Earlier articles on Buyer’s Credit have provided details on total cost involved like, Interest cost, libor, lou charges, forwarding booking cost, arrangement fee, and others.
This article provides details on how interest cost (margin) is arrived at by Indian Bank Overseas Branches or Foreign Bank.
LIBOR + Margin Rates
Factors which play important roles in Margin are
- Availability of Funds: Whether sufficient funds are available (will be able to borrow) for the required amount of transaction.
- Cost of Funds: The rate at which these banks gets to borrow funds from their local market (L + X).
- Tenure: Tenure for which these funds are borrowed.
- Banks Lines: For Example: When lines of a particular banks is running in scarcity, bank would ask for higher margin in comparison to other banks lines.
- Internal Minimum Margin: Over an above cost of funds (L+X) bank adds their margin. There is minimum cut off margin decided by bank treasury or committee below which they are not able to offer pricing.
- External Factors: Some recent examples are Market Volatility, US downgrade, Greece and Portugal debt crisis, etc.