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
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Mechanism of Buyer’s Credit Rollover

Saravana Bhaskar
Blog
15th Dec, 2017
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
Saravana
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.

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