Process to be followed to avail Buyer’s Credit Rollover from other financial institutions? ●     Firstly, the importers should get a fresh quote issued by the new buyer’s credit arranging bank. ●     To avoid any delay charges, it is always better to send the ‘Letter of Undertaking’ with a value date at least 1 day prior to the due date of the already existing buyer’s credit. ●     The local banks make the payment along with interest using A2 Form, once the funds are received at the existing buyer’s credit bank. What are the other key factors to consider? 1.    As per the RBI guidelines and norms, buyer’s credit for non-capital goods is not allowed beyond their operating cycle. 2.    The prime factor to consider is the cost factor. Every time you opt for buyer’s credit rollover, LIBOR will keep changing and even the Margin might change. Moreover charges like LOU charges (the nationalised banks can charge a fixed amount as commitment charge and other usance charges, due to which there are chances of increased overall cost) 3.    The bank arranging Buyer’s credit can charge for delayed payment if any, this can be factored at the time of determining the value date for rollover transaction. There are banks that also charge an additional $50 to $100 other than interest cost for the rollover of the existing buyer’s credit.  Important Documents required: 1.    LOU format and Swift address. 2.    Fresh offer letter 3.    Form A2 4.    Form 15CA and Form 15CB (when interest payments are being made to the overseas financial institution) There is nothing as such prescribed by RBI on interest payment in the rollover buyer’s credit amount. Therefore, most of the importers banks that issue LOU do not allow interest payment, but sometimes it can depend on the bank’s internal policies.Keynote: Just remember that, if the buyer’s credit does not get rolled over, it would get converted into term loan resulting in payment of a higher rate of interest to the importer
Mechanism of Buyer’s Credit Rollover
Rated /5 based on 20 customer reviews
Saravana

Saravana Bhaskar

Blog Author

Saravana Bhaskar is the Brain Child behind incubation of White Matter. With over a decade of rich banking experience, he has handled many eminent positions in bank from Global Gateway Coordinator to Portfolio Head -South India. He is catalyst in steering White Matters’ association globally, with his proven abilities of leadership; his vision is to achieve transformational changes at White Matter. Bhaskar is true Car enthusiast, who has an insatiable interest in cars. He is an avid reader, and has ear for Music.

Mechanism of Buyer’s Credit Rollover

Rollover Buyer’s credit is an extension of the tenure on Buyer’s credit availed by importers in India.This enables importers to extend the credit to 1 year for Non-capital goods and up to 5 years on capital goods.However, most of the banks in India restrict the total tenure to 3 years from the date of shipment.The funding for rollover Buyer’s credit is arranged on the basis of the payment guarantee (LoU) issued by importers banks to overseas financial institutions. While availing fresh buyer’s credit, the client has the option of choosing the tenure. It is, however, restrictedto the maximum of working capital gap identified.The client can choose to go for fresh Buyer's credit for the maximum tenure allowed, wherein the importers get an option to choose on LIBOR reset at 3M/6M or 12 M. Likewise, interest settlement will be made depending on the reset chosen by the importer. In this case, the margins are fixed for the tenure of Buyer's credit availed. When can Buyer’s Credit Rollovers happen? ●     To leverage on lowest interest rate and extend the credit to maximum tenure i.e., Operating cycle or 1 year in case of raw material import and 3 years in case of Capital goods imports. ●     Unfavourable Foreign exchange to settle Buyer’s credit on the due date which may influence for rollover ●     Insufficient working capital on the due date. Refer RBI Circular as appended:   https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=10023&Mode=0 What is the Process to followed to avail Buyer’s Credit Rollover from the Existing Bank? ●     Importer will approach SaveDesk for availing Rollover quotes at least 2 days in advance from Due date which ensures timely settlement ●     Either before or on the due date, the local bank will issue a ‘Letter of Undertaking’ and make an interest payment of the already existing buyer’s credit. ●     On the required date, the overseas buyer’s credit will approve the rollover of existing buyer’s credit and confirm the local importer’s bank with MT799, which includes the new due date with interest along with the fresh maturity. If you have to opt for a rollover from other banks, one of the predominant reasons could be better pricing. Though it has better pricing, one should also consider other charges like swift charges, intermediary bank charges etc before opting for rollover from another financial institution. What is the Process to be followed to avail Buyer’s Credit Rollover from other financial institutions? ●     Firstly, the importers should get a fresh quote issued by the new buyer’s credit arranging bank. ●     To avoid any delay charges, it is always better to send the ‘Letter of Undertaking’ with a value date at least 1 day prior to the due date of the already existing buyer’s credit. ●     The local banks make the payment along with interest using A2 Form, once the funds are received at the existing buyer’s credit bank. What are the other key factors to consider? 1.    As per the RBI guidelines and norms, buyer’s credit for non-capital goods is not allowed beyond their operating cycle. 2.    The prime factor to consider is the cost factor. Every time you opt for buyer’s credit rollover, LIBOR will keep changing and even the Margin might change. Moreover charges like LOU charges (the nationalised banks can charge a fixed amount as commitment charge and other usance charges, due to which there are chances of increased overall cost) 3.    The bank arranging Buyer’s credit can charge for delayed payment if any, this can be factored at the time of determining the value date for rollover transaction. There are banks that also charge an additional $50 to $100 other than interest cost for the rollover of the existing buyer’s credit.  Important Documents required: 1.    LOU format and Swift address. 2.    Fresh offer letter 3.    Form A2 4.    Form 15CA and Form 15CB (when interest payments are being made to the overseas financial institution) There is nothing as such prescribed by RBI on interest payment in the rollover buyer’s credit amount. Therefore, most of the importers banks that issue LOU do not allow interest payment, but sometimes it can depend on the bank’s internal policies.Keynote: Just remember that, if the buyer’s credit does not get rolled over, it would get converted into term loan resulting in payment of a higher rate of interest to the importer
Rated /5 based on 20 customer reviews
Mechanism of Buyer’s Credit Rollover

Mechanism of Buyer’s Credit Rollover

Saravana Bhaskar
Rollover Buyer’s credit is an extension of the tenure on Buyer’s credit availed by importers in India.This enables importers to extend the credit to 1 year for Non-capital goods and up to 5 year...
Continue reading

After $32 Billion Bailout the Govt has Planned on Lending Reforms as Bankers Fear New Bad Debt Crisis

The finance ministry officials and the bankers will have a meeting to talk about the lending reforms drafted to prevent bad loan crisis after the $32 billion bailout of state-run banks that has been disclosed by the government recently.After the announcement of capital injection in the previous month, the policymakers and the bankers fear that India would throw all the good cash after bad, and this can be reduced if the lending rules are reinforced and the government reforms need to protect banks from the political pressure."After bailing out the banks with taxpayer money, the government wants to ensure that such a problem doesn't happen again," said a senior finance ministry official having direct knowledge of the matter, who refused to share details.The Finance Minister Arun Jaitley has affirmed that the recapitalisation will not only go along with bank reforms but will also take steps to merge weak banks with stronger rivals. According to bankers, one of the biggest issues is government's reticence in dealing political interference in lending.India is close to $147 billion pile of unpleasant loans backed by powerful and politically provided to businesses which are defaulting on loans. One of the high-profile cases of conspiracy and fraud in relation to loans by the owner of Kingfisher Airlines is one of the best examples."There's a risk of a rise in stressed assets unless bank corporate governance improves," said N. Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a think-tank funded by the finance ministry.A spokesman for the finance ministry mentioned that, there is a bulk of bad loans made by the corporate defaults which is developing stress in loans worth about 4 trillion rupees extended to more than 70 million small enterprises under the Modi’s programme to generate jobs from the last 3 years."We are scared about these risky loans, 50 percent of which may become stressed assets soon," said D. Franco, a manager at State Bank of India's branch in Chennai and general secretary of the All India Bank Officers' Confederation.
Rated /5 based on 20 customer reviews
After $32 Billion Bailout the Govt has Planned on Lending Reforms as Bankers Fear New Bad Debt Crisis

After $32 Billion Bailout the Govt has Planned on Lending Reforms as Bankers Fear New Bad Debt Crisis

Saravana Bhaskar
The finance ministry officials and the bankers will have a meeting to talk about the lending reforms drafted to prevent bad loan crisis after the $32 billion bailout of state-run banks that has been d...
Continue reading

For The Next WTO Meet, India Has Marked Its Red Line

For the coming month’s ministerial meeting of WTO (World Trade Organisation), India has marked its red lines, and has stated that  it is not ready for discussions on setting up a global regime for new issues related to e-commerce until it addresses issues related to public stock holding and resolves earlier disparities in the global trading system.  “We have certain long-term issues which are developmental issues. The Doha Development Round was an important beginning but somehow lost its way. We are not expecting Buenos Aires (ministerial meeting) to be another reinventing of the Doha developmental issues. We don’t want any new issues to be brought in because there is a tendency of some countries to keep discussing new things instead of discussing what’s already on the plate. We want to keep it focused,” commerce and industry minister Suresh Prabhu said in an interview.India has always tried to resist discussions involving issues like e-commerce to investment facilitation. Countries like US, Japan, Canada, the EU and Australia are demanding a global regime for e-commerce as it aids companies such as Amazon set foot in markets like India, China and Brazil easily. Presently, India for example does not allow business-to-consumer (B2C) e-commerce and is prompting companies like Amazon to function in “marketplaces” where there are restrictions on how much a vendor can sell.There is a need for the government to address several basic issues such as labour and gender which WTO does not cover. These are under “non-trade issues” which India has maintained.Rita Teaotia, the commerce secretary, said at a CII event- “Our position has been continuously that we will not refuse to engage (on new issues such as e-commerce). We are ready to engage. Nevertheless, the technical work must happen at the committee level. These issues must be thrashed out and only when they reach a sufficient level of maturity, they can be brought to a (WTO) ministerial. This is clearly our position.”India’s Ambassador to the WTO, JS Deepak mentioned that India without its own national policy on investment facilitation and e-commerce should not be taking commitments in the WTO. Prabhu has informed that at the Buenos Aires meeting, India will make efforts and look for a solution to public stockholding issues as it curbs its capability to support all its farmers. Also, in the most popular and developed countries apart from the Indian farm goods, it will drive for domestic subsidy reduction for agriculture especially in Australia, Canada, the EU and the US. American government’s approach is important as Donald Trump has seen plenty of questions about free trade agreements that the US had signed.
Rated /5 based on 20 customer reviews
For The Next WTO Meet, India Has Marked Its Red Line

For The Next WTO Meet, India Has Marked Its Red Line

Saravana Bhaskar
For the coming month’s ministerial meeting of WTO (World Trade Organisation), India has marked its red lines, and has stated that  it is not ready for discussions on setting up a global regime for ...
Continue reading

Sum And Substance Of ‘Credit Limit’

What Is Credit Limit?The financial institutions set a maximum amount of credit that can be offered to their customers, which is known as the “Credit limit/Cash Credit” in financial terms. A cash credit is a short-term fund loan offered to a company. Usually this forms a part of secured loan and is offered against collateral. Banks check the credit worthiness of client basis past historicals, repayments track record for previous loans & type of business and collateral offered. Once a security for repayment is established, the business houses can draw up to pre-fixed amount mentioned on the Sanction letter.Credit Limit for Customers:If the customers want to avail credit limit, it is essential for them to have a great credit history with periodic higher value payments. This can also act as an absolute form of leverage for the customers. Banks do offer ad-hoc facilities under special request made by customer basis type of business, seasonality and repayment track record, but for all such credit limit amount, he might have to face consequences like paying higher interest rate for ad-hoc limitsCustomer should ensure that a right product mix is offered to him at the time of sanction and credit limits offered is in line with his future business requirement.To Evaluate And Estimate The Credit Limit, Following Are The Mandatory Questions:The foremost question that is asked to assess your credit limit is- how long are your payment terms? It is said that the prior sales influence the future sales, the longer the better.What is the stretch of the company's sales contracts?What is the level of competition in the market for the product or the service that is offered by different financial institutions.Is the growth rate of the borrowing company substantial or is the profit margin facing constraints?Are the bank references evident? What are the financial information you can obtain from the  customers?Can the company manage to buy credit default swaps or trade credit insurance on the customers?What is the level of confidence bestowed on the in-house collections team and their processes?What is the stretch of the company's sales contracts?Based on what criteria and formulas are companies applying to assess the credit limit based on customers' financials (i.e. percentage of net worth, etc.)?Can the sales transactions on open account or letter of credit (LC) be used? LC serves as a good tool for credit risk management, but LC requires line of credit.What is the margin of the product or the service and what is the loss rate that can be assumed? Like the credit card companies do to build the card volumes.The Benefit of Informing Credit Limit to the Customers:The customers can plan their actions on purchases when they know their credit limit.    If the credit limit extended is inadequate, it can be discussed with the credit department and additional information that increases the credit line can be provided to the credit manager.Cash can be paid for the new shipments, or it can either be paid down to the account if the customer is in need to make further purchases above the credit limit. If the customer is not qualified for a large credit, the credit manager can have a dialogue on what conditions the credit limit can be increased in the future.Informing a customer on their credit limit reduces the chances of having to tell in the future that a pending order is being held and cannot be released.The business customers are informed on the maximum amount that can be lent, as it allows them to order goods to the available limit and mitigate their risks. Credit limit is consistently done to re-evaluate the customer creditworthiness and their financial health, and all of this analysis is covered in the company’s credit policy.
Rated /5 based on 20 customer reviews
Sum And Substance Of ‘Credit Limit’

Sum And Substance Of ‘Credit Limit’

Saravana Bhaskar
What Is Credit Limit?The financial institutions set a maximum amount of credit that can be offered to their customers, which is known as the “Credit limit/Cash Credit” in financial terms. A cash c...
Continue reading

Commerce ministry: WTO e-commerce sector still “in the dark”

In New Delhi on Nov 1, it was said by the commerce ministry Suresh Prabhu, that it would be a premature start if negotiations are made in the e-commerce sector at the World Trade Organization (WTO) as the contours of this sector are still “in the dark”.Sudhanshu Pandey Joint Secretary in the Department of Commerce, said that India is more focused on domestic e-commerce players and making rules for them."Starting negotiations on WTO rules in the e-commerce would be premature as the contours of this space are still in the dark," industry body Ficci said in a statement quoting Pandey.There was an interactive session that was organised by Ficci and the Centre for WTO Studies, where the officials spoke about e-commerce, trade rules, digital trade and WTO.In the WTO's ministerial meeting to be held in Argentina in the coming December, many developing countries including the US have assumed the remarks to be significant and have decided to push further to include new issues like e-commerce and investment facilitation as the topic of discussion.Pandey said, to govern global trade through e-commerce, there are several countries waiting eagerly to negotiate the multilateral rules."Such rules stand to hurt the interests of most developing countries, including India. India needs to think whether it was prepared to take on the obligations that would bind its stakeholders to an international policy in a sector, which was still evolving," he added.He also mentioned that since last July, there were around 24 papers that have been submitted by different countries including Japan which has put across highly ambitious papers on  e-commerce to WTO.  In such a situation, Pandey exclaimed that there is a need for India to shield its domestic market which is still growing. Now, making a national rule for e-commerce is also a formidable task as there are many issues that are overlapping. It is also said that to aid in formulating an overarching national policy for e-commerce, different departments have also taken initiatives to resolve the issues. Speaking at the event, Head of the Centre for WTO Studies, Abhijit Das, mentioned that there are many challenges in starting the negotiations, which include data localisation, servers, data flow, and mandatory sharing of telecom infrastructure that needs more attention.
Rated /5 based on 20 customer reviews
Commerce ministry: WTO e-commerce sector still “in the dark”

Commerce ministry: WTO e-commerce sector still “in the dark”

Saravana Bhaskar
In New Delhi on Nov 1, it was said by the commerce ministry Suresh Prabhu, that it would be a premature start if negotiations are made in the e-commerce sector at the World Trade Organization (WTO) as...
Continue reading

Buyers Credit Digest

Buyers Credit Digest
Rated /5 based on 20 customer reviews

There is a Need to Accelerate Building US-India Economic Ties: Kenneth Juster

Kenneth Juster, a top economic adviser and one of the prime architects of the remarkable Indo-US civil nuclear agreement, stated that eradicating trade impediments would definitely boost the process of raising ties between India and US.Juster said that America has to “push a range of economic issues, including standard and non-tariff barriers and intellectual property” with India, during a congressional meeting in response to a query from the Senator, Rob Portman."There is enormous potential in the economic sphere, but we have only begun to scratch the surface. We need to continue pressing forward to make sure that India adheres to its WTO (World Trade Organisation) obligations," Juster notified members of the Senate Foreign Relations Committee.The President Trump’s 62-year-old nominee is of the opinion that, there will be a scope of greater interest in the protection of intellectual property, as most of the entrepreneurs in India, grow intellectual property by their own.Juster also mentioned that he would be a profound advocate for the US’ undivided attention in India, if permitted by the Senate.In the long run, he anticipated that the economic relationship would be viewed as a strategic asset and a tool that would be a backbone to the overall strategic partnership and something that is majorly in the concern of both the countries."As Prime Minister (Narendra) Modi moves forward with his reform programmes and as he seeks to have a high level of growth, it will become increasingly clear that US companies can contribute to that. Removing some of these trade barriers would be an accelerator in the growth process," Juster stated."When I was a US Trade representative we did start a US- India trade policy dialogue in 2005. Since then we have tripled our trade with India. It was such a low starting point that there is much more to be done," he added.Portman arrived at a decision that there is a need for a balanced, fair and free trade.  "I do continue to have deep concerns about market access to some of our products and services and specifically the intellectual property," the Senator mentioned.Chairman of the Foreign Relations Committee, Senator Bob Corker, put across his frustration over the slow-moving Indian reforms in the economic sphere.“American companies continue to face barriers in accessing the Indian market, including high tariffs and strict localisation policies," he said.He mentioned that, there are compulsory licensing restrictions and heedless intellectual property protections for the companies that are allowed to enter the Indian market.“Clearly, the economic playing field is not even," Corker claimed.
Rated /5 based on 20 customer reviews
There is a Need to Accelerate Building US-India Economic Ties: Kenneth Juster

There is a Need to Accelerate Building US-India Economic Ties: Kenneth Juster

Saravana Bhaskar
Kenneth Juster, a top economic adviser and one of the prime architects of the remarkable Indo-US civil nuclear agreement, stated that eradicating trade impediments would definitely boost the process o...
Continue reading

India has asked for an Immediate Revision of IMF Quota

Finance Minister Arun Jaitley, addressing the annual meetings of the International Monetary Fund (IMF) and the World Bank that happened in Washington, anticipated that it could be achieved as a part of the 15th General Review of Quotas.It is clear that India has called for the immediate revision of the quota to reflect the ground realities of the world in the benevolence of dynamic emerging markets."There is an urgent case for revising quota shares in favour of dynamic emerging market countries in line with global economic realities to maintain fairness in the governance structure of the fund,"  Jaitley told the world financial leaders yesterday."We should make every effort to complete the 15th Review by the agreed timeline of 2019 Annual Meetings," he propounded.Jaitley mentioned that the threats to global finance and economic stability have noteworthy implications for IMF’s operations.While operating as a strong quota-based institution, IMF needs to have sufficient resources to meet the demands, Jaitley opined. Similarly, the procrastinated but collectively agreed on Lima Roadmap for the World Bank Group, had predicted to see a conclusion of the 2015 shareholding review by Annual Meetings 2017, he mentioned."While we note that we failed to deliver it, given the progress that has been made so far, we strongly urge all to commit to delivering an equitable conclusion of this process for both the IBRD and IFC by the Spring Meetings 2018," he said.He reminded that any further hold in terminating the review will threaten the development in the applicant countries and also affect the presence and the leadership of both Bank and IFC in MDBs."We look for an expeditious decision on capital enhancement through both selective capital increase (SCI) and general capital increase (GCI) for both the IBRD and IFC, by Spring Meetings 2018," he added.Jaitley also guaranteed that India will continue to perform vigorously on the back of credible macroeconomic readjustments and structural reforms, to all the world financial leaders.Growth in the apparent markets and developing economies(EMDEs) is anticipated to recoup going forward, while the steadfastness of the less productivity and potential growth in advanced economies (AEs) remains troublesome, the minister said.Contributable to the ongoing adjustments to lesser commodity prices, the prospects in commodity exporting countries has continually kept up with the challenges, he added.  Moreover, the financial threats rooting from the swiftly inclining leverage of the private non-financial sectors amidst the low-interest rates have definitely raised the medium-term risks to financial stability, he said.The policy strains could be increased in EMDEs due to the unexpected monetary reversal accommodation by AEs."The risks of growing populism and consequential loss in trade volumes will affect global recovery adversely - and it is incumbent upon all of us to foster cooperative multilateral efforts to boost fair trade practices," he said.Noting the growth, compared to 2016, US and the Europe area is anticipated to improve in 2017. On the verge of strong domestic and external demand, Japan and Russia are continuing to recover, he sated. Moving ahead, Brazil is expected to grow vigorously and overcome recession and also added that Sub-Saharan economies are also expected to have inclined performances."As for the Indian economy, the sound fundamentals and number of progressive policy initiatives taken in the last few months will provide the basis for a strong prognosis and convergence with growth potential," Jaitley said.
Rated /5 based on 20 customer reviews
India has asked for an Immediate Revision of IMF Quota

India has asked for an Immediate Revision of IMF Quota

Saravana Bhaskar
Finance Minister Arun Jaitley, addressing the annual meetings of the International Monetary Fund (IMF) and the World Bank that happened in Washington, anticipated that it could be achieved as a part o...
Continue reading

Exporter's Understanding on Bill Discounting and Bill Negotiation

Most of the times, we would hear our working capital bankers discussing Bill Discounting or Bill Negotiation on our export bills, although, the outcome of both the products are one and the same. It ensures the realization of export bills along with proceeds of the exports into your account. As an exporter, you get money for the completed exports irrespective of it being bill discounting or bill negotiation.Export Bill Discounting: Bill Discounting takes place generally for DA bills where there is an USANCE period. Upon shipment, Exporter(Seller) generally prepares all the required documents which are required as per the trade commercial contract which includes Invoice,Packing List,Bill of Lading (BL) or Airway Bill, Bill of Exchange and other documents if any called for and will be routed through Exporters bank to the Importer(Buyer) which allows Importer to retire the documents basis acceptance and release the goods.Export Bill Discounting is generally a post-shipment facility and is not backed by LC’s. This limit generally forms a part of CAT 1 limits and it is needless to mention it as a product with recourse.For exporters who got Bill Discounting facility, all the required documents as a part of the trade contract will be submitted to the bank counters and the bank typically discounts 80%-90% of invoice value and credits your account to ease the working capital. Upon receipt of this payment from the Importer, the outstanding will be knocked off along with interest portion and the remaining bill value will be credited back to the Exporter’s account.Bill Negotiation:Bill Negotiation is a term used when the documents of the exporters are negotiated at the counters of banks and a facility is drawn out of it, post shipment. This particular product is availed for shipments done under the documentary credit.As an exporter, one needs to exercise caution while preparing documents under the documentary credit, to ensure it's a clean bill and not a discrepant document. Clean Bill Negotiation is where the client limits are not used and discounted under bank lines depending on the availability of limits/lines between the Exporters and Importers bank.Clean Bills are negotiated and credited to exporters account upon receiving acceptance from the bank who issued the LC.This forms a part of CAT 2 limits when it is offered to exporters without recourse and limits drawn on bank lines. This is an off-balance sheet product.From a banker’s perspective, Bill Negotiation is a low-risk trade product as it is backed by LC compared to Bill Discounting.If you need any further clarification, please write to us Bhaskar@savedesk.coTo Read about Foreign letter of credit discounting click here
Rated /5 based on 20 customer reviews
Exporter's Understanding on Bill Discounting and Bill Negotiation

Exporter's Understanding on Bill Discounting and Bill Negotiation

Saravana Bhaskar
Most of the times, we would hear our working capital bankers discussing Bill Discounting or Bill Negotiation on our export bills, although, the outcome of both the products are one and the same. It en...
Continue reading

Forward Contract from Importers and Exporters Perspective

In simple terms, a Forward Contract is an over-the-counter instrument that sets the price of an instrument today for delivery on a future date. This is done in exchange for another financial instrument or an asset as agreed at the time of Forward Contract execution.Forward Contract generally refers to currency (Foreign Exchange)market. Yet, this applies to other asset classes too such as Equity market, Commodities.In this session, we are detailing on currency Forward Contract and operational understanding about the same from both Exporters’ and Importers’ point of view.Currency Forward:It’s a special type of contract in which agreements are made between two parties  to exchange two different currencies at a future date, wherein the price of exchange is agreed today. Currency Forward as a hedging tool helps the buyer or seller in protecting the exchange fluctuations, thereby it helps them to forecast their cost well in advance.Currency Forwards are plain vanilla derivative instruments.Delivery Rate = (Current Spot + Premiums for period of contract ) ± Agreed bank exchange marginsDelivery Rate:Delivery rate is nothing but a rate agreed by both the parties at the time of entering into Forward Contract which will be delivered at any cost on maturity i.e., by end of Forward Contract date.Currency Spot:Currency Spot refers to rate either on Bid/Ask side of interbank rates applicable at that moment. SPOT generally gets delivered on T+2 days on the exchange of currency.Premiums:Premiums refer to interbank premium rates either on Bid/Ask side. Premiums are generally driven by interest rate differences between the currencies of exchange during the Forward Contract.Bank Exchange Margins:Except for Authorized dealers, none can deal in currency forwards. Generally, bank facilitates these trades where the client agrees to buy or sell foreign currency at future date with a bank. Bank executes these contracts by setting up LER(Loan Equivalent Risk) limits for the clients who need Currency Forwards.Typically, LER for major currency with INR as pair is Max of 20% for a 1-year tenor. Based on the relationship, bank charges margins for facilitation of this product ranging from 0.01% to 3%.Costs Involved:Typically Forwards are done on the basis of margin money, inform of FD or Limits and are assigned based on past performance of your import/export business during the last financial year. There is no specific cost as such, unlike Options where the premiums are paid upfront. However, there could be limit setup fee and exchange margins for facilitation of this product by authorized dealersFrom Importers perspective:Importers in India use this product to control the outflow of INR against the currency of purchase in the future date. This will enable to manage their profit margins respective to the transaction.Importers agree to buy Foreign Exchange i.e., currencies other than INR for delivery on future date depending on the trade. Foreign currency will be bought at a prescribed price by selling equivalent value of INR on maturity.In this case, it is assumed that the importer wants to get into Currency Forward contract basis, for a trade of 3 Months. His contract rate should be as followsInterbank Spot : 65.41Premiums for 3 Months:70.50 PBank Margins : As agreed mutually between bank and client, let’s take 5p for a dollar in this case.Client rate = 65.41 + 0.7050 + 0.05 i.e, 66.165 is delivery rate for this importer by end of 3 Months.Importers pay the premium, which increases the cost of the product. Hence, pricing of the product needs to be done accordingly.From Exporters Perspective:Again Exporters use this product to avoid any fluctuations in currency exchange. Since most of currency pairs are on premiums, Exporters are at the benefits in getting into Currency Forwards.Exporters get the premium paid for the period of Currency Forward contract over and above the SPOT interbank.Exporters in India agree to sell foreign currency and buy INR against an agreed rate, as per Currency Forward contract.Let's have a look at the same illustration above quoted from exporters perspective:-Interbank Spot  : 65.41Premiums for 3 Months: 68.50 PBank Margins : As agreed mutually between bank and client, let’s take 5p for a dollar in this case.Client rate = 65.41 + 0.6850 - 0.05 i.e, 66.135 is delivery rate for this Exporter by end of 3 Months.This is all about Currency Forwards till you enter into a contract with your authorized dealers. Banks set up your limits for such Currency Forwards based on your past performance(PP Limit) or on the basis of the current underlying exposure on foreign currency.Want to understand more on currency forwards? Please write to advisor@savedesk.in
Rated /5 based on 20 customer reviews
Forward Contract from Importers and Exporters Perspective

Forward Contract from Importers and Exporters Perspective

Saravana Bhaskar
In simple terms, a Forward Contract is an over-the-counter instrument that sets the price of an instrument today for delivery on a future date. This is done in exchange for another financial instrumen...
Continue reading

SUBSCRIBE TO OUR BLOG

Share Blog

Follow Us