Further to my earlier article, Importer will have to follow below procedure and internal checks to avail buyers credit.
Internal Checks from your end:
- Non Fund based Limit. In order to avail buyers credit, it requires to have non fund based limit with existing bank. Under banking terms, Non Fund based limits are defined as Letter of Credit (LC) limits, Bank Guarantee (BG) limits etc. Normally during sanction, bank tends to keep these limits inter changeable between LC / BG or fund based limits. If not, bank would not be able to issue Letter of Undertaking (LOU)/ Comfort (LOC) for buyers credit. Some nationalized bank insist on using word buyers credit in sanction before availing buyers credit. Thus as a first check, see if these limits are available in the sanction letter, if not get your bank to add this limits or make it interchangeable.
- Gap availability in Non fund based (NFB) limits: In cases where you already have non fund based limits but it is fully utilized for say LC or BG than you might not be able to utilize it for buyers credit. Thus at the time of sanction of loan or at the time of renewal, make sure that there are enough limit available and interchange with fund based limit as well, if required, can convert Fund based (FB) limit to non fund based for that much amount.
- Tenure of Buyers Credit: At the time of sanction, bank clearly mentions the tenure for which a LC or BG can be issued. This needs to be checked, as maximum tenure for which buyers credit can be availed. Say you want buyers credit for 180 days whereas sanctioned tenure of the non funds based limits is for 90 days, than you can avail buyers credit for maximum of 90 days at a time and then roll it over afterwards.
- Forward Booking: Bank may insist on booking forward cover for the currency risk upto the amount of buyers credit. So before moving into transaction, check on the approximate forward premium for the tenure.
- Format of Letter of Comfort: Every Foreign bank offering buyers credit has their own format of letter of comfort / letter of undertaking. There might be a chance that your bank might not issue letter of comfort in that format or might insist on using their own format. Thus check with your bank on this before proceeding.
- Operational Issue: Say each all of the above issues are taken care off and you got the offer letter issued for buyers credit for a payment due in next couple of days. Now your bank has to issue letter of comfort which normally should not take more than few hours if the above points were already taken care off. But some nationalized bank branches would still take couple of days to issue letter of comfort. To avoid any delay payments keep provision of few days. Secondly some international bank might insist on getting Letter of comfort / undertaking to be sent by authenticated swift. Thus you might have to check if there is swift key arrangement between your bank and the foreign bank.
Initial requirement for getting quote issued
- Amount and Currency of Transaction: Exact value as per invoice or LC has to be provided here.
- Tenure for which buyers credit is required: Details of tenure for which buyers credit is required has to be provided here. As per RBI regulation, under non capital goods ((Raw Material, Consumables, Accessories, Spares, Components, Parts etc) payment has to be made within 360 days from the shipped on board date of Bill of Lading (BL) or operating cycle whichever is less and for Capital goods within 3 years. Thus according to requirement, RBI regulation and your sanction (as per point 3 of initial check), will decide what tenure to be mentioned.
- Due date of transaction: Date on which Bill / LC / payment becomes due. Normally one should mention 1 day before due date. Also take care if the same is not Saturday, Sunday or Currency holiday for that particular currency, otherwise it would delay your transaction.
- Bank which will give letter of comfort / undertaking: Mention your bank name. Every bank has line (limit) of credit on other bank. It might be possible that overseas bank from where you are arranging quote does not have line on your bank and thus would not be able to complete your transaction
- Underlying transaction (Goods involved): What goods are involved in the transaction? As per bank’s internal policy, they would not deal in funding for certain goods and thus would not offer funds for the transaction. For example, some banks does not give buyers credit if the underlying goods involves wood.
- Country of Origin of Goods: Internationally few countries are under UN sanction or OFAC sanction and thus dealing under a particular currency is not allowed for that country. For example, import from Iran, Libya etc, international branches would not offer buyers credit on such transaction because of OFAC sanction.
Other than above, bank might ask for more information like, in case of LC transaction, LC number, issue date, expiry date, last date of shipment, port of loading etc.
As seen above, there are many operational checks before entering into a buyers credit transaction. Thus is it suggested to take help of consultant.