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%
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.
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