Most of us are aware that, Buyer’s credit (BC) is a cheap source of funding available to facilitate imports into India barring advance payments. As an importer, we are happy to avail LIBOR or EURIBOR plus margins offered by overseas lenders . The rates quoted are comparatively cheaper than INR funds.
We tend to ignore some of the best practices which could still reduce our overall cost. Now let’s understand the pricing structure of a sample buyer’s credit transaction.
An importer is requesting buyer’s credit quote for an import of $200000 for 35 days.
You may find quotes as 3M L+ 30 Bppa (basis points) + $50
Overseas Lender Cost :
LIBOR/EURIBOR + Margins
Out of pocket expenses if any
Working Capital Banker Charges :
Arrangement Fee, if quote is arranged by Bank . Typically ranges between 0.1 to 0.4 Bppa. If the quotes are arranged by consultant, Fixed fee is levied.
LUT/LOC Issuance charges. This is charged predominantly on basis of credit rating, collateral coverage, strength of balance sheet , cash flows etc. This can range typically between 0.3% to 2.5% P.a. Very rarely have we witnessed issuance at fixed fee by banks.
Document handling charges(Fixed / Variable Fee).
Import commission charges(Fixed/ Variable Fee).
Swift charges(Fixed Fee)
WithHolding Tax if any(Range bound )
Hedging cost if opted for (~4.5% P.a)
Best practices to follow while availing BC:
In the above example, LIBOR quoted is for 3 months although we have 2M LIBOR available. This could have brought the pricing lesser by 5Bps. Ensure to check the LIBOR quoted by the foreign lenders which has to be as close as next available LIBOR comparing the tenure of Buyer’s credit. For your reference, LIBOR is generally quoted for tenures as Overnight,1 week,1M,2M,6M and 12 M.
Understand if there are any out of pocket expenses levied by Foreign lender which could increase your cost drastically. Especially for low value buyer’s credit it is preferable to choose a foreign lender without any out of pocket expenses.
Agree on pricing in advance related to executing the transaction with your working capital bankers. Most preferably, understand the cost for each line item separately as quoted above.
Keep an eye on margins offered by foreign lenders and calculate your net outflow on BC ROI to take a judicious call.
To understand if there is any scope of cost reduction relating to your current buyer’s credit, share your existing quote /offer letter to email@example.com .