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
- 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
- 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
- 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)
- 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.
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
- Master Direction – External Commercial Borrowings, Trade Credit, Borrowing and Lending in Foreign Currency by Authorised Dealers and Persons other than Authorised Dealers: Dated: 19-09-2016
- RBI Master Direction – Import of Goods and Services: Dated: 31-03-2016