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How Suppliers Credit can put Importers business back to Track?

Suppliers Credit: An importer initiates his business with the intention of accomplishing huge returns for the investments made. To fulfill the demand and needs of a country, the resources within a geographical border might not be sufficient, this space between the demand and supply is viewed as a profitable market in a business perspective by the traders. In the aftermath of the Central bank (RBI) forbidding the issuance of LOU’s for trade transactions, the Importers business was disrupted with the non-availability of immediate fund requirements for their working capital needs. Though a little time-consuming process, Suppliers credit backed by LC which is a similar option to Buyers credit has come to the rescue of small Importers. What is Suppliers Credit? The trade finance facility made available to the Importer to brings the goods into India based on the usance of Letter of Credit(LC) is known as Suppliers Credit. Here, the credit is funded by the overseas financial institutions or the sellers preferably from the seller’s country at a cost close to Libor rates which are cheaper than the local source of funding. How will Suppliers Credit help the Importers? Suppliers credit service can be availed only when it is backed by LC (Letter of Credit) which is an agreement comprising the details of the transactions. Also, the interest rates for the funding process is kept minimal, which is similar to buyers credit services with slightly varied costs. Tenure for Capital and Non-Capital Goods  A maximum tenure of 3 years is allowed for all the Capex transactions. A maximum tenure of up to 1 year/ 360 days is permitted for the Non-capex transactions from the date of the shipment. Transactions up to $20 million dollars are allowed, anything beyond the sanctioned limit requires RBI approval. Benefits / Advantages of Suppliers Credit The exporter/suppliers are dealt on sight basis Importer’s business is financed with short-term credit Importers can negotiate and settle for a better deal Financed in foreign currency close to Libor rates A low-cost source of credit significantly cheaper than the local funds Backed by LC guarantee which mitigates the risk to a certain extent Process Flow / Workflow for Availing Suppliers Credit  When an Importer requires credit after entering into a contract with the Supplier, he approaches SaveDesk (arranger) to avail Suppliers credit along with the relevant transactions details. SaveDesk, from an overseas financial institution, offers the best deal to the Importer. On acceptance of the offered price, the Importer gets an LC guarantee issued with his bank which is confined to the lending financial counters. Once the goods are shipped, the Supplier submits the necessary documents at his bank. Further, the documents are scrutinized by the lending overseas financial institution. On account of acceptance of documents and repayment as per as the LC terms by the Importer’s bank,the lending bank discounts the bill. The payment is remitted to the respected Supplier based on the LC terms. On the required due date, the Importer makes his payments to his bank which in return is settled to the lending overseas financial institution. Cost / Charges Involved in Suppliers Credit Interest cost i.e. LIBOR LC Advisory charges: which will be charged around 0.1- 0.5% Courier/Postage/Swift charges Corresponding bank charges: (Depends on bank networks) LC confirmation charges: ranges around 0.3% to 1.1% (optional) Indian Bank interest cost Documentation handling charges Negotiation charges A wise businessman takes the market arbitrage and imports goods and materials from other countries by availing low-cost loans (Suppliers credit) that would work out better for him. It can be the import of machinery equipment, raw materials anything from outside to make profits within the domestic boundaries.
How Suppliers Credit can put Importers business back to Track?
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Saurabh

Saurabh Jain

Blog Author

 

One of the Co-founders, Saurabh serves as an active advisor to several SaveDesk’s portfolio companies and also works closely with them to improve business performance, select key management personnel, ensuring statutory and financial oversight and compliance supported by various agreements.Prior to SaveDesk, Saurabh spent seven years with Standard Chartered Bank commercial banking team as an associate director, where he was responsible for client management,financial analysis, portfolio management and large ticket deal’s execution in South India. Saurabh holds an MBA in Marketing from the Institute of Technology Management, and graduated with Honors degree in Electrical and Electronics Engineering from RGPV, Madhya Pradesh

 

How Suppliers Credit can put Importers business back to Track?

Suppliers Credit: An importer initiates his business with the intention of accomplishing huge returns for the investments made. To fulfill the demand and needs of a country, the resources within a geographical border might not be sufficient, this space between the demand and supply is viewed as a profitable market in a business perspective by the traders. In the aftermath of the Central bank (RBI) forbidding the issuance of LOU’s for trade transactions, the Importers business was disrupted with the non-availability of immediate fund requirements for their working capital needs. Though a little time-consuming process, Suppliers credit backed by LC which is a similar option to Buyers credit has come to the rescue of small Importers. What is Suppliers Credit? The trade finance facility made available to the Importer to brings the goods into India based on the usance of Letter of Credit(LC) is known as Suppliers Credit. Here, the credit is funded by the overseas financial institutions or the sellers preferably from the seller’s country at a cost close to Libor rates which are cheaper than the local source of funding. How will Suppliers Credit help the Importers? Suppliers credit service can be availed only when it is backed by LC (Letter of Credit) which is an agreement comprising the details of the transactions. Also, the interest rates for the funding process is kept minimal, which is similar to buyers credit services with slightly varied costs. Tenure for Capital and Non-Capital Goods  A maximum tenure of 3 years is allowed for all the Capex transactions. A maximum tenure of up to 1 year/ 360 days is permitted for the Non-capex transactions from the date of the shipment. Transactions up to $20 million dollars are allowed, anything beyond the sanctioned limit requires RBI approval. Benefits / Advantages of Suppliers Credit The exporter/suppliers are dealt on sight basis Importer’s business is financed with short-term credit Importers can negotiate and settle for a better deal Financed in foreign currency close to Libor rates A low-cost source of credit significantly cheaper than the local funds Backed by LC guarantee which mitigates the risk to a certain extent Process Flow / Workflow for Availing Suppliers Credit  When an Importer requires credit after entering into a contract with the Supplier, he approaches SaveDesk (arranger) to avail Suppliers credit along with the relevant transactions details. SaveDesk, from an overseas financial institution, offers the best deal to the Importer. On acceptance of the offered price, the Importer gets an LC guarantee issued with his bank which is confined to the lending financial counters. Once the goods are shipped, the Supplier submits the necessary documents at his bank. Further, the documents are scrutinized by the lending overseas financial institution. On account of acceptance of documents and repayment as per as the LC terms by the Importer’s bank,the lending bank discounts the bill. The payment is remitted to the respected Supplier based on the LC terms. On the required due date, the Importer makes his payments to his bank which in return is settled to the lending overseas financial institution. Cost / Charges Involved in Suppliers Credit Interest cost i.e. LIBOR LC Advisory charges: which will be charged around 0.1- 0.5% Courier/Postage/Swift charges Corresponding bank charges: (Depends on bank networks) LC confirmation charges: ranges around 0.3% to 1.1% (optional) Indian Bank interest cost Documentation handling charges Negotiation charges A wise businessman takes the market arbitrage and imports goods and materials from other countries by availing low-cost loans (Suppliers credit) that would work out better for him. It can be the import of machinery equipment, raw materials anything from outside to make profits within the domestic boundaries.
Rated /5 based on 20 customer reviews
How Suppliers Credit can put Importers business back to Track?

How Suppliers Credit can put Importers business back to Track?

Saurabh Jain
Suppliers Credit: An importer initiates his business with the intention of accomplishing huge returns for the investments made. To fulfill the demand and needs of a country, the resources within a ...
Continue reading

5 Reasons Why Business Houses Import

 All business houses are ceaselessly working towards optimizing their bottom line by extending their sources of supply, while most other companies encounter problems in procuring requirements and multiplying their profits. Have you ever wondered what is the most common thing about these potential profit-making companies? Yes, it is that these business houses invariably source their requirements from foreign markets. It happens to be a strategy in boosting your supply chain management and sourcing goods at a lower cost. Starting an import business has its own set of pros and cons, however here are a few points discussed on the advantages/benefits of importing: Supply in excess to demand: Each country has diversified resources which are rich and excess in supply than their domestic demands. These specialized goods or raw materials are exported across national borders and procured by the importers at right prices to make huge profits locally. As these goods are exclusive and advanced, the goods are paid and brought into the country which is useful for the customers to access new products from other markets. Exploring foreign new market trends with simplified regulations: Every country has its own unique markets tailored to serve its domestic demands. Any individual involved in importing and exporting business is fortunate enough to understand and explore the technical know-how and the effective strategies of other potential markets. Detailed study and analysis of these markets can aid in the innovation of new products and approaches in pushing your products to the target customers, in turn helping you make huge profits in the business. In most of the developed and developing countries, import and export business has become a significant part of their economy. Since the trade happens in global markets the local governments has intervened to simplify the trade process. Often the cross-border importers deal with different markets and their regulations. Hence, the government has taken measures to encourage and mitigate risks for the parties involved. Availability of affordable loans: Borrowing loans are also made easy with low-cost funding rates. They often remove pressure on the cash flow and insure you from unsettled bills of your overseas dealers. Services such as suppliers credit, buyers credit, bank guarantee and documentary LC payments are available to finance your import business. Reduced manufacturing costs: One of the predominant reasons for business houses to import materials offshore is the minimal manufacturing costs. It can be raw materials or advanced machinery equipment imported, they tend to reduce the overall manufacturing cost of a product as they are bought in bulk and plays an important role in cutting down the labour costs as well. Market expertise/arbitrage: Trading globally, dealing with currencies, exploring new markets and their products enhances the profits and the goodwill of your business. It basically helps importers to make smart moves in the market and lead the domestic markets with their potential sales for a longer duration. Optimised profits and Enhanced sales: Importing is one of the best and easy ways to maximize your business profits. The bulk goods imported are usually cost-effective helping in producing higher quality products. Often inventing new and unique products helps in better reach to the customers and also in the expansion of business which inevitably leads to increased profits. If you are on the verge of making your business lead the industry you deal with, importing is one thing you should consider. Be a wise importer, understand how to decide on a viable product that needs to be imported for the best result in your business.
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5 Reasons Why Business Houses Import

5 Reasons Why Business Houses Import

Saurabh Jain
 All business houses are ceaselessly working towards optimizing their bottom line by extending their sources of supply, while most other companies encounter problems in procuring requirements...
Continue reading

One Stop Portal For All Your Buyers Credit Needs

India is an import-driven economy, where non-domestic commodities,goods and equipments etc are imported across national borders to make profits indigenously. Meanwhile, liberalisation has paved way for the blue chip companies to access global funds for their working capital requirements. Simultaneously, the practice of availing short term import finance like buyers credit or suppliers credit has gained momentum in the recent times. In the wake of the cross-border trade and its recent developments, the RBI has taken jurisdiction to fill in the gaps of trade credit assessments. What is Buyers Credit? Buyers credit is a short term import business funding facility offered to the Indian importers by the banks or financial institutions outside India. This service was introduced to encourage importers (buyers), which in turn aids them in procuring loans from overseas FI at low-cost borrowing rates which are coupled with Libor rates. Under this, credit is easily available for the import of capital and non-capital goods based on the LOU (Letter Of Undertaking). Why Buyers Credit? Importers taking advantage of buyers credit leverage their business, as the cost of funding by the overseas FI are based on Libor or Euribor rates which are relatively economical than the domiciliary interest rates.   What is LIBOR? LIBOR (LONDON INTERBANK OFFERED RATE) is  a benchmark rate used internationally to set a range of financial deals. It is predominantly used as base price in calculating interest rates and acts as a measure of trust in the global financial system. Example of Interest Rate Calculation Process for Buyers Credit availed with Libor as the base price: Bank mentions Interest rate on Offer letter usually under below heading 3M L + 20 BPS  (Volume along with Specific Tenure will be mentioned) 6M L + 20 BPS  (Volume along with Specific Tenure will be mentioned) For instance, if the customer avails Buyers Credit of $100K from FI for 90 days, below interest will be applicable in above two scenarios 1 USD = INR 65 BPS ( Basis Point ) = 0.2% 3 Month Libor = 1.2% 6 Month Libor= 1.4% Case 1 :- a.  3M LIBOR + 60 BPS = 1.8% =  100000*65*1.8*90/360*1/100= 29250 Case 2 :- b.  6M LIBOR + 60 BPS = 2% =100000*65*2/100*90/360= 32500 Thus under same situations customer will pay an additional INR 3250 to avail BC for the same tenure. LIBOR Rate Graph    FORMAT OF AUTHENTICATED SWIFT MESSAGE LETTER OF UNDERTAKING (LOU) MT 799 1. LC No.         : 2. Name and full address of the Importer / End User : 3. Importer is a Public Sector entity (state Yes or No): 4. Name and full address of the Exporter : 5. Description of Goods Imported: 6. Capital Goods (state Yes or No): 7. Country of Origin of Goods : 8. Shipment from (Port & Country): 9. Shipment to (Port & Country): 10. Name of Shipping Company / Airline: 11. Charter Party BL (state Yes or No): 12. Name of the vessel & IMO No. (if by sea) 13. Date of BL/AWB: 14. Amount of Loan : 15. Date of funding: 16. Tenor required (as per quote) 17. Interest Rate (as per quote) 18. Rollover transaction (state Yes or No): 19. Branch contact person Name, Tel. No. and Email : 20. PAN No. of Applicant 21. CIF No. of Applicant 22. Date of Incorporation of Applicant company 23. External Rating Agency Name 24. External Rating and Date 25. Internal Rating and Date 26. Account Status :  Standard / SMA/ NPA / Restructured 27. Whether 10pct of security available for the buyers credit amount: Yes/No Advantages / Benefits of Buyers Credit: Buyers credit foreign funding is based on LIBOR rates which range from 0.3-2% Payments are made on time to the exporter (required due date) Importer gets extended credit time for his import repayments Quick transactions are executed through SWIFT (recognized channel for banking communications) Negotiation of a better deal on account of immediate payments Eases the process of conducting (import) international business Choice of funding currency is proffered to the importer (USD, GBP, EURO, JPY) Payments are transacted as per LC payment terms and conditions Buyers credit can be financed through LC, open account transactions or collections(DP/DA) Buyers credit tenure can be extended through BC rollover facility Some of the checkpoints to consider for before availing Buyers Credit facility: The maximum duration of Buyers Credit Facility for Capital Goods is 3 Yrs The maximum duration of Buyers Credit for Non-Capital Goods is 1 Yr. Maximum credit limit per Buyers Credit transaction is $20 MN. Ceiling Cost of buyer’s credit is 6 Months LIBOR + 350 BPS  (L+350 bps) The cost involved in Buyer’s Credit Interest costs: The cost (margin) that is charged above Libor rates is the total cost of finance by the banks, it varies with the funds borrowed. Here, the rates are calculated with libor rates as the base price, which is quoted as (Libor+Margin rates) “3M L+350 bps” where 3M is 3 month, L is libor and bps is basis points. “Basis point” is a unit that is equal to 1/100th of 1%. It can also be put across as 3M L+3.50%. Libor will differ with the tenure. Hedging cost: This is usually the cost charged for hedging transactions against the volatile currency fluctuations in the market, which comes at an additional cost of up to 3%. It is optional for the importer to book for forwards and in a few banks, it is a mandatory process. Currency risk premium: Reckons on the risk perceived on the transactions. Letter of undertaking/letter of credit: It is charged by the existing bank or local bank for the issuance of LOU. It is charged as high as 1.5%. Arrangement fee: The fee paid to the broker/ agent for the service rendered by him in arranging BC quotes. Withholding tax(WHT): This is an additional cost deducted as tax on the interest paid on the loans borrowed. Rates charged by the overseas lenders are net of taxes; thus it has to be grossed up at the time of calculation of interest. Export credit agency(ECA) guarantee charges: The sum paid to avail the facility of credit insurance or financial guarantee. Other additional charges: A2 payments on maturity, charges for documents 15CA and 15CB on maturity, intermediary bank charges, out-of-pocket charges etc come under this category which cost him additional money. Process Flow / steps involved in Buyers Credit: X Pvt Ltd imports the goods either under Letter of credit(LC) / Documentary credit (DC) , Collections ( DA/DP ) or open account. X Pvt Ltd approaches SaveDesk two days before the due date of the bill to avail buyers credit financing. SaveDesk provides instant cheap quotes to X Pvt LTD from by a foreign lender which generally is (1M/2M/3M Libor + X bps ) Post acceptance of quote ,SaveDesk provides offer letter to X Pvt Ltd. X Pvt Ltd's existing banker marks his import limits and issues LOU (Letter of undertaking) /LOC (letter of comfort ) for certain fee to the foreign lender. The foreign lender credits the importer's bank i.e. ABC Pvt Ltd's existing bankers Nostro account through SWIFT payments. Importer's banks credits the same to the exporters account on the required due date. Importers bank recovers the principal along with the interest amount and remits it to the funding bank/ foreign lender as per the agreements.   Buyers Credit Rollover: If the borrowed importer is unable to make payment settlement on the required due date to the bank, the tenure of the buyers credit contract can be extended which is referred as Buyers credit rollover. What are the key factors to consider for the Buyers Credit Rollover? Here, the importer is opting for a fresh buyers credit and hence it includes the issuance of a fresh quote by the arranging bank. The buyer(importer) can make choice of his tenure which is again restricted to his maximum working capital. With the change in Libor the margins might change leading to increase in the overall cost. RBI enables importers to extend credit up to 5 years on Capex transactions and up to 1 year for Non-capex transactions. 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. Challenges faced by the Indian Importers: Importers often deal with multiple markets and often face agitation with the volatile currency fluctuations in the foreign markets. They were fortunate enough to take advantages of services such as buyers credit that was benefiting them in pooling short-term import finance at competitive interest rates. With the recent fraudulent practices in buyers credit by Nirav Modi (PNB scam), importers are finding it hard to leverage business without buyers credit facility. Few other common problems faced by the importers are: Cost of funds/ interest rates offered by the banks and other financial institutions are higher Banks restricting importers in availing BC from consultants TAT (Turn Around Time)  for the offer letter Banks are usually restricted in confirming offer letter only by their concerned overseas  branches. There is a standard delay in the process of funding confirmation and the credit being funded to the importer’s nostro account. Way forward post-RBI ban and the other feasible approaches in availing cheap funds: Further, a similar arrangement by the RBI which is in aid currently to the importers is the Suppliers Credit. This is also an import financing facility to simplify the payment and collection process in the import business. This is essentially funded under the Letter of credit (LC) where payments are made immediately after the goods are dispatched. Other funding arrangements are also available such as Bank guarantee and documentary LC payments. Disadvantages of Suppliers Credit: There is an additional cost applicable for LC Payment terms is restricted and can only be extended till the LC validity Suppliers credit is slightly expensive in comparison to the Buyers credit Suppliers credit has no extended tenure for repayment Payments are done on sight basis, hence there is no scope for bridging working capital gap. Benefits of taking SC through SaveDesk: Instant availability of quotes Low-cost borrowing rates Convenient, as the process is executed by SaveDesk Regular updates on the funding process Buyer’s Credit quotes from multiple arrangers across different time zones Avail the other options available and execute your import transactions under forex exposures at minimal cost. Get your import funding process effectively monitored and mitigate risks with SaveDesk. Abbreviations: LIBOR - LONDON INTERBANK OFFERED RATE LC - Letter Of Credit LOU - Letter Of Undertaking BPS - Basis points FI - Financial Institutions DC - Documentary Credit SWIFT - Society for Worldwide Interbank Financial Telecommunication TAT - Turn Around Time
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One Stop Portal For All Your Buyers Credit Needs

One Stop Portal For All Your Buyers Credit Needs

Saurabh Jain
India is an import-driven economy, where non-domestic commodities,goods and equipments etc are imported across national borders to make profits indigenously. Meanwhile, liberalisation has paved way fo...
Continue reading

Why Suppliers Credit Is Crucial For Importer Business?

The concept of imports and exports serves the purpose of fulfilling the domestic demands by mutually sharing the resources and commodities between two national borders. To facilitate easy trade finance to the importers of India the government had structured buyers credit funding process. After divulging the PNB biggest buyers credit scam, there has been a surge of prices and stringent practices followed by the RBI which has significantly disrupted the Indian importers. Nevertheless, another similar option is available to the importers to avail trade finance, which is popularly known as Suppliers credit. What is Suppliers Credit? Suppliers credit is a trade credit funded to the importer on basis of Letter Of Credit (LC). Under the LC method of payment, the overseas suppliers or financial institutions preferably from the seller’s country finances the importers at cheaper rates than the local source of funding, which are close to Libor rates. It is beneficial to the seller as he receives payments immediately after the shipment of goods, which in turn helps the importer to negotiate for better prices. Since the issuance of LOU(letter of undertaking) has been banned, the importers are switching  to avail suppliers credit facility which also aids in availing cheap interest rates like buyers credit. Why suppliers credit?/Advantages of suppliers credit: The exporter/suppliers are dealt on sight basis Importers can negotiate for better commercial terms. Low-cost source of funds As only imports under LC qualifies for suppliers credit the risk in the process is mitigated. The letter of credit is an assurance issued which includes detailed information of the transaction and is generally restricted to overseas FI counters. Suppliers credit can be availed by the importers on both capital/non capital goods up to USD 20 million per transaction. The payments here are processed through international payment networks known as SWIFT(Society for Worldwide Interbank Financial Telecommunication code). Differences between Buyers Credit and Suppliers Credit: Buyers Credit Suppliers Credit Swift payments through MT799 Swift payments through MT760 Credit is funded to the importers nostro account Portion of the transaction is paid at sight, the rest of it is paid in accordance with the terms and conditions agreed with the seller (drafts, promissory notes etc). Additional clauses or Amendments are not required in LC Negotiation Clause, Reimbursement Clause and Confirmation Clause are covered under this. LC Clauses might need to be included/amended as requested by suppliers credit offering bank   Payments were allowed to be made on the due date to the exporters Supplier/exporters are paid at sight With the non-availability of the buyers credit trade facility, the importers were put under inconvenience. Now, the importers are availing suppliers credit which has evolved to be a new revolution in the importers trade finance facility.  
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Why Suppliers Credit Is Crucial For Importer Business?

Why Suppliers Credit Is Crucial For Importer Business?

Saurabh Jain
The concept of imports and exports serves the purpose of fulfilling the domestic demands by mutually sharing the resources and commodities between two national borders. To facilitate easy trade financ...
Continue reading

Service Exports from India Scheme (SEIS) for Exporters

What is SEIS ? In order to promote Exports from India, the government of India has launched Service Exports from India Scheme (SEIS) which is rewarded in the form of duty scrip credit.  These Scrips are rewarded for all eligible exports from India, which can be traded against any custom fee-related activity. Why SEIS? As we all know, India is a trade deficit country i.e. our imports are greater than exports, this deficit leads to the artificial demand of dollars in India. Advantages of boost to Exports are as follows- Boost to SMEs and MSMEs Creation of Jobs Stable & strong currency Overall Economic and Infrastructure growth What are the Eligibility Criteria :- For an exporter in India to be eligible for SEIS scheme scrips apart from companies having IEC code, the following foreign exchange criteria should be met- S.No Incorporation Type Minimum Foreign Exchange In FY 1 Partnership Firm/LLP/Company USD 15000 2 Proprietorship Firm USD 10000   Net foreign exchange earnings for the SEIS scheme is calculated as: Net Foreign Exchange = Gross Earnings of Foreign Exchange – Total Expenses or payment or remittances of Foreign Exchange. Uses of Credit Scrip Duty credit scrips can be used for the settlement of Excise Duty Custom Duty Service Tax Settlement of Default of EPCG claims etc Benefits of SEIS Scrips Substantial Reward  ( Between 3-5% of Net Exports ) Freely Tradeable Easily Transferable Valid for 18 Months from date of Issue Exports qualified for SEIS Scheme: -   More details about export activities qualified for SEIS scrip claims can be found here http://dgft.gov.in/exim/2000/FTP-2017/ftp17-051217.pdf Ineligible Export service for SEIS: - Any Equity or debt participation, receipts of  loans, donations etc. not related to rendering of services will not qualify for SEIS Any service which is not mentioned in DFGT circular on SEIS For more details/clarity reach out to Saurabh @ savedesk.co
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Service Exports from India Scheme (SEIS) for Exporters

Service Exports from India Scheme (SEIS) for Exporters

Saurabh Jain
What is SEIS ? In order to promote Exports from India, the government of India has launched Service Exports from India Scheme (SEIS) which is rewarded in the form of duty scrip credit.  These ...
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Divulging India Biggest Buyers Credit Scam

Buyers Credit is a short-term loan available to an importer from Foreign Lender’s at low interest rates. There has been breach committed in the issuance of Letter of Undertaking (LOU’s) in the process. This funding facility which has been used fraudulently is leading to problematic situations to the Indian importers.   What went wrong –PNB Scam? Two of the Punjab National Banks (Mumbai) employees were issuing Fake LOU details favoring Nirav Modi group of companies, there by giving birth to one of the biggest scam of $1.77Bn in Buyers Credit history in India. Since LOU’s are considered to be most authentic bank to bank communication, lending bank’s too did not bother to do additional due diligence on LOU’s issued by Punjab National Bank. Banks, which are affected? Union Bank Axis Bank Allahabad Bank. Do remember these are all Indian Banks housed in foreign locations, which funded PNB India basis LOU issued. How it was executed? It started with Modi’s diamond firms which approached Punjab National Bank for Buyers credit requirement for the import of diamonds . As per process companies availing buyers credit should have Buyers Credit limits with LOU Issuing bank, which in this was PNB. Limits should be lien marked for issuance of LOU to lending bank. Where as in this case employees of PNB issued fake LOU’s without performing necessary checks and banking formalities (Obviously to benefit Modi’s firm).  Basis these fake LOU’s foreign branches of Indian banks extend loans to PNB India Nostro account & from Nostro these funds were remitted to Exporter. Exporter’s in this case were either kith and kins or close business associated of Nirav Modi or his own companies in different countries. Thus resulting in one of the biggest scam of Buyers Credit history. PNB has reported this case to CBI (Central Bureau of Investigation) for further investigations, Meanwhile as a usual practice by all fraudster, Mr. Nirav Modi has also fled from India, Indian officials are still baffled how to ‘Find NiMo’ Impact of PNB Scam on Importers in India Importers in India are facing challenges to avail Buyers Credit post unraveling of Buyers Credit Scam.  In spite of multiple foreign lenders available in market, getting a quote and offer letter has become a task. Most of them are either not quoting or are offering rates which are way beyond regular standards. We have tried listing down current issues faced by Importers In India Total No of foreign lenders/Banks offering quotes are reduced Time taken to offer quotes is increased Few of the LOU’s are cancelled in spite of issuance of offer letter Importers negotiation has come down as less no of lenders are available. Most of the banks are asking for B/L & invoice from LOU issuing bank official ID. Cost of funds for client will go up as he will have to use OD facility to make payment Double Whammy for Importers as Currency prices has also shot up by approx. 1.5% in couple of days. PNB bank Customer facing maximum challenges to have their LOU’s funded. This scam has questioned many compliance practices followed by Indian banks  & has resulted in lot of discomfort to the Importers . Case is been investigated by CBI officials and will surely lead to redefining entire process of Buyers Credit business in India.
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Divulging India Biggest Buyers Credit Scam

Divulging India Biggest Buyers Credit Scam

Saurabh Jain
Buyers Credit is a short-term loan available to an importer from Foreign Lender’s at low interest rates. There has been breach committed in the issuance of Letter of Undertaking (LOU’s) in...
Continue reading

Significance of LIBOR on Borrowing Cost for Buyers Credit

As we all know, all importers can borrow cheap funds coupled with LIBOR, but ever wondered, how LIBOR affects the cost of borrowing and what happens to capex  transactions LIBOR rates? All the above queries will be answered in this blog. All the foreign currency loans are borrowed either in LIBOR/EBOR; hence any movement in their rates will yield to expensive cost of borrowing in India. Impact of LIBOR on Importers Scenario 1: - If an Indian Importer had availed Buyers Credit of  $100K for 180 Days in the Month of September’17, Client will pay 6ML @ 1.51% , This event is before FED meeting held in Dec’17. Scenario 2: - If an Indian Importer wish to avail Buyers Credit of $ 100K for 180days in the Month of Feb’18, Client will pay 6ML @ 2.03% BC availed in month of September’17 is cheaper by 0.53%, for same tenure and same amount Reason for LIBOR rate increase LIBOR is on move since 2016 due to continued rate hikes from US Federal Reserve. In fact, commentary for this year from US FED Chairperson - Janet Yellen is hawkish too and we can expect 3 rate hikes for FY18-19. Fed still continues to attain a balance between responding to positive news on growth and unemployment that fostered a gradual tightening, while at the same time, signalling caution due to the continually weak inflation readings that have confused policy makers. 25 Bps were hiked on 14th Dec’17, following which LIBOR rates were increased Lowest & Highest LIBOR rates reported in Past 30 Yrs. were respectively on- Oct’15 – 0.32% Mar’89 – 11.06%   Please find the attached historical LIBOR movement for the past 30 years. How to protect businesses from LIBOR movement If exposed to EUR/CHF currency, move invoicing/dealing in those currencies. For Capex transactions, hedge LIBOR rates on the date of borrowing for entire tenure. Evaluate overall cost of funding with Indian lending rate , i.e. net cost post adding forward premiums. You can always reach out to us for more clarity on above @ www.savedesk.co
Rated /5 based on 5 customer reviews
Significance of LIBOR on Borrowing Cost for Buyers Credit

Significance of LIBOR on Borrowing Cost for Buyers Credit

Saurabh Jain
As we all know, all importers can borrow cheap funds coupled with LIBOR, but ever wondered, how LIBOR affects the cost of borrowing and what happens to capex  transactions LIBOR rates? All the...
Continue reading

Union Budget : Is It A Leg Up To Our Economy?

Finance Minister Arun Jaitley proposed the annual budget for 2018-2019 in the parliament on Feb 1. Though the budget was foreseen to be presented  on Feb 28 every year, from the past year it has been announced on the Feb 1 to trap the advantages of early sanctioning of loans and line the tax revenues pursuant to the new measures. This is the fourth last Union budget proposed by the current ruling government before the elections in 2019. Finally, the anticipation for the Annual financial statement has ended. Narendra Modi had given a few hints revealing that it was not going to be much of populist in nature. Meanwhile, the propounded budget upheld a holistic approach on the overall livelihood ignoring the twaddling groups. Highlights on the Union-Budget 2018 The focus has been laid on ‘ease of living’ for the lower-middle class people of the nation. The finance minister announced the largest healthcare scheme to cover 10 crore families with Rs 5 lakhs for each family. The e-NAM network has already been connected to 470 APMC’s out of 585 and the remaining will be connected by March this year. Assurance of lowering the corporate tax has been kept up by trimming it to 25% on companies with turnover of up to 250 cr. Without affecting the comfort of income of the middle class, travel allowance of Rs.40,000 as consolation is allowed as deduction. For the purpose of job creation in rural areas of India, a sum of Rs 14.5 lakh crore is allocated. Rs 1.48 lakh crore is generously set up for renewal and reconstruction of 3600 km rail tracks and 600 railway stations. For the suburban railways, 40,000 cr was announced in the annual statement. Realizing the target of attaining revenue generation through share stake in PSU, the long-term capital gains from equity has been hooked at tax of 10%. Building on 99 smart cities is emphasized along with initiating air connectivity to 56 unattended airports and 31 unattended  helipads. Around 55000 cr has been allocated under the MNREGA (Mahatma Gandhi National Rural Employment Guarantee Act). To benefit the small farmers and helping them meet their working capital needs through ‘Kisan  Credit Cards, Animal Husbandry Infrastructure Development Fund (AHIDF) and  Animal Husbandry Infrastructure Development Fund (AHIDF) for financing animal husbandry and fisheries sector. A sum of 10,000 cr is setup for these new bodies. To double the profit and the joy of our farmers Minimum Support Price (MSP) has been declared where the prices of their crops will be 50% more than the cost of their produce, Niti Aayog has been put in place for the same purpose. Amount of 200 cr is proposed for the encouragement of organic farming, organized cultivation, SMEs involved in manufacturing perfumes and essential oils and other related industries. 2600 cr for ground water irrigation under Prime Minister Krishi Sinchai Yojna is allocated for 96 deprived irrigation districts. The Modi’s government has initiated in promoting agro-processing financial institution and has doubled the sum allocated to 14000 cr in the Ministry of Food Processing sector. Krishi Sampada Yojana is used as a tool to draw investments in food processing. Enlarged scope is provided to cover irrigational development projects through the Long Term Irrigation Fund (LTIF) organised in NABARD. 11 lakh cr is structured as institutional credit for agriculture for this financial year. A special scheme and a few measures to address the air pollution in the Delhi-NCR region is proposed. Under the Saubhagya Yojana, an aim of providing free electricity connections to households a sum of 16000 cr has been put across under the scheme. Under Swachh Bharat Mission, initiative of construction of  2 crore toilets has been taken up. Under the Right to Education Act, around 13 lakh untrained government teachers will be provided trainings to increase the standards as well as the use of digital boards in the classrooms. Concern for the motherhood is displayed by increasing the maternity leaves from 12 weeks to 26 weeks. Free connection of LPG is offered with a target of increasing from 5 cr to 8 cr for poor women. An estimate of 51 lakh houses in rural areas and 37 lakhs in urban areas will be constructed. The ruling government has proposed to cover 5cr rural citizens with 5 lakh wifi hotspots to provide access to internet. 9975 cr has been allocated for National Social Assistance Programme benefiting the widows, orphaned children, and poor Socio-Economic Caste. Prime Minister’s Research Fellows (PMRF) scheme aims in facilitating 1000 B-tech students to do Ph.D in IIT’s and IISc expecting to take part in the teaching of higher educational institutions. Funds will be allocated upto 5750 cr for the National Rural Livelihood Mission in current financial year Special attention has been proffered to the senior citizens and pensioners permitting complete dispensation of tax deducted at source on interest collecting of up to Rs 50,000 on post office savings and bank fixed deposits, while expanding tax discount on annual medical insurance premium of up to Rs 50,000 and broadening the extent of tax exemption to Rs 100,000 on healthcare for senior residents. To promote and expand tourism in our nation and for medical emergencies the financial minister has proposed to construct a tunnel under Sela Pass. To magnify the tourists’ experience from the Archaeological Survey of India,100 Adarsh monuments will be upgraded. Initiating from the missions, 482 cities and 144 cities have got credit rating and investment grade rating respectively. To bridge the working capital gap of the enormous MSME’s, 3794 cr is allocated for the credit support of this sector. For the smooth cash flow of the MSME’s, online loan facilities will be revamped. Corporate and public banks on TReDS (Trade Electronic Receivable Discounting System) are to be linked to GSTN. Non-performing assets and stressed accounts will be addressed and measures will be taken to reduce the tax burden. Additional measures will be taken for the effective functioning of Venture Capital Funds and the Angel Investors. Further pushing to the Corporate access bond markets, RBI has circulated guidelines for SEBI to accommodate ¼ th funding needs from bond markets to the corporates. Every individual enterprise will be provided with Unique ID 5G Testbed at IIT, Chennai is going to be inaugurated by the Department of Telecom. Measures are taken to liberalise FDI (Foreign Direct Investments) To link all the stakeholders, National Logistics Portal will be developed as a single online market platform by the Department of Commerce. Including 2 insurance companies 14 CPSEs will be listed on stock exchanges Stirring the economy further, public sector insurance firms namely National Insurance Company Ltd., United India Assurance Company Limited and Oriental India Insurance Company Limited has been merged and listed . Raising disinvestments by 10% from the previous year it is kept moderate at 80,000 cr. Cryptocurrency is given some importance,despite not considering it as a legal tender the government has reacted proactively towards blockchain technology The holding period of LTCG is reduced from three to two years. Exchange fund trade on stock exchanges DIPAM devising offers including debt ETF The Bank recapitalization program has aimed at lending an addition credit of 5 lakh cr to the public sector banks. A policy will be formulated where gold is developed as an asset class, measures for consumer-friendly exchange of gold. Outward Direct Investment (ODI) policy will be revamped for integrated investments. In the presence of the concerned ministers, government will formulate policies, practices for the prices, proper usage of forwards and options market, magnification of warehouse and other strategies related to imports and exports. The much anticipated union budget of 2018-2019 clearly stated that money was doled out to streamline social security, rural areas, infrastructure to benefit the Indian economy. Predominantly focus is to address the rural agrarian crisis in a holistic way. The proposal was put across amidst the opposing groups as the estimated budget was beyond targets.Currently, India is a 2.5 trillion dollar economy ranking as the seventh largest economy in the world. At the moment, the pressing concern is whether the proposed Union Budget will successfully enable India to rank up as the fifth largest economy in the world. This still remains to be the unanswered question in the minds of the citizens.
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Union Budget : Is It A Leg Up To Our Economy?

Union Budget : Is It A Leg Up To Our Economy?

Saurabh Jain
Finance Minister Arun Jaitley proposed the annual budget for 2018-2019 in the parliament on Feb 1. Though the budget was foreseen to be presented  on Feb 28 every year, from the past year it has ...
Continue reading

Introduction to Buyers Credit Interest Rates and Calculation Process

Buyers Credit is short-term loan offered by overseas financial institutions/Bank to importers in India. Buyer’s credit provides access to cheap and easy availability of funds. The funds are provided to an importer for the purchase of capital goods and non-capital goods. Buyer’s credit facility can be availed for eligible goods and services in India on deferred payment terms. The available funds are used to make payments to exporter’s bank against import bill on the due date. Funds are charged closed to Libor rates which are less costly than the local source of funds. Normally, it is calculated as Libor + Margin rates. The Interest rates offered by FI’s involve factors which play important roles in finalising them. They are: To examine whether sufficient funds are available to borrow for the transaction. Tenure for which funds are borrowed. When banks are running in scarcity they would prefer higher margins compared to other bank lines. The cost of funds that is what rates these banks get to borrow from their local market. There is an Internal Minimum margin or the cut-off margin decided by the committee or treasury. The bank is not allowed to offer pricing below the cut off margin. Banks adds their margin above the cost of funds (L+X) borrowed. External factors like economic conditions, inflations, market volatility and recent events like US downgrade, Greece and Portugal debt crisis etc also impact margin rates. Check Points for before availing Buyers Credit Maximum duration of Buyers Credit Facility for Capital Goods in 3 Yrs Maximum duration of Buyers Credit for Non-Capital Goods is 1 Yr. Maximum credit limit per Buyers Credit transaction is $20 MN. Ceiling Cost of buyer’s credit is 6 Months LIBOR + 350 BPS  (L+350 bps) Cost involved in buyer’s credit Buyer’s credit process involves a number of steps and through the process flow there are cost involved to extract its benefits: Interest cost:  Any margin charged above LIBOR forms Interest Margin, this is a financing cost  charged by banks. Interest costs usually vary with Cost of funds with respective banks. Normally it is calculated as Libor+Margin rates, it is also quoted as “3M L+350 bps” where 3M is 3 month, L is libor and bps is basis points. “Basis point” is a unit that is equal to 1/100th of 1%. It can also be put across as 3M L+3.50%. Libor will change depending upon tenure. Letter of undertaking/letter of credit:It is the cost charged by the existing bank or local bank in India for issuing LOU. It is charged as high as 1.5%. Currency risk premium: Depends on the risk perceived on the transactions. Forward booking cost /hedging cost:  In case of long terms BC, Bankers/AD insists on availing  hedging strategies to cover Foreign exchange fluctuations which comes with an additional cost of up to 3%. It is optional for the importer to book for forwards and in few banks, it is a mandatory process. Arrangement fee: it is paid to the arranger also known as broker or agent. It is the sum paid for the service rendered by authorised dealer in arranging buyer’s credit quotes to the importer. Withholding tax(WHT): tax has to be deducted by the Indian importer on the interest amount paid for the loans borrowed. Rates charged by the overseas  lenders are net of taxes; thus it has to be grossed up at the time of calculation of interest and the borrower bears tax payment as his additional  cost. WHT will not be applicable  if the loans raised are from overseas branch of Indian banks. Export credit agency(ECA) guarantee charges: They may provide credit insurance and financial guarantee. To avail this facility a sum has to be paid. Other charges: A2 payments on maturity, charges for documents 15CA and 15CB on maturity, intermediary bank charges, out-of-pocket charges etc come under this category which cost him additional money. Interest Rate Calculation Process: - Bank mentions Interest rate on Offer letter usually under below heading 3M L + 20 BPS  (Volume along with Specific Tenure will be mentioned) 6M L + 20 BPS  (Volume along with Specific Tenure will be mentioned) For instance, if the customer avails Buyers Credit of $100K from FI for 90 days, below interest will be applicable in above two scenarios 1 USD = INR 65 BPS ( Basis Point ) = 0.2% 3 Month Libor = 1.2% 6 Month Libor= 1.4% Case 1 :- a.  3M LIBOR + 60 BPS = 1.8% =  100000*65*1.8*90/360*1/100= 29250 Case 2: b.  6M LIBOR + 60 BPS = 2% =100000*65*2/100*90/360= 32500 Thus under same situations customer will pay an additional INR 3250 to avail BC for the same tenure. To read about Importance of hedging Buyers Credit
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Introduction to Buyers Credit Interest Rates and Calculation Process

Introduction to Buyers Credit Interest Rates and Calculation Process

Saurabh Jain
Buyers Credit is short-term loan offered by overseas financial institutions/Bank to importers in India. Buyer’s credit provides access to cheap and easy availability of funds. The funds are prov...
Continue reading

Suresh Prabhu: Shift of Focus on New Sectors To Boost Manufacturing, Exports

To shift focus on the recent emerging sectors such as genomic, commerce and industry minister Suresh Prabhu has indicated for a shift in India’s export and manufacturing strategy, especially on the goods that are not currently among the top 10 items that are being shipped out of the country. The new person in Udyog Bhavan is strategizing mainly on India’s political relationships to push Indian exports to new markets in countries like Cuba and many places in Africa.Prabhu has informed that India has its own model, as it is looking forward to increasing from under 20% of GDP share from manufacturing to incline employment and also aid sectors like agriculture and their food processing."If India has to have a competitive advantage, we can't keep copying others because that has already been used and become redundant. We have to find India's own model and we are identifying that in consultation with global experts and our own industry”, Prabhu mentioned in one of his recent statements.As the share of services is growing faster, it is definitely not an easy task to increase the share of manufacturing. We have to ensure that manufacturing also has to be kept up with the pace of growth in services, the minister exclaimed.Prabhu is aiming at presenting India in the global arena, for these efforts are being made to launch “Make in India 2.0” along with other similar schemes.Specific targets will be set up with additional steps to support the manufacturing sector and the new focused areas as genomic. For example, to cut down the reliance on imports from China, development and progress of basic chemicals has been identified as a priority."It is more like backward integration for the industry." The success of the plan hinges on investment by the domestic industry, which he admitted was grappling with idle capacity as well as financial stress. He said exports could help use up the excess production capacity and added that there were indications that the strain on the balance sheet was easing as companies de-leveraged.To accelerate the economic growth, the government is looking forward to dealing with investments. Prabhu also mentioned that it is not necessary for an immediate review of the FDI regime.The minister also added that he has marked some of the issues on the export side with Finance minister Arun Jaitley which also includes some issues related to GST, and signified that his ministry has called for more resources.The move to get export promotion councils to sketch the business plans for India’s traditional focus areas like engineering, textiles, and plantations are pushed forward.While the minister is bringing back the focus on project exports through advancing project financing especially in West Africa to handle the competition from China, he also acknowledged that nation did not possess deep pockets like our neighbour.It is known that 'Pvt sector has driven India's growth story' and the concept here is to forge the partnerships. For instance, the minister has invited Korean companies to make investments in the marine space. "They will themselves import, so that will aid the economy”.Also, the Korean companies are known for good brand equity, as a result, Japanese and others will be responsive in buying from them. Meanwhile, we can also use their technology and investments to make export to other countries.Prabhu declared that China has agreed to study India’s sector-specific problems with Rita Teaotia, commence secretary who is handling the task from India side.Prabhu stated, "India's growth story is a private sector-driven growth story as many of the restrictive practices which were impeding their growth were removed since 1991. We will allow this spirit to grow. I have appointed a regulatory review committee under the chairmanship of secretary, industrial policy and promotion. This will allow unleashing of entrepreneurial spirit. We will make software by removing hurdles, hardware by providing space and partnering with states."
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Suresh Prabhu: Shift of Focus on New Sectors To Boost Manufacturing, Exports

Suresh Prabhu: Shift of Focus on New Sectors To Boost Manufacturing, Exports

Saurabh Jain
To shift focus on the recent emerging sectors such as genomic, commerce and industry minister Suresh Prabhu has indicated for a shift in India’s export and manufacturing strategy, especially on the ...
Continue reading

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