RBI’s policy on ECB’s ( External commercial borrowings) for startups

By Kranthi Tilak Reddy 29th Aug, 2017

Kranthi Tilak Reddy

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98 5 29th Aug, 2017

RBI’s policy on ECB’s ( External commercial borrowings) for startups

AD Category-1 banks can allow Startups raise ECB under the automatic route as per the below guidelines:

Eligibility: If the Central Government of India, recognizes an entity as a Startup, as on the date of raising ECB would be eligible to avail this facility.

Maturity: Minimum average maturity period is 3 years.

Recognized Lender: Lender should be resident of a country that is a member of FATF or regional bodies associated with FATF (Financial Action Task Force)

Overseas branches of Indian banks and overseas wholly owned subsidiary/ joint venture of an Indian entity can not be a lender as per this policy.

ECB can be raised by Startups as below:

Loans
Preference shares (non-convertible, optionally convertible and partially convertible preference shares)

Cap on Amount:

Startups can only borrow maximum of USD 3 million or equivalent per FY in INR or any convertible currency or combination of both.

The lender and the borrower can mutually agree on costs associated with the deal.

End use of ECB proceeds:

Funds raised through ECB can be only used for anything associated with the borrower’s business.

ECB can be converted into equity as long as it’s in line with the regulations associated with foreign investments in startups.

Collateral: Lender and borrower can agree upon the collateral/security and it can be movable, immovable assets, patents, IP rights or financial securities.

Guarantees: Corporate or personal guarantees can be issued. However, in case of a non-resident they need to qualify as lender to issue the same.

Indian banks, Indian FI’s and NBFC’s (Non Banking Financial Company) aren’t permitted to issue a guarantee either in the form of LC, LOU or LOC.

Currency Hedging: If the ECB is raised in INR, overseas lender is permitted to hedge the exposure through various derivative products available with AD category -1 banks in India.

It is imperative startups availing ECB have the appropriate Forex Risk Management Policy to obviate any risks associated with the currency movement.

Retention or investment of ECB proceeds:

ECB proceeds can be retained abroad only for expenses in foreign currency, until utilization funds can be invested in the below mentioned liquid assets.

Deposits or products offered by banks rated not less than AA (-) by Standard & Poor/ Fitch IBCA or Aa3 by Moody’s.
Treasury bills or other instruments of one-year maturity with similar rating mentioned above.
Deposits with overseas branches or subsidiaries of Indian banks abroad.

Proceeds meant for INR expenditure should be transferred immediately to the borrower’s INR account. Borrowers are allowed to deposit the proceeds, pending utilization, in term deposits with AD category-1 banks not exceeding a period of 1 year.

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Kranthi Tilak Reddy

Blog Author

Kranthi Tilak Reddy is one of the co founders and COO of White Matter Advisory services P Ltd. He is an Engineering graduate from SRM University and has done his Masters in finance.Being a true go-getter and an optimist to the core he has grown up the ranks in banking industry at an astonishing rate, his last stint being Associate Director, Business Clients -South with Standard Chartered Bank. With over 10 years of association with SME businesses and clients he certainly brings rich vein of expertise to the WMA table but more importantly his alluring passion towards great and customer service” the foundation on which he asserts WMA has been built.

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Everything You Need to Know about Equipment Loan/Machinery Loan

By Saurabh Jain

Today in the world of fierce competition and ever-changing client’s product requirement, it is necessary to automate, upgrade & improve the efficiency of shop floor with various new types of machinery and equipments.   But what’s more imperative is to look into financial viability and various equipment financing options available for equipment loan to upgrade your machines. Obviously, there are various questions which trigger your mind: Are there any Leasing options available?  What are the criteria for Banks/NBFC’s to fund equipment loan? How many days would it take to avail machinery loan? What are the benefits of taking loan from Banks v/s NBFC?  What are the cheaper financing options available under Suppliers credit? Are there any financing options for Startups? Why Equipment Loan: - Equipment Loan/Machine loans are availed by any business to improve the productivity & the efficiency of your business.  Most common types of equipment loans are availed to by Earth Moving equipments, CNC machines, Industrial equipments, Medical Machines, Dental equipments, Cranes, Precision tool cutting equipments etc.    These machines can either be purchased or can be leased. Which again paves the way to a question Loans v/s Leases, which one is better. Terms and Conditions for Equipment Loan: At least 20% of the money to be infused by the company to buy the equipment. Minimum 2 years of ITR filed and profitability to be shown in the Balance Sheet. No bad remarks on company or promoter, Court cases, Legal hearing etc. Basic CIBIL criteria to be met Machine purchased to be hypothecated to lender till the repayment of the loan is done. Standard M/c’s are funded by any lender since customized machines won't fetch any buyers in secondary markets in event of default. Usually, amount lent is inclusive of 80% of the total Invoice value which is inclusive of GST. Flexible payment options are available with lenders, with moratorium, without the moratorium etc. Benefits of Equipment Loans: Quickest Loan Sanction: - TAT for all equipment loans is shortest. Usually, if all the desired documents are submitted by client, it doesn’t take more than a week’s time to receive the sanction letter. Depreciation/Tax Benefits: -  Biggest advantage of Equipment Loan is calming the depreciation in Balance Sheet. Funding up to 80% of Invoice Value: - Another advantage is you can procure up-to 80% of invoice value (Inclusive of GST) which gives you the flexibility to use more money for the business. Flexible Re-Payment Option: - Many flexible repayment options are available today with the various lenders which gives you the flexibility to choose from deferred payment options, various structured solution to bring down the cost of the project etc. Pre-Requisite for Equipment Loan: Three Years of Business Existence: - To ascertain the business continuity and the performance of the business, Banks/NBFCs usually don’t fund greenfield project unless backed by renowned investors. Good CIBIL Rating: -  Credit Information Bureau India Limited in a rating agency which, maintains and rate your credit risk, which lenders use to assess your credit history and determine your eligibility basis your current exposure and track record of the past repayments on loan. Excellent credit history is the prerequisite to determine your loan eligibility. Excellent Business Plan: -  End use of funds will be sought for and so will be the projected business from the funded amount, most of the times the money is funded directly to the seller than into company account, unless it’s a reimbursement of equipment already purchased. For all the above terms to be met, we need to have an excellent business plan. Your entire business plan should be finalized in a few paragraphs, giving the crux of the business.  Directors Profile/ Company Profile: -  All lenders seek company’s profile to have insight about the company’s vision, products line and major clientele’s. Educational background and experience of promoters are sought to make sure about the person behind the business. Cash Flows: - Financial records confirming the money coming in and money spent is asked, before equipment loan is sanctioned. This is predominantly done to check if the money is invested in business and there is no diversion of funds. Ethical financial reporting is what lenders consider while funding small business loan requirement. Equipment Loan Interest rates:-  Loans offered by various lending institution depends on their cost of funds , hence loans offered by Pvt Banks, Psu Banks would be cheaper than loans offered by NBFCs.  Typical lending cost/ROI offered by Banks would vary between 9.5%-12.5% , which is usually backed by additional security as collateral along with hypothecation of your machinery. ROI offered by NBFCs depends on CIBIL, Credit Rating, Equipment Type. Usual ROI for NBFC starts from 12.75% -15% & is offered without security or collateral free . Machine imported/bought is used as collateral & is hypothecated to lending institution till the time of complete repayment.  What is Equipment Leasing: - Finance Lease options allow you to lease (rent) the equipment you wish. Technically, in such arrangement, Lessee pays to the lessor for use of an asset which is owned by the lessor.  Basically, borrower or lessee pay the cost of the equipment, interest and charges during the term of the agreement, via regular payments scheduled/EMI’s. Upon the end of EMI’s or Loan tenure, equipment can be either purchased at minimal pricing or returned back to the lessor. Leasing is the best option available as this gives you the flexibility to return the equipment post end of the term also, comes at reduced ROI than Machinery Loan. Other Credit underwriting terms & conditions would remain the same as per equipment loan. Processing Fees for Machinery Loan/Leasing :- Processing Fees for all equipment loans /Leasing typically ranges between 0.5% -1.5% . This is taken post acceptance of sanction letter by borrower. SaveDesk provides access to multiple lenders and bring insight to best interest rates, products offered and structures best suited for your business requirement. Want to know more about Equipment loans Call us on +91-9986641076, or write on advisor@ savedesk.co

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How Suppliers Credit can put Importers business back to Track?

By Saurabh Jain

Suppliers Credit: An importer initiates his business with the intention of accomplishing huge returns for the investments made. To fulfill the demand and needs of a country, the resources within a geographical border might not be sufficient, this space between the demand and supply is viewed as a profitable market in a business perspective by the traders. In the aftermath of the Central bank (RBI) forbidding the issuance of LOU’s for trade transactions, the Importers business was disrupted with the non-availability of immediate fund requirements for their working capital needs. Though a little time-consuming process, Suppliers credit backed by LC which is a similar option to Buyers credit has come to the rescue of small Importers. What is Suppliers Credit? The trade finance facility made available to the Importer to brings the goods into India based on the usance of Letter of Credit(LC) is known as Suppliers Credit. Here, the credit is funded by the overseas financial institutions or the sellers preferably from the seller’s country at a cost close to Libor rates which are cheaper than the local source of funding. How will Suppliers Credit help the Importers? Suppliers credit service can be availed only when it is backed by LC (Letter of Credit) which is an agreement comprising the details of the transactions. Also, the interest rates for the funding process is kept minimal, which is similar to buyers credit services with slightly varied costs. Tenure for Capital and Non-Capital Goods  A maximum tenure of 3 years is allowed for all the Capex transactions. A maximum tenure of up to 1 year/ 360 days is permitted for the Non-capex transactions from the date of the shipment. Transactions up to $20 million dollars are allowed, anything beyond the sanctioned limit requires RBI approval. Benefits / Advantages of Suppliers Credit The exporter/suppliers are dealt on sight basis Importer’s business is financed with short-term credit Importers can negotiate and settle for a better deal Financed in foreign currency close to Libor rates A low-cost source of credit significantly cheaper than the local funds Backed by LC guarantee which mitigates the risk to a certain extent Process Flow / Workflow for Availing Suppliers Credit  When an Importer requires credit after entering into a contract with the Supplier, he approaches SaveDesk (arranger) to avail Suppliers credit along with the relevant transactions details. SaveDesk, from an overseas financial institution, offers the best deal to the Importer. On acceptance of the offered price, the Importer gets an LC guarantee issued with his bank which is confined to the lending financial counters. Once the goods are shipped, the Supplier submits the necessary documents at his bank. Further, the documents are scrutinized by the lending overseas financial institution. On account of acceptance of documents and repayment as per as the LC terms by the Importer’s bank,the lending bank discounts the bill. The payment is remitted to the respected Supplier based on the LC terms. On the required due date, the Importer makes his payments to his bank which in return is settled to the lending overseas financial institution. Cost / Charges Involved in Suppliers Credit Interest cost i.e. LIBOR LC Advisory charges: which will be charged around 0.1- 0.5% Courier/Postage/Swift charges Corresponding bank charges: (Depends on bank networks) LC confirmation charges: ranges around 0.3% to 1.1% (optional) Indian Bank interest cost Documentation handling charges Negotiation charges A wise businessman takes the market arbitrage and imports goods and materials from other countries by availing low-cost loans (Suppliers credit) that would work out better for him. It can be the import of machinery equipment, raw materials anything from outside to make profits within the domestic boundaries.

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How Suppliers Credit can put Importers business back to Track?

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5 Reasons Why Business Houses Import

By Saurabh Jain

 All business houses are ceaselessly working towards optimizing their bottom line by extending their sources of supply, while most other companies encounter problems in procuring requirements and multiplying their profits. Have you ever wondered what is the most common thing about these potential profit-making companies? Yes, it is that these business houses invariably source their requirements from foreign markets. It happens to be a strategy in boosting your supply chain management and sourcing goods at a lower cost. Starting an import business has its own set of pros and cons, however here are a few points discussed on the advantages/benefits of importing: Supply in excess to demand: Each country has diversified resources which are rich and excess in supply than their domestic demands. These specialized goods or raw materials are exported across national borders and procured by the importers at right prices to make huge profits locally. As these goods are exclusive and advanced, the goods are paid and brought into the country which is useful for the customers to access new products from other markets. Exploring foreign new market trends with simplified regulations: Every country has its own unique markets tailored to serve its domestic demands. Any individual involved in importing and exporting business is fortunate enough to understand and explore the technical know-how and the effective strategies of other potential markets. Detailed study and analysis of these markets can aid in the innovation of new products and approaches in pushing your products to the target customers, in turn helping you make huge profits in the business. In most of the developed and developing countries, import and export business has become a significant part of their economy. Since the trade happens in global markets the local governments has intervened to simplify the trade process. Often the cross-border importers deal with different markets and their regulations. Hence, the government has taken measures to encourage and mitigate risks for the parties involved. Availability of affordable loans: Borrowing loans are also made easy with low-cost funding rates. They often remove pressure on the cash flow and insure you from unsettled bills of your overseas dealers. Services such as suppliers credit, buyers credit, bank guarantee and documentary LC payments are available to finance your import business. Reduced manufacturing costs: One of the predominant reasons for business houses to import materials offshore is the minimal manufacturing costs. It can be raw materials or advanced machinery equipment imported, they tend to reduce the overall manufacturing cost of a product as they are bought in bulk and plays an important role in cutting down the labour costs as well. Market expertise/arbitrage: Trading globally, dealing with currencies, exploring new markets and their products enhances the profits and the goodwill of your business. It basically helps importers to make smart moves in the market and lead the domestic markets with their potential sales for a longer duration. Optimised profits and Enhanced sales: Importing is one of the best and easy ways to maximize your business profits. The bulk goods imported are usually cost-effective helping in producing higher quality products. Often inventing new and unique products helps in better reach to the customers and also in the expansion of business which inevitably leads to increased profits. If you are on the verge of making your business lead the industry you deal with, importing is one thing you should consider. Be a wise importer, understand how to decide on a viable product that needs to be imported for the best result in your business.

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5 Reasons Why Business Houses Import

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One Stop Portal For All Your Buyers Credit Needs

By Saurabh Jain

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% =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. 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. Abbreviations: 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

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One Stop Portal For All Your Buyers Credit Needs

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Why Suppliers Credit Is Crucial For Importer Business?

By Saurabh Jain

The concept of imports and exports serves the purpose of fulfilling the domestic demands by mutually sharing the resources and commodities between two national borders. To facilitate easy trade finance to the importers of India the government had structured buyers credit funding process. After divulging the PNB biggest buyers credit scam, there has been a surge of prices and stringent practices followed by the RBI which has significantly disrupted the Indian importers. Nevertheless, another similar option is available to the importers to avail trade finance, which is popularly known as Suppliers credit. What is Suppliers Credit? Suppliers credit is a trade credit funded to the importer on basis of Letter Of Credit (LC). Under the LC method of payment, the overseas suppliers or financial institutions preferably from the seller’s country finances the importers at cheaper rates than the local source of funding, which are close to Libor rates. It is beneficial to the seller as he receives payments immediately after the shipment of goods, which in turn helps the importer to negotiate for better prices. Since the issuance of LOU(letter of undertaking) has been banned, the importers are switching  to avail suppliers credit facility which also aids in availing cheap interest rates like buyers credit. Why suppliers credit?/Advantages of suppliers credit: The exporter/suppliers are dealt on sight basis Importers can negotiate for better commercial terms. Low-cost source of funds As only imports under LC qualifies for suppliers credit the risk in the process is mitigated. The letter of credit is an assurance issued which includes detailed information of the transaction and is generally restricted to overseas FI counters. Suppliers credit can be availed by the importers on both capital/non capital goods up to USD 20 million per transaction. The payments here are processed through international payment networks known as SWIFT(Society for Worldwide Interbank Financial Telecommunication code). Differences between Buyers Credit and Suppliers Credit: Buyers Credit Suppliers Credit Swift payments through MT799 Swift payments through MT760 Credit is funded to the importers nostro account Portion of the transaction is paid at sight, the rest of it is paid in accordance with the terms and conditions agreed with the seller (drafts, promissory notes etc). Additional clauses or Amendments are not required in LC Negotiation Clause, Reimbursement Clause and Confirmation Clause are covered under this. LC Clauses might need to be included/amended as requested by suppliers credit offering bank   Payments were allowed to be made on the due date to the exporters Supplier/exporters are paid at sight With the non-availability of the buyers credit trade facility, the importers were put under inconvenience. Now, the importers are availing suppliers credit which has evolved to be a new revolution in the importers trade finance facility.  

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Why Suppliers Credit Is Crucial For Importer Business?

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Service Exports from India Scheme (SEIS) for Exporters

By Saurabh Jain

What is SEIS ? In order to promote Exports from India, the government of India has launched Service Exports from India Scheme (SEIS) which is rewarded in the form of duty scrip credit.  These Scrips are rewarded for all eligible exports from India, which can be traded against any custom fee-related activity. Why SEIS? As we all know, India is a trade deficit country i.e. our imports are greater than exports, this deficit leads to the artificial demand of dollars in India. Advantages of boost to Exports are as follows- Boost to SMEs and MSMEs Creation of Jobs Stable & strong currency Overall Economic and Infrastructure growth What are the Eligibility Criteria :- For an exporter in India to be eligible for SEIS scheme scrips apart from companies having IEC code, the following foreign exchange criteria should be met- S.No Incorporation Type Minimum Foreign Exchange In FY 1 Partnership Firm/LLP/Company USD 15000 2 Proprietorship Firm USD 10000   Net foreign exchange earnings for the SEIS scheme is calculated as: Net Foreign Exchange = Gross Earnings of Foreign Exchange – Total Expenses or payment or remittances of Foreign Exchange. Uses of Credit Scrip Duty credit scrips can be used for the settlement of Excise Duty Custom Duty Service Tax Settlement of Default of EPCG claims etc Benefits of SEIS Scrips Substantial Reward  ( Between 3-5% of Net Exports ) Freely Tradeable Easily Transferable Valid for 18 Months from date of Issue Exports qualified for SEIS Scheme: -   More details about export activities qualified for SEIS scrip claims can be found here http://dgft.gov.in/exim/2000/FTP-2017/ftp17-051217.pdf Ineligible Export service for SEIS: - Any Equity or debt participation, receipts of  loans, donations etc. not related to rendering of services will not qualify for SEIS Any service which is not mentioned in DFGT circular on SEIS For more details/clarity reach out to Saurabh @ savedesk.co

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Service Exports from India Scheme (SEIS) for Exporters

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Divulging India Biggest Buyers Credit Scam

By Saurabh Jain

Buyers Credit is a short-term loan available to an importer from Foreign Lender’s at low interest rates. There has been breach committed in the issuance of Letter of Undertaking (LOU’s) in the process. This funding facility which has been used fraudulently is leading to problematic situations to the Indian importers.   What went wrong –PNB Scam? Two of the Punjab National Banks (Mumbai) employees were issuing Fake LOU details favoring Nirav Modi group of companies, there by giving birth to one of the biggest scam of $1.77Bn in Buyers Credit history in India. Since LOU’s are considered to be most authentic bank to bank communication, lending bank’s too did not bother to do additional due diligence on LOU’s issued by Punjab National Bank. Banks, which are affected? Union Bank Axis Bank Allahabad Bank. Do remember these are all Indian Banks housed in foreign locations, which funded PNB India basis LOU issued. How it was executed? It started with Modi’s diamond firms which approached Punjab National Bank for Buyers credit requirement for the import of diamonds . As per process companies availing buyers credit should have Buyers Credit limits with LOU Issuing bank, which in this was PNB. Limits should be lien marked for issuance of LOU to lending bank. Where as in this case employees of PNB issued fake LOU’s without performing necessary checks and banking formalities (Obviously to benefit Modi’s firm).  Basis these fake LOU’s foreign branches of Indian banks extend loans to PNB India Nostro account & from Nostro these funds were remitted to Exporter. Exporter’s in this case were either kith and kins or close business associated of Nirav Modi or his own companies in different countries. Thus resulting in one of the biggest scam of Buyers Credit history. PNB has reported this case to CBI (Central Bureau of Investigation) for further investigations, Meanwhile as a usual practice by all fraudster, Mr. Nirav Modi has also fled from India, Indian officials are still baffled how to ‘Find NiMo’ Impact of PNB Scam on Importers in India Importers in India are facing challenges to avail Buyers Credit post unraveling of Buyers Credit Scam.  In spite of multiple foreign lenders available in market, getting a quote and offer letter has become a task. Most of them are either not quoting or are offering rates which are way beyond regular standards. We have tried listing down current issues faced by Importers In India Total No of foreign lenders/Banks offering quotes are reduced Time taken to offer quotes is increased Few of the LOU’s are cancelled in spite of issuance of offer letter Importers negotiation has come down as less no of lenders are available. Most of the banks are asking for B/L & invoice from LOU issuing bank official ID. Cost of funds for client will go up as he will have to use OD facility to make payment Double Whammy for Importers as Currency prices has also shot up by approx. 1.5% in couple of days. PNB bank Customer facing maximum challenges to have their LOU’s funded. This scam has questioned many compliance practices followed by Indian banks  & has resulted in lot of discomfort to the Importers . Case is been investigated by CBI officials and will surely lead to redefining entire process of Buyers Credit business in India.

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Divulging India Biggest Buyers Credit Scam

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What are the current problems being faced by organizations in raising capital?

By Kranthi Tilak Reddy

Raising capital refers to establishing capital from investors or venture capital sources by any firm. When any company wants to be more extensive, it can raise additional capital. Usually, extremely small or small company capitals come from three sources- friends and family, Business Angels and venture capitalists. Medium enterprises most of the times go with debt financing, equity financing and sometimes from the government too. There are many schemes provided by the government for such enterprises which lead to improvising in the economy of India. The methods and processes involved in raising capital for long term and medium term are listed below-       A. Issue of shares Equity shares Preference shares     B. Issues of debentures     C. Loan from Financial Institutions     D. Loans from commercial banks     E. Public deposits     F. Reinvestment of profits The methods and processes involved in raising capital for short term are as follows- Trade credit Factoring Discounting bills of exchange Bank overdraft and cash Above are the most common sources of startup capital for businesses. Every entrepreneur should know the game before being willing to invest their own money and proceed towards implementing business plan. “It’s often said, raising money is not actually a success, it’s not actually a milestone for a company and I think that’s true” - Marc Andreessen We shall now proceed to the discussion of some of the major concerns faced by organizations in raising capital- The current problems being faced by organizations in raising capital   One of the biggest challenges of funding is accepting rejection. Usually, the startup entrepreneurs do not end up with a good response. Investors are really not interested in startup or small-scale industries as they see very less potential. The main trouble that small businesses face while approaching for funds is the problem of uncertainty. Usually, small businesses do not have any past record that investors or lenders can analyse to decide whether or not to provide the small business with the required fund needed for expansion. Usually, small and medium firms have to pay a higher rate of interest in banks as compared to big and established firms. Banks and financial institutions ask for personal guarantees also. The stock marketers tend to lay or attach little value to it because they may not have confidence in small business offers. This will make the firm to issue more number of shares which dilute the firm’s earning. It becomes difficult for small businesses to find investors who are willing to invest. Investors are more likely to invest in bigger and more attractive firms. Strategies to resolve the current issues Grants by the government should be given to individuals for a specific project or purpose. There are some conditions which are to be followed for grants to be obtained. Funds from informal network of friends and family members is often ignored as a source of fund for small and medium-sized companies if well harnessed . Venture capitalists provide money to start-ups in the expectation of abnormally high return.

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What are the current problems being faced by organizations in raising capital?

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How Effective Is Hedging To The Importers And Exporters?

By Piuesh Daga

A smart importer or the exporter opts for hedging to make a sharp-witted move against the currency fluctuations. Basically, it is a cautious initiative to cover yourself from encountering the fear of ‘probability of loss’. Whether an importer or exporter business is always initiated with a motive- “PROFIT”. There are a few strategies that can aid you to limit your risks to a certain extent and realize profits, ‘hedging’ is one of them. What is Hedging in Finance? Hedging is one of the proposed actions to mitigate risks and secure businesses from future uncertainties. The price movements of the currencies are unpredictable as the market forces have varied volatility in the global financial stability. When you want to avoid such exposures, “hedging” comes into the picture. Hedging Meaning: It is a strategy with an objective to save the potential profits by freezing the exchange prices for a fixed future date. It is similar to an insurance. Here, basically, the hedger is fixing the price at a certain level to cover the risk of upward and downward movement of prices. There are various types of hedging namely financial instruments like options, currency future contracts, exchange- traded funds, derivatives, etc. Example of Hedging: An Indian importer imports 10,000 apple products from China for 10,00,000 lakhs, the exchange is performed in international currencies absolutely based on the currency movements.The importer hedges at 64.00 USD in the future contracts to protect his payments from appreciation and depreciations of the dollar values. The tenure of the contract is agreed at 6 months from the date of imports. On the completion of the tenure, the exchange rate of dollar lies at 66.00 USD. Here the importer has hedged himself and paid 6,40,00,000 against 6,60,00,000 and retained the loss of extra pay of 20,00,000 lakhs. How hedging improves your business: Overall protection: Hedging itself acts as a shield against currency fluctuations. Using this strategy you can hedge regardless of the upward or the downward movements. The “hedger” is on a safer side and is risk-free until the payments are settled. Better informed decisions: Drafting strategies such as taking long positions in the forward markets and eliminating risks and uncertainties for the transactions settled in foreign currencies is very much important. It helps you understand the expenses, and in turn aids in increasing your business value. Exact value price for import/export: In the case of importers and exporters, the international transaction predominantly depend on the dollar values. Hence, hedging is pivotal for them to cover from the risk of changing currency values. Otherwise, there are chances of losing profits with the adverse currency movements. Through hedging, the importer/exporter is locking the current value for a particular transaction through currency options or future contracts from London International Financial Future Exchange or Chicago Mercantile Exchange etc.(they also allow final exchange rates than a fixed point). Protect you against currency fluctuations: Currency hedging, in essence, is protecting against volatility of the currency either be with the weakening or strengthening of the dollar rates. Hedging example: Say the contract made on a particular date is US $2,00,000, and the dollar rate on the same day is INR 62.00. The payments are agreed to be made after two months. Assume that on the due date, the dollar rate is INR 60.00. The exporter is receiving INR 12000000 instead of INR 12400000, resulting in a loss of 4,00,000. Currency hedging against the contract is preferable here. Bottomline is saved: This practice is better than the traditional ways, here we can usefully freeze the prices which are mutually decided beforehand. The fear of losing money is minimized. If this strategy is understood and executed properly, it will be of great importance in saving business bottomlines. Better business opportunities: Hedging techniques aid in expanding business opportunities as the actions are planned formerly. With a minimal risk of loss, there are diversified choices for suited scenarios.You are ensured to be protected from the market upswings once you enter the contract. The financial markets are uncontrollable, however, it is always better to hedge your business to narrow down faulty losses. Make a smart choice by opting hedging and anticipate profits against unfavourable financial climates.

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How Effective Is Hedging To The Importers And Exporters?

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Significance of LIBOR on Borrowing Cost for Buyers Credit

By Saurabh Jain

As we all know, all importers can borrow cheap funds coupled with LIBOR, but ever wondered, how LIBOR affects the cost of borrowing and what happens to capex  transactions LIBOR rates? All the above queries will be answered in this blog. All the foreign currency loans are borrowed either in LIBOR/EBOR; hence any movement in their rates will yield to expensive cost of borrowing in India. Impact of LIBOR on Importers Scenario 1: - If an Indian Importer had availed Buyers Credit of  $100K for 180 Days in the Month of September’17, Client will pay 6ML @ 1.51% , This event is before FED meeting held in Dec’17. Scenario 2: - If an Indian Importer wish to avail Buyers Credit of $ 100K for 180days in the Month of Feb’18, Client will pay 6ML @ 2.03% BC availed in month of September’17 is cheaper by 0.53%, for same tenure and same amount Reason for LIBOR rate increase LIBOR is on move since 2016 due to continued rate hikes from US Federal Reserve. In fact, commentary for this year from US FED Chairperson - Janet Yellen is hawkish too and we can expect 3 rate hikes for FY18-19. Fed still continues to attain a balance between responding to positive news on growth and unemployment that fostered a gradual tightening, while at the same time, signalling caution due to the continually weak inflation readings that have confused policy makers. 25 Bps were hiked on 14th Dec’17, following which LIBOR rates were increased Lowest & Highest LIBOR rates reported in Past 30 Yrs. were respectively on- Oct’15 – 0.32% Mar’89 – 11.06%   Please find the attached historical LIBOR movement for the past 30 years. How to protect businesses from LIBOR movement If exposed to EUR/CHF currency, move invoicing/dealing in those currencies. For Capex transactions, hedge LIBOR rates on the date of borrowing for entire tenure. Evaluate overall cost of funding with Indian lending rate , i.e. net cost post adding forward premiums. You can always reach out to us for more clarity on above @ www.savedesk.co

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Significance of LIBOR on Borrowing Cost for Buyers Credit

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