What is Supplier’s Credit?
Supplier’s credit is a trade credit facility for imports into India, where a Buyer ( importer) is able to avail credit either from the Seller or from a financial institution preferably from Seller’s country. This is only made available under letter of credit and not accepted for any other import payment methods.
Supplier’s credit is mostly used when the seller demands payment at sight. However, Buyer needs USANCE period for the same shipment. Typically, it is used for CAPEX imports where banks would restrict clients to use only fund based limits(Term Loans) which is far expensive than Supplier’s credit. By availing Supplier’s credit, Buyer gets access to cheaper source of funds(LIBOR Based).
Supplier’s Credit allows the buyers to deal with seller on sight basis term which allows them to negotiate for better discounts to acquire goods at better prices. At the same time, it’s beneficial for the seller too, as they get the payment immediately after shipment of goods (Upon acceptance by Buyer’s Bank to make the payment).
Regulation on Supplier’s Credit.
Supplier’s credit is directed and regulated basis RBI Master Circular on ECB & Trade Credits & RBI Master Direction - External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers.
Few important points to be noted as follows.
Authorized Dealers are allowed to approve trade credits for both capital/Non capital goods upto USD 20 million per transaction. Anything beyond this specific threshold will have to be referred to RBI for their approval
Supplier’s credit for import of Non-capital goods can be upto 1year from the date of shipment. However, the same is restricted to working capital cycle when the facility is drawn from the bank.
Supplier’s credit for import of capital goods can be availed upto 5 years. However, banks may restrict the tenure to 3 years from the date of shipment. LOU/LOC are generally issued to maximum of 3 years.
Rollovers are not allowed beyond permissible tenure.
Buyer (Importer) approaches SaveDesk (Arranger) with relevant transaction details pertaining to the import i.e., before LC issuance
SaveDesk gets an offer from overseas Financial Institutions.
Buyer confirms on the pricing offered and gets the LC issued through his working capital banker. LC’s are generally restricted to overseas FI’s counters .
Upon Shipment, Supplier submits the documents to their bank which in turn is sent to overseas FI from whom Supplier’s credit is being availed for scrutiny of documents.
This is further forwarded to buyer’s bank by overseas FI for acceptance. Upon acceptance by Buyer, Buyer’s bank sends overseas FI guaranteeing payment on due date.
Overseas FI discounts the bill and makes the payment to supplier through their bank.
On due date, Importer makes the payment to his bank which in turn is paid to overseas FI to settle the transaction.
Requirement to avail Supplier’s credit
Only Imports under LC qualify to avail supplier’s credit
LC generally are restricted to overseas FI counters
Necessary changes in LC to be done relating to USANCE period basis, the offer received from overseas FI.
Suppliers Credit is generally availed from an overseas FI where the seller is present, which avoids delay in documents sent on acceptance. However, with recent developments in Banking sector, its availed from other countries too keeping in mind significant savings on interest rates offered.
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