Buyer's Credit
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Get QuotesQ&A BUYER'S CREDIT
Credit availed by an Importer (Buyer) in India from foreign lenders such as financial institutions and banks for payment of his Imports is essentially the Buyer's Credit. The overseas Bank lends the Importer (Buyer) based on the Letter of comfort/ Letter of Undertaking issued by the Importers (Buyer's) Bank. Importers Bank/consultant coordinates between the Importer and the Overseas lender for arranging buyers credit by issuing Letter of Comfort /Letter of Undertaking for certain amount of fee.Local sources of funding are expensive, so Buyers credit helps importers avail foreign funds at relatively cheaper rate, that is close to LIBOR.
For Importers:
- Ability to negotiate with suppliers for better commercial terms.
- Cheaper source of funds to procure capital/non-capital goods.
- Deal with suppliers on sight basis.
- Extended credit period to ease on operating cycle.
For Exporters:
- Suppliers receive the payment at sight.
Restrictions:
- Can be availed only for imports backed by Letter of Credit (LC).
- Restricted to working capital cycle, for Non-capital goods maximum of 1yr and 3yrs for Capital Goods.
- ABC Pvt Ltd imports the goods either under Letter of credit(LC) / Documentary credit (DC) , Collections ( DA/DP ) or open account.
- ABC Pvt Ltd requests SaveDesk two days before the due date of the bill to avail buyers credit financing.
- SaveDesk would provide quote to ABC P LTD given by the foreign lender which generally is (1M/2M/3M Libor + X bps )
- Post acceptance of quote ,SaveDesk provides offer letter to ABC P LTD.
- ABC 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 will credit the importer's bank i.e. ABC Pvt Ltd's existing bankers Nostro account for the required amount.
- Importer's existing banker will make the payment to the exporter utilising the amount credited to their Nostro account.
- ABC Pvt Ltd's bank in India would recover the principal and interest amount and remit the same to funding bank/ foreign lender on due date.
Foreign lenders lend money basis the Letter of Undertaking (LOU) or Letter of Comfort (LOC) issued by the Importers bank. Since the foreign lenders lend on the LOU of the importers bank, the default risk lies with the Indian Bank rather than the Importer.
No. Since the default risk is with the Importers bank, the foreign lender would have done its due diligence like creating a line of credit basis the Sovereign and Bank rating. Hence, if a bank line gets exhausted or utilized completely, the foreign lender might not lend basis the LOU issued by that bank.
No. This product is only available for import of Goods. Only importers who have got bank lines or Buyers Credit limit can avail this facility. Banks usually give this limit post understanding the Importers financials, working capital cycle and backed by proper collateral.
Yes. It varies from banks to banks. Few banks charge a flat fee and few banks charge on a % per annum.
- Arrangement Fee
- Letter of Undertaking (LOU) Issuance fee
- Interest Cost
- Coupon Cost
- Lenders fee- depends on the lending bank (Applicable, case to case basis)
- With Holding tax (Applicable, case to case basis)
Lending done by a overseas lender is usually done at LIBOR + Spread. Hence LIBOR (equivalent of MCLR or PLR in Indian terms) is your Interest cost and the spread, say 100 bps per annum becomes your coupon cost.
Yes. As per the latest Master Circular on Trade Credits the all in ceiling cost for a Buyers credit transaction is 6 Month Libor + 350 bps. All in ceiling cost included lenders spread, arrangement fee, handling fee, out of pocket expenses. It doesn’t include LOU Issuance charges.
Refer Master circular: https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?id=8101
LIBOR is an acronym of London Interbank Offered Rate. It is an average of interest rates estimated by each of the leading banks who are part of the association in London. LIBOR rates usually calculated for 5 currencies and 7 borrowing periods ranging from overnight to one year.
Yes. The rates are decided by the association hence LIBOR changes like any other instrument.
Yes. Companies can protect the adverse movement of LIBOR by entering into a Interest Rate Swap.
Yes. Companies can hedge their principal, interest and coupon by entering into a plain vanilla forward or call option.
Well, once the requirement is identified by the Importer, they approach their bank or consultant seeking an offer on interest rates. Once Importer is ok with the interest rates of the foreign lender, the lender issues an Offer letter which is submitted to the bank along with the other relevant document for the bank to issue LOU.
Now, the importers bank issues LOU to the foreign lender basis which the lender funds the NOSTRO account of the importers bank. Then, the importers bank can use those funds to make the payment to the importers supplier on the due date.
Yes. Charges depend on bank to bank.
On the day of repayment, banks will see the T -2 applicable LIBOR rate in the market and make the payment basis that.
Yes. With prior intimation to the lender