What is Supplier’s Credit ?
Supplier’s Credit is a structure of financing import into India. In this structure, overseas suppliers or financial institutions outside India provide financing to importer on Libor linked rates against usance letter of credit (LC).
Why Required ?
- Suppliers would ask for sight payment where as importer want credit on the transaction.
- Now with buyers credit structure not available, suppliers credit is one of option for raising Libor linked finance for importer.
Benefits of Suppliers Credit
For Importer
- Availability of cheaper funds for import of raw materials and capital goods
- Ease short-term fund pressure as able to get credit
- Ability to negotiate better price with suppliers
- Able to meet the Suppliers requirement of payment at sight
For Supplier
- Realize at-sight payment
- Avoid the risk of importer’s credit by making settlement with LC
Suppliers Credit Process Flow
- Importer enter into contract with supplier for import.
- With transaction details importer approaches arranger to get suppliers credit for the transaction
- Arranger get an indicative pricing from overseas bank, which importer confirms.
- Importer approach his bank and get LC issued, restricted to overseas bank counters with other required clauses
- Overseas Bank confirms the LC and advise LC to Supplier’s Bank. Suppliers Bank provides the copy of the LC to Supplier.
- Supplier ships the goods and submits documents at his bank counter.
- Supplier’s Bank sends the documents to Overseas Bank.
- Overseas Bank post checking documents for discrepancies (As per UCP 600) sends the document to importer’s bank for acceptance:
- If documents are as per order, the same is discounted and transferred to supplier’s bank.
- Incase of discrepant documents, documents are sent on acceptance basis. On receipt of Importer bank acceptance, the same is discounted and transferred to supplier’s bank.
- Supplier receives the payment for the LC. Depending on who is bearing the interest cost:
- If importer is bearing interest cost, supplier receives full payment.
- If Suppliers is bearing interest cost, supplier will receive LC amount – Interest.
- Importer’s Bank receives the documents. Importer’s bank and Importer accept documents. Importer’s Bank provides acceptance to Overaseas Bank, guaranteeing payment on due date.
- On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank
Cost Involved
- Foreign bank interest cost
- Foreign Bank LC Confirmation Cost (Case to Case basis)
- LC advising and or Amendment cost
- Negotiation cost (normally in range of 0.10%)
- Postage and Swift Charges
- Reimbursement Charges
- Cost for the usance (credit) tenure. (Indian Bank Cost)
Requirement
- Import transaction under LC
- Incoterms : FOB/CIF/C&F
- Arrangement has to be done before LC gets opened. Incase of LC already opened, relevant amendment has to done.
- LC to be restricted to suppliers credit providing bank under 41D clause of LC
- Under Payment Term: 90 days Usance payable at Sight (mention tenure according to tenure and offer received)
Prepayment of Suppliers Credit
Technically yes, prepayment can be made to Usance LC subject to below condition is satisfied. But as there will be loss of interest for overseas banks it will not accept reduced payment. Even if they accept it will be with penal charges. Thus practically prepayment will not be possible.
Extract from RBI Master Directions on Import of Goods and Services
(ii) In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance at the rate at which interest has been claimed or LIBOR of the currency in which the goods have been invoiced, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances may be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.
RBI Regulations
Over the years there has been many changes in norms. Summary of current rules are given below and for further details please refer article “RBI Trade Credit (Buyers Credit / Suppliers Credit) Circular Extract“
- Maximum Amount Per transaction : $20 Million
- Above $20 Million, RBI Approval required.
- Maximum Maturity in case of import of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc): upto 1 year from the date of shipment or operating Cycle whichever is less.
- Maximum Maturity in case of import of capital goods : upto 5 years from the date of shipment (Beyond 3 years banks are not allowed to provide Letter of Undertaking / comfort)
- No Rollover / Extension will be permitted beyond permissible limits
- All-in-cost Ceilings: 6 Month Libor + 350 bps
Reference
- Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers
- RBI Master Direction – Import of Goods and Services
Buyer's Credit & Supplier's Credit 
Can you tell me the situation when one should opt for buyers credit and when suppliers credit.
As said in article, it is requires LC to use suppliers credit, where as buyers credit can be done for any type of payment mode. Thus discussion point on whether to use a buyers credit or suppliers credit should be
A. In large transaction case, it is better to close on financial of getting funds booked by way suppliers credit instead waiting till documents comes at banker counter and than we go out scouting for funds. This is highly relevant in the current market scenario where there is short supply of bank lines and funds.
B. At time of taking sanction of term loans in capital goods, many a times client miss out getting structure of using buyers credit in first 3 years and than convert to term loan. Thus when actual transaction customer up, banker do not allow using buyers credit. Suppliers credit can help solving this issue, as normally in term loan sanction, for import of machinery, provision is Lc is kept by bank. Thus instead for going for sight Lc, one can go for long tenure LC and thus use cheaper funds which is the purpose for using either of the products.
Does credit risk insurance premium form part of the All in cost?
To go by RBI circular, the type of cost which are mention are related to buyers credit. Where as Credit Insurance is for different purpose and thus as per my understanding of circular, it will not form part of all in cost.
Whether a client can take both suppliers and buyers credit?
Customer can utilize suppliers credit and buyers credit for the same transaction subject to RBI provision for tenure, where in case of non capital goods (Raw Material, Consumables, Accessories, Spares, Components, Parts etc) total tenure should not be more than 360 days and in case of capital goods total tenure is not more than 3 years.
For Example: Customer opens an LC under which he uses suppliers credit for 180 days initially and on the due day of making the payment of suppliers credit, arranges buyers credit from fresh tenure of 90 days.
what are the merits and demerits of buyers credit and suppliers credit??????
What would happen if buyer promises to pay at a later date and creates a charge on the goods supplied by the seller? Would ECB and Trade credits apply. Because going by the stipulation in import of goods and services guidelines Deferred Payment includes supplier’s and buyer’s credit and are dealt under ECB + TC guidelines???
1. ECB and Trade Credit Guidelines will become applicable in above case if deferred payment is greater than 6 Months and less than 3 years.
2. And as per my understanding, an entity not registered in India can to create charge on assets. It would have to use a product called Security Trustee Services offered by various financial institution
What is difference between supplier’s credit and normal l/c discounting by beneficiary as both functions in similar way in which exporter gets fund before due date.
Difference between normal LC discounting and Suppliers Credit are
1. Incase of normal LC discounting exporter gets the LC discounted through his bank and interest also borne by exporter (in most of the cases). Incase of suppliers credit importer arranges to get the lc discounted through a third party bank (other than his own bank) and interest is borne by importer.
2. Incase of normal LC, exporter can also get pre-shipment funding from his working capital banker, where as in case of suppliers credit it can be post shipment funding only.
Also, would this difference apply as well ?
When the exporter discounts ( LC discount ) then it would be subject to the country interest rates ; and when the importer discounts ( Suppliers Credit ) would it not be subjected to LIBOR / EURIBOR rates ??
Also, a question that i had was does Euribor rates also be accounted for interest payments to the third party bank ??
1. When importer uses suppliers credit he will get it done on Libor / Euribor rates.
2. Overseas bank quote rates at 6 Month Euribor + 60 bps. But currently, as Euribor is negative, overseas bank consider it as zero or 1 bps.
What is difference b/w buyers credit and suppliers credit??
Refer below article.
Difference between Buyer’s Credit and Supplier’s Credit
Can we make pre payment of Usance LC before due date?
Yes, prepayment can be made to Usance LC subject to below condition is satisfied.
Extract from RBI Master Circular on Import of Goods and Services
(ii) In case of pre-payment of usance import bills, remittances may be made only after reducing the proportionate interest for the unexpired portion of usance at the rate at which interest has been claimed or LIBOR of the currency in which the goods have been invoiced, whichever is applicable. Where interest is not separately claimed or expressly indicated, remittances may be allowed after deducting the proportionate interest for the unexpired portion of usance at the prevailing LIBOR of the currency of invoice.
What if there is a transaction between group companies and there is no LC involved ? ie the goods were imported from say the holding company and payment has been deferred beyond 6 months ?
Hi.. Just wanted to the cost benefit of Suppliers credit over buyers icredit if someone is importing capital goods in India…
3 Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses —- What are these other clauses? can you share the sample.
Well summarized.
Is suppliers credit can be availed by Importer only against Usance Letter of Credit not against any other payment terms of International Trade like Collections on D/A basis.
Short answer is yes suppliers credit can be used against usance lc.
There are different payment mode for import and for each of these mode, different finance product can be used.
1. Usance LC: Usance payable at Sight (UPAS) structure can be used. Earlier term suppliers credit was used for this structure in India. For further detail refer What can be termed as Suppliers Credit ?
2. DA: Factoring can be used.
3. For LC sight or DP document: Buyers Credit against SBLC can be used.