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One Stop Portal For All Your Buyers Credit Needs

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
One Stop Portal For All Your Buyers Credit Needs
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One Stop Portal For All Your Buyers Credit Needs 776 One Stop Portal For All Your Buyers Credit Needs Blog
Saurabh Jain Apr 18, 2018
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 f...
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Service Exports from India Scheme (SEIS) for Exporters

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

Service Exports from India Scheme (SEIS) for Exporters

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 ...
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Divulging India Biggest Buyers Credit Scam

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

Divulging India Biggest Buyers Credit Scam

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...
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How Effective Is Hedging To The Importers And Exporters?

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?

How Effective Is Hedging To The Importers And Exporters?

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 ...
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Significance of LIBOR on Borrowing Cost for Buyers Credit

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

Significance of LIBOR on Borrowing Cost for Buyers Credit

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...
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Significance Of Libor (London Interbank Offered Rate)

History of Libor: Rooted from the early 1980s, LIBOR has an active part in the modern financial markets. In 1986, Libor was officially launched by the “British Bankers”, with top three currencies - dollar, yen and the pound sterling.  Before the takeover by IBA (ICE Benchmark Administration) it was known as BBA libor until Feb 1, 2014. SIGNIFICANCE OF LIBOR: The libor rates have a vast spread significance and as it is not just limited to London or Europe. They have more than sixty nations as volunteered members possessing an international scope. This is primarily due to the lowest borrowing rates presented  among all the other financial institutions. The FOREX market is probably unthinkable without libor and its implications in global currency trade. Also familiar as ICE libor or benchmark rate offered by the London interbank, it is predominantly used in Forex markets to serve the purpose of calculating interest rates on various loans across the world. WHAT IS LIBOR? “LIBOR” or Intercontinental Exchange London Inter bank Offered Rate is a reference benchmark rate charged by the banks for short-term debt instruments which includes government and corporate bonds, derivatives such as currency and interest swaps etc.The rates offered are considered as the base price by banks to calculate interest rates. Libor is used as base price+marginal interest cost that help companies to hedge interest rates exposures. HOW DOES LIBOR FUNCTION? It is structured to work in a way where a group of major banks is asked to quote the rate at which they could borrow funds from other banks before 11:00 AM each morning (Greenwich Mean Time). About 35 libor rates are posted each business day and the lowest interest rates are compiled for loans with 7 different maturities for 5 major currencies. Libor can range from overnight to twelve months, but the most quoted is the 3 month USD rate. Basically, libor is calculated on a method called “trimmed arithmetic mean” wherein the extreme values are included.This can be expressed as “LIBOR+X bps”, wherein bps stands for ‘basis point’ and ‘X’ is the premium charged over and above the libor rate by the lender to the borrower. The publication of benchmark such as libor is beneficial for the bank customers to judge whether a loan rate is competitive in the market. Libor is not prefixed but is based on a questionnaire where selective banks estimate the borrowing rates. LIBOR decides rates on five major currencies  1)CHF(Swiss Franc)   2)EUR(Euro)   3)GBP(Pound Sterling)   4)JPY (Japanese Yen)   5)USD(US Dollar). Most of the credit agencies, banks and other financial institutions all over the world look up to libor rates to set up their own interest rates. Presently, there are contracts worth more than trillions of dollars which are spread across different maturities to benchmark libor. Other rates are fixed on top of libor. Though it has encountered a number of controversies, its daily borrowing rates continue to be at the top to calculate base for interest rates.
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Significance Of Libor (London Interbank Offered Rate)

Significance Of Libor (London Interbank Offered Rate)

Kranthi Tilak Reddy
History of Libor: Rooted from the early 1980s, LIBOR has an active part in the modern financial markets. In 1986, Libor was officially launched by the “British Bankers”, with top three ...
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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

Mechanism of Buyer’s Credit Rollover

Saravana Bhaskar
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 year...
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Introduction to Buyers Credit Interest Rates and Calculation Process

Buyers Credit is short-term loan offered by overseas financial institutions/Bank to importers in India. Buyer’s credit provides access to cheap and easy availability of funds. The funds are provided to an importer for the purchase of capital goods and non-capital goods. Buyer’s credit facility can be availed for eligible goods and services in India on deferred payment terms. The available funds are used to make payments to exporter’s bank against import bill on the due date. Funds are charged closed to Libor rates which are less costly than the local source of funds. Normally, it is calculated as Libor + Margin rates. The Interest rates offered by FI’s involve factors which play important roles in finalising them. They are: To examine whether sufficient funds are available to borrow for the transaction. Tenure for which funds are borrowed. When banks are running in scarcity they would prefer higher margins compared to other bank lines. The cost of funds that is what rates these banks get to borrow from their local market. There is an Internal Minimum margin or the cut-off margin decided by the committee or treasury. The bank is not allowed to offer pricing below the cut off margin. Banks adds their margin above the cost of funds (L+X) borrowed. External factors like economic conditions, inflations, market volatility and recent events like US downgrade, Greece and Portugal debt crisis etc also impact margin rates. Check Points for before availing Buyers Credit Maximum duration of Buyers Credit Facility for Capital Goods in 3 Yrs 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) Cost involved in buyer’s credit Buyer’s credit process involves a number of steps and through the process flow there are cost involved to extract its benefits: Interest cost:  Any margin charged above LIBOR forms Interest Margin, this is a financing cost  charged by banks. Interest costs usually vary with Cost of funds with respective banks. Normally it is calculated as Libor+Margin rates, it is also quoted as “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 change depending upon tenure. Letter of undertaking/letter of credit:It is the cost charged by the existing bank or local bank in India for issuing LOU. It is charged as high as 1.5%. Currency risk premium: Depends on the risk perceived on the transactions. Forward booking cost /hedging cost:  In case of long terms BC, Bankers/AD insists on availing  hedging strategies to cover Foreign exchange fluctuations which comes with an additional cost of up to 3%. It is optional for the importer to book for forwards and in few banks, it is a mandatory process. Arrangement fee: it is paid to the arranger also known as broker or agent. It is the sum paid for the service rendered by authorised dealer in arranging buyer’s credit quotes to the importer. Withholding tax(WHT): tax has to be deducted by the Indian importer on the interest amount paid for 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 and the borrower bears tax payment as his additional  cost. WHT will not be applicable  if the loans raised are from overseas branch of Indian banks. Export credit agency(ECA) guarantee charges: They may provide credit insurance and financial guarantee. To avail this facility a sum has to be paid. Other 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. Interest Rate Calculation Process: - 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. To read about Importance of hedging Buyers Credit
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Introduction to Buyers Credit Interest Rates and Calculation Process

Introduction to Buyers Credit Interest Rates and Calculation Process

Saurabh Jain
Buyers Credit is short-term loan offered by overseas financial institutions/Bank to importers in India. Buyer’s credit provides access to cheap and easy availability of funds. The funds are prov...
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Simplified Hedging Norms For Exchange Rate Risks By RBI

There are simplified norms set up by RBI recently for hedging exchange rate risks. Under this, the companies are allowed to take up to USD 30 million on a gross basis.  Though the draft scheme of simplified hedging facility was released in April 2017, its first official announcement was made by the Reserve Bank of India in August 2016."The facility is being introduced with a view to simplify the process for hedging exchange rate risk by reducing documentation requirements, avoiding prescriptive stipulations regarding products, purpose and hedging flexibility, and to encourage a more dynamic and efficient hedging culture," said an RBI notification.The provisions for resident and non-resident firms (other than individuals) contracted or anticipated, to hedge exchange rate risk on transactions, made permissible under Foreign Exchange Management Act (FEMA) will come into force from  January 1, 2018.“The products covered under this will be any Over the Counter (OTC) derivative or Exchange Traded Currency Derivatives(ETCD)”, the RBI said, adding cap on outstanding contracts is "USD 30 million, or its equivalent, on a gross basis"."If hedging requirement of the user exceeds the limit in course of time, the designated bank may re-assess and, at its discretion, extend the limit up to 150 percent of the stipulated cap," the guidelines read.It also said that internal policy is mandatory for banks with respect to the deadline up to which a hedge contract for a given latent can be rebooked by the user or rolled over.
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Simplified Hedging Norms For Exchange Rate Risks By RBI

Simplified Hedging Norms For Exchange Rate Risks By RBI

Piuesh Daga
There are simplified norms set up by RBI recently for hedging exchange rate risks. Under this, the companies are allowed to take up to USD 30 million on a gross basis.  Though the draft scheme of si...
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Everything you need to know about OFAC Sanctions

What is OFAC?OFAC or Office of Foreign Assets Control is a department of US Treasury that regulates both economic and trade sanctions against countries or individuals who are directly involved or promote terrorism or narcotics related activities. OFAC Sanctions generally regulates United States persons in conducting  or  dealing  with any commerce or trade related activities with the sanctioned countries as listed, which may change from time to time.United States Persons are:U.S. Citizens Permanent U.S. residents / LPRs i.e. Lawful permanent residentsCompanies incorporated under U.S. Law or in U.S.All companies / persons located in the U.S.Companies or entities which are owned /controlled by the U.S. Citizens.Why do Indian Companies or Indian Banks abide by OFAC Sanctions?The obvious question is why are Indian companies regulated from trading with the sanctioned countries or why Indian banks restrict such transactions? Many countries tacitly abide by the sanctions imposed by the U.S, mainly for the below reasons:US dollar is the most traded or accepted currency globally for the international trade, cross-border payments or other related transactions.Today’s global banking system and transactions involve Correspondent banks, which could be based out of US or associated with the U.S. banks.Cross-border payments could directly or indirectly involve U.S. banks, hence third countries companies or banks, often refuse to conduct transactions with companies / countries on the US sanctions list on account of settlement related issues.Economic and diplomatic ties with the U.S.  There are various types of economic sanctions, few of them are stated below:Country Based SanctionsList Based Sanctions/Smart SanctionsSecondary SanctionsCountry Based Sanctions: Below listed countries currently face country-based sanctions, which means any trade or economic transactions involving these countries are restricted.IranNorth Korea.SudanCentral African RepublicSyria andCubaBurma, also known as Myanmar, was earlier a part of the above list. However, in late 2016, sanctions against the Asian country have been ended. Although US sanctions against Burma have been lifted, there are still a few mild restrictions that companies dealing with Burma should be wary of.List Based Sanctions:Also known as ‘smart sanctions’, these are specific to persons, companies, and entities and not the whole country. List-based sanctions allow the government to accurately aim at individuals and entities that are a menace to the country’s security, foreign policy, and economy of the U.S.OFAC forbids any transactions between U.S. persons and individuals, companies on the SDN list i.e. Specially Designated Nationals and Blocked Persons list. Smart-sanctions were used for the Ukraine-based sanctions as they are more precise and don’t end complete ties with a particular country.Secondary Sanctions:These are currently being applied only to non-US persons, entities or organizations that have significant volumes of trade with Iran and can be used against other countries in future when the need arises.
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Everything you need to know about OFAC Sanctions

Everything you need to know about OFAC Sanctions

Kranthi Tilak Reddy
What is OFAC?OFAC or Office of Foreign Assets Control is a department of US Treasury that regulates both economic and trade sanctions against countries or individuals who are directly involved or prom...
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Can an Importer Combine Multiple Bills and Avail a Single Buyer’s Credit Quote

There could be instances where an importer has to make multiple payments to the same exporter. The importer can choose to combine all the bills and avail a single Buyer’s Credit quote, which would help him reduce various costs that are associated with availing Buyer’s Credit. Advantages:Generally, transactions with higher value would fetch better quotes in the market. i.e. if there are 3 bills of 30,000 USD each for 90 days, the interest rate/cost in the isolation would be much higher than a single quote for 90,000 USD.Multiple BC quotes mean additional LOU charges and arrangement fees as it’s linked to the number of offer letters issued.Obviates the delay and hassle of obtaining multiple quotes either from the bank or the consultants.   Things to consider while opting for such transactions:Importer should check with his bank i.e. the LOU issuing bank on availing Buyer’s Credit by combining multiple bills.Payment due dates could vary between each bill so the importer has to choose specific drawdown date and opt for BC accordingly.  Process Flow ChartProcess FlowImporter decides on the drawdown date.Importer has to inform his bank on combining multiple bills and execute a single BC transactionImporter takes BC quote either from the bank or consultant post providing the details of multiple bills.Importer’s bank issues LOU /LOC with complete details of all the bills involved in the transaction.Overseas lender or the funding bank funds the cumulative amount of all the bills as requested.Post receipt of funds, importers bank makes payment to the   exporter/ supplier as per the details provided in the bills.
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Can an Importer Combine Multiple Bills and Avail a Single Buyer’s Credit Quote

Can an Importer Combine Multiple Bills and Avail a Single Buyer’s Credit Quote

Kranthi Tilak Reddy
There could be instances where an importer has to make multiple payments to the same exporter. The importer can choose to combine all the bills and avail a single Buyer’s Credit quote, which would h...
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