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
Saurabh Jain
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Introduction to Buyers Credit Interest Rates and Calculation Process

Saurabh Jain
Blog
30th Nov, 2017
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:

  1. To examine whether sufficient funds are available to borrow for the transaction.

  2. Tenure for which funds are borrowed.

  3. When banks are running in scarcity they would prefer higher margins compared to other bank lines.

  4. The cost of funds that is what rates these banks get to borrow from their local market.

  5. 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.

  6. 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

  1. Maximum duration of Buyers Credit Facility for Capital Goods in 3 Yrs

  2. Maximum duration of Buyers Credit for Non-Capital Goods is 1 Yr.

  3. Maximum credit limit per Buyers Credit transaction is $20 MN.

  4. 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

  1. 3M L + 20 BPS  (Volume along with Specific Tenure will be mentioned)

  2. 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

Saurabh
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

 

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