From Importer’s Perspective

There are various reasons because of which an importer would like to make a pre-payment of buyers credit. Such as:

• USD-INR rate in favour of importer post buyers credit is taken.
• Buyers credit is taken by way of keeping Fixed deposit as security and now importer wishes to free cash.
• Importer wishes to free Non Funds based limits for other use.
• Any other such reasons.

Disadvantages of Pre-closure for Importer:

• Interest for whole tenure has to be paid or interest for the given tenure  plus prepayment charges  which result into same as interest for whole tenure or if not more.
• Bank’s charge LOU charges at the time of issuing buyers credit for full tenure. Incase of prepayment, it results into increases in overall cost.

RBI Regulation

There is no specific mention of prepayment incase of Trade Credit made in Master Circular of External Commercial Borrowing and Trade Credit. Thus, inference has to be derived  from other circulars

• Master Circular of External Commercial Borrowing and Trade Credit: Repayment of external commercial borrowing has been allowed by RBI for upto $400 Million without any approval.
• Master Circular on Import of Goods and Services:
  1. Under general rules and regulation for import payment transaction, circular say “Where specific regulations do not exist, AD Category – I banks may be governed by normal trade practices”
  2. Under the same circular: C.2. Interest on Import Bills “(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.”

From Bank Perspective

Accept few banks, most of the bank  do not explicitly mention  in the offer letter / undertaking format whether repayment is allowed or not. As market practice, few banks have been allowing making pre payment subject to 

• It is pre informed to them before making principal and interest payment.
• No part repayment.
• Principal plus Interest payment is made.
• Interest for complete tenure is paid. Say, if buyers credit is taken for 180 days and prepyament is made on 90 day, still interest of the complete tenure is payable. But while doing this, care should be taken that it does not breach all-in-cost ceiling of 6 Month Libor + 350 bps as prescribe by RBI.

Reference

• RBI Circular : Trade Credit for Imports into India – Review of All-in-cost ceiling: Dated: 30-03-2012
• 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