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RBI’s Policy on Trade Credits for Imports

“Trade credits” are credits extended to importer for imports directly by overseas seller, bank & FI for maturity up to five years. Based on the source of finance we have trade credits such as Buyer’s Credit & Suppliers credit. Buyers Credit: Loan extended to importer by a bank or financial institution outside India for funding of his import payments is known as “Buyer's Credit”. Suppliers Credit: Credit extended by the overseas supplier to the importer for his imports into India is known as “Supplier’s Credit”.  Amount and Maturity: (i) AD banks are permitted to allow trade credits for imports up to USD 20 million per import transaction with a maturity period up to one year (from the date of shipment).All such imports should be permissible under the current Foreign Trade Policy of the DGFT (ii) AD banks can approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and up to five years (from the date of shipment ) for import of capital goods. Roll-over or extension isn’t allowed beyond this period. (iii) Trade credit period should be in line with the operating cycle and trade transaction. It’s responsibility of AD Category banks to ensure  these instructions are diligently complied with. Cost Ceilings on Trade Credits: The current all-in-cost ceilings are as under The all-in-cost ceilings include arrangement fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any. c) Letter of Undertaking or Letter of comfort issuance: For import of non-capital goods AD banks are allowed to issue Letters of guarantee/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favor of exporter’s bank and financial institution, for an amount not exceeding USD 20 million per transaction for a period up to one year. For capital goods the permissible period is three years from the date of shipment, subject to guidelines issued by Reserve Bank. The AD banks are not allowed to issue Letters of Credit / Guarantees / Letter of Undertaking (LoU) / Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution for the extended period beyond three years. d) Reporting AD banks have to diligently furnish details of approvals, drawal, utilization, and repayment of trade credit granted by all its branches, in a consolidated statement, during the month, in form TC from April 2004 onwards not later than 10th of the following month. Each trade credit may be given a unique identification number by the AD bank. AD banks are required to furnish data on issuance of LCs / Guarantees / LoU / LoC by all its branches, in a consolidated statement at quarterly intervals from December 2004 onwards, not later than 10th of the following month.
RBI’s Policy on Trade Credits for Imports
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RBI’s Policy on Trade Credits for Imports 462 RBI’s Policy on Trade Credits for Imports Blog
Kranthi Tilak Reddy Aug 14, 2017
“Trade credits” are credits extended to importer for imports directly by overseas seller, bank & FI for maturity up to five years. Based on the source of finance we have trade credits such as Buyer’s Credit & Suppliers credit. Buyers Cred...
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Foreign Letter of Credit Discounting

Letter of Credit (LC) Discounting is a short-term credit facility provided by the bank to Exporter. Seller/Exporter bank purchases the invoice and discounts 85-90% of amount upon due diligence & limits availability with applicant bank. This product offering comes with minimal cost which has to be borne by exporter/importer depending upon the terms and condition agreed upon in LC. Letter of Credit Discounting:- Letter of Credit Discounting is a product offered to the exporter for Usance LCs .In trade usually Buyer wants to have credit period and sellers want to have quick payment, to address this issue, bank supports exporter with LC discounting.  Below are the advantages of LC Discounting:  Exporter gets immediate payment; Importer obtains the goods along with the credit period to pay  LC Discounting Charges : Fees paid by exporter to the bank to avail service of Foreign Bill Discounting is known as LC discounting charges. These charges are usually  mentioned in LIBOR+ BPs . Typically this interest cost will vary between 6-10% Per annum. The cost may even go up to 14% Pa if LC Confirmation is  added.  LC Confirmation:- Exporter bank attempts to protect interest of exporter for which they will insist on adding confirmation to LC, which typically means  that, in the event of default of applicant or bank, Confirming bank will take responsibility of honoring LC. Confirmation is usually added if in case  credibility of the applicant or applicant’s country is less. This again adds to overall LC discounting cost. This cost can again run up to few percentage  points.  LC Discounting cost typically depends on  1. Applicants Bank credibility  2.  Applicants country’s market risk  3.  Amount of  LC discounting Basic Documents Required for LC Discounting Bills, drawn under irrevocable LC. (Revocable LCs are not discounted)Beneficiary Bank to submit all the docs as per LC clause.The bills of exchange documents certifying bonafide trade transactions. Letter of Credit Discounting Process Upon the receipt of LC exporter, necessary documents are submitted to beneficiary bank.  This LC acts as a guarantee to the seller/exporter. Sellers Bank sends these documents to the issuing/applicant bank or confirming bank. Applicants bank/Buyers or confirming bank checks the authenticity of the document. Upon successful inspection of documents, applicant bank communicates back to beneficiary on acceptance of bill. On the Post Acceptance of bill by the buyer, beneficiary bank discounts LC upto 85-90% of total bill. Process involved in LC Discounting Step 1 - Buyer to apply for LC. Step 2 - Seller bank to issue LC. Step 3 - Bank to advise the LC. Step 4 - Exporter/Seller to dispatch goods to Importer Step 5 - Exporter/Seller to submit transportation documents to Issuing Bank. Step 6 - Importer to accept documents and notification to be sent to sellers bank by Importers bank. Step 7 - LC to be discounted and funds credited upon acceptance. Advantages of LC Discounting 1. Ease of working capital cycle / Liquidity for Exporter 2. Beneficiary receives payment much before the due date, thus help him to have better cash flows 3. Risk gets transferred to Confirming bank , thus making it safe and secure mode of getting funds 4. Gives Beneficiary better bargaining power to negotiate, on basis of longer credit payment terms 5. FLC rates are usually offered at Libor Rates, which makes it a cheaper loan.  Disadvantages of LC Discounting 1. Bank Charges a fee for discounting LC. This reduces business margins to the Exporter. 2. Physical Verification of goods are not done, only documents are verified 3. Discounting rates vary from bank to bank as lines available may vary from each bank. 4. FEMA and other regulatory compliance related activities to be adhered to  5. FLC is associated with forex fluctuation risk which could lead to huge forex losses. In case, seller wish to hedge forex exposure it adds to additional cost.    
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Foreign Letter of Credit Discounting

Foreign Letter of Credit Discounting

Saurabh Jain
Letter of Credit (LC) Discounting is a short-term credit facility provided by the bank to Exporter. Seller/Exporter bank purchases the invoice and discounts 85-90% of amount upon due diligence & lim...
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Importance of Hedging your Buyers Credit Exposure

Companies take buyers credit for 2 primary reasons, either they don’t have cash to pay out their dues on time or they expect the INR to appreciate. In both the situations what companies usually forgot is the risk which they carry of further INR depreciation. With this article, i am trying to give you a real time example of how a company paid 20% interest rate by taking a buyers credit.ABC Company took a buyers credit as under:Following is a real time data pertaining to the above transaction:Following were the Fixed Cost for the company, irrespective they do hedging or not.Hedging Vs Non Hedging outflows for the client:Findings of the above example:a. In case client would have hedged; his eventual cost in INR turns out to be 9.46% pab. If the client didn’t hedge, his eventual cost in INR turns out to be 19.35% paStrategies around the above example:Underlying theory for any strategy around Buyers Credit: The difference between Importers CC Interest Rate and the BC Cost (LOU, Arrangement, Interest, Coupon) is the break even point. Strategy 1: On the day of draw down if the summation of your BC Cost, LOU Cost and Hedging Cost is below the CC Interest Rates by say 2 to 3% then hedgeStrategy 2: From the date of draw down till repayment if INR appreciates against USD, the % of appreciation can be factored to cut down the BC Interest cost. Having said and done, companies clearly need to undermine the Risk Management Policy under which they are working. Questions like what if the INR appreciates against USD should be tackled by the RMP of the company. The whole idea of writing this article was to bring in a point that lots of companies who take buyers credit don’t even consider the option of hedging because they are only adept to the point that Buyers Credit is a low cost funding.
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Importance of Hedging your Buyers Credit Exposure

Importance of Hedging your Buyers Credit Exposure

Piuesh Daga
Companies take buyers credit for 2 primary reasons, either they don’t have cash to pay out their dues on time or they expect the INR to appreciate. In both the situations what companies usually f...
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Israel Anticipating To Boost Exports to India

India and Israel are two nations maintaining extensive military, economic and strategic relations. India imports massive military equipments from Israel and is currently the largest buyer of Israeli military equipment. To boost exports, Israel is eyeing the strong middle class base in India. The visit of Prime Minister Narendra Modi has been a “historic” moment, as none of preceding Prime Minister had attempted a visit to Israel. Dubiety persists here due to discussions on a free trade agreement (FTA). The negotiations have worked on from past seven years. Despite that, FTA between the two nations has remained elusive. On May 26, 2010, the first rounds of negotiations were held. On a question concerning the long-pending pact, Israeli foreign ministry officials said that India was “re-evaluating” it, but giving little weight to its significance, said that there are newer developments that will help enhance the potential of the economic relationship between the two countries. “India is a key export market for Israel. Tightening relations with India and this historic visit of the Indian Prime Minister will lead, beyond increasing security exports, to growth in trade in goods and services,” Israeli minister of economy and industry Eli Cohen said. “The Indian economy is becoming a prime destination for Israeli exports, with its 1.3 billion consumers led by 300 million citizens in the middle and upper-middle class, with purchasing power equal to the middle class of Western economies,” Cohen noted. In an interview, Modi mentioned that India was not looking forward to a traditional “import-export relationship” with the Jewish nation. “It is more than a buyer-seller relationship. We are more interested in a tech-based partnership with an emphasis on ‘Make in India.’” he added. According to the ministry of economy and industry of Israel, trade allying the countries has mounted up from $200 million in 1992 to $4.13 billion in 2016 (including diamonds). Exports had reached to $1.29 billion, but later it had a drop down, with exports totalling $1.15 billion(excluding diamonds). There was a dip by 13% in 2016.   Alliances on R&D creation of a joint fund and identifying key sectors like water, agriculture and space technologies have been taken into consideration. For this, two nations have to collaborate, extend support and deepen ties, majorly to increase economic cooperation between the nations.
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Israel Anticipating To Boost Exports to India

Israel Anticipating To Boost Exports to India

Saurabh Jain
India and Israel are two nations maintaining extensive military, economic and strategic relations. India imports massive military equipments from Israel and is currently the largest buyer of Israeli...
Continue reading

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