Importers in India are allowed to settle/pre-close their buyer’s credit facility availed from overseas lenders. However, the same is regulated on RBI Master Circular on Import of Goods and Services & RBI Master Direction – Import of Goods and Services, RBI Master Circular on External Commercial Borrowings and Trade Credits
From importers perspective, following are commonly known reasons why importers prefer to pre-close the buyer’s credit.
Un-hedged buyer's credit outstanding is settled considering favourable exchange rates.
Demanding business requirement to prepay buyer’s credit, so as to use the same available limits for other purpose.
Conditions from Foreign Lenders:
Most of the foreign lenders offer letter on buyer’s credit that does not cover specific conditions against pre-closure of the said credit. However, traditionally most of them allow importers to pre-close provided the following
Part-Payment is not allowed
Interest along with Principal is paid completely .
Foreign Lender is kept informed about the pre-closure at the time of Offer letter issuance and their consent on the same.
Principal & Interest outstanding is paid for the complete Loan tenure including the unexpired tenure i.e.,Buyers credit availed for say 120 days can be prepaid anytime before, provided interest for 120 days along with Principal is paid at the time of pre-closure. We need to ensure that the cost of borrowing at anytime should not exceed All-in- ceiling cost* prescribed by RBI for Trade Credits i.e., 350 basis points over 6M LIBOR
Relevant Extract from RBI Master Direction & Circular relating to Import of Goods & Services,External Commercial Borrowings & Trade Credits for reference:
Interest on Import Bills
AD Category – I bank may allow payment of interest on usance bills or overdue interest on delayed payments for a period of less than three years from the date of shipment at the rate prescribed for trade credit from time to time.
In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance, at the rate at which interest has been claimed or LIBOR of the currency in which the goods have been invoiced, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances may be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.
All-in-cost includes rate of interest, other fees and expenses in foreign currency except commitment fee, pre-payment fee, and fees payable in Indian Rupees. The payment of withholding tax in Indian Rupees is excluded for calculating the all-in-cost. The all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.
Disadvantages of Pre-closure:
Cost of interest to be repaid for contract tenure of buyer’s credit in full at the time of closure .
Cost of LOU paid at the time of availing buyer’s Credit for full tenure .
Increases the overall cost of the import.