Change in LIBOR Tenures and Impact on Trade Finance
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.
Buyer's Credit & Supplier's Credit 
As per RBI ECB Master Circular 2011 , all in cost ceiling of interest rates for AD Category banks is LIBOR+200 bps. My queries are:
1. Is LIBOR+200 bps limit applicable to foreign banks i.e can they quote beyond this limit is the cost of funds is more than the limit?
2. If quoted beyond this limit can AD Cat. banks give LOC to foreign Bank stating actual interest rates?
3. If No can foreign office quote Interest rate as LIBOR+200 bps and excess of cost of fund+margin as upfront processing fees?
Authorized Dealer (AD) (Bank) role is defined in the above Circular as approver of the trade credit from overseas supplier, bank and financial institution taken by Importer. Thus all the question you have asked holds true for both Indian bank overseas branches and foreign bank as well.
1. To answer your question, ceiling of 6 Months LIBOR + 200 bps holds true for all suppliers, banks or Financial Institutions. These can be Indian bank overseas branches or foreign bank having Indian subsidiary or foreign bank
2. To answer your second question, Banks cannot approve sending any LOU (Letter of undertaking / comfort) for buyers credit transaction where offer letter states more than 6 Months LIBOR + 200 bps
3. Last one and tricky question is a gray area. Normally upfront processing fee is taken as other charges or forex advisory charges etc, either payable in India or payable abroad. Question arises if RBI allows it above the ceiling cost for buyers credit in the circular ? By the spirit, answer is no. But is this avoidable for bank or importers in current market. Answer to this question is also NO. Cost of funds in international market have gone up to around l + 200 to 300bps, which make its unavoidable. Thus, as of now these are shown as two different transaction, and others charges or forex advisory charges as nothing to do with buyers credit. Offer letter is at L + 200 bps and separate advice is provide which say forex advisory charges or other charges.
But there is larger question which need to answered here. This situation is market show the slow pace in which our regulatory body react to the changing market situation.
Does charges about 6 Month L + 200 bps mean that banks are making huge money. The answer is NO. Cost of funds in international market have gone up to say around L + 200 to 300 bps. Than how can these banks lend you at L + 200 bps. Thus, there are two option with them, either they close their buyers credit business for some time or find a way out of the regulatory process. Most of this banks have closed their buyers credit business, because of which you are seeing this shortage of funds and non availability of buyers credit.
Resolution to this problem is by way Industries body making representation to RBI and get a relaxation on this ceiling till the market improves
Further to above issue faced by bank and customers, on 15/11/2011 RBI relaxed the cap from 6 Month Libor + 200 bps to 6 Month Libor + 350 bps.
how to calculate buyers credit cost p.a. basis (6 month libor + 250 bps)
Kindly confirm whether 6month Libor rate + BPS for p.a cost or that is for 6 month, in India suppose we have CC ROI is 12%, then how can we calculate the buyers credit cost & compare it from CC interest rate
As given in your example: 6 Month Libor = 0.345 + 2.50 = 2.845% pa.
The above cost is only interest cost of overseas bank. Other charges applicable for buyers credit are LOU charges, Hedging cost, Arrangement Fee etc. Thus before comparing with CC, all these charges have to be added to arrive at total cost. Below excel sheet help you arrive at total cost.
Buyers Credit Cost Calculation Sheet
Dear Sir,
Thanks for your reply. I am just giving you the details, kindly provide how to calculate total cost of fund in (%) as well as in INR
6 Month Libor Percentage 0.345%
BPS 2.75%
Swift Charges (Fixed ) 2000
FCC Charges (Variable) 1350
(Foreign Currency Conversion)
Spot Rate 62 (Hedging for 6 month)
6 Month Premium 2.60
(We may take USD 100000 @ 62 for example basis)
Now how to calculate Buyers Credit Cost, Hedging cost & Total Cost of Fund on the basis of above details.
Details given above are incomplete. Do call me on given number to take it forward.
I have to make payment plus interest to my supplier for supply of LPG commercial cylinder for the year 2015-16 now i am going to make a payment with interest so please advise me what % of interest rate i have to pay.