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Note: Since the article is written, lou charges of BOB has changed but concept still holds true as some banks still have such differential pricing.
Letter of Comfort Charges
Normally importers would tend to look at Interest Cost provided by Foreign bank (Indian bank overseas branches or Foreign bank) on deciding which offer to accept. But this is a wrong approach. Importers should look at overall cost. Overall cost would be Foreign bank interest cost and LOU charges of your bank.
For instance, a customer having limits with Bank of Baroda (BOB) and getting Letter of comfort or undertaking issued from them for buyer’s credit.
Letter of Comfort / Undertaking Charges of BOB
– Buyer’s Credit availed with BOB branches – 1.00% p.a
– Buyer’s credit availed with other banks – 1.50% p.a
Link : Bank of Baroda Service Charges (Under Point 6 – Forex Service Charges, Sub clause 2.4(d))
Now let’s take an example.
XYZ Bank offer: L + 1.50.
Overall cost in case of XYZ Bank BC : 0.25 + 1.50 + 1.50 = 3.25%
BOB Overseas Branch: L+1.75
Overall Cost if in case of BOB Overseas: 0.25 + 1.75 +1 = 3.00%
* Assumption: 90 days LIBOR is taken in above case
As you see in above example, even after BOB overseas branch cost was higher, overall transaction cost for you would be still cheaper.
Thus
- You should refer bank’s website or check with your banker or buyers credit consultant to find out LOU charges and check if there exist any such differential pricing as it exists for Bank of Baroda and compare overall cost.
- If it does, also check if the cost has been passed on to you.
Buyer's Credit & Supplier's Credit 