In earlier article we have discussed about costing of buyers credit, list of which is given below.
- Overseas Bank / Branch Interest cost
- LOU / LOC charges
- Forward / Hedging Cost
- Arrangement fee
- Other charges
- Withholding Tax(WHT)
Quote for buyers credit are arranged by consultants or LOU issuing banks for importers.
Off late few LOU issuing banks have started a practise of giving quote to importer including LOU Charges (L+Margin+LOU Charges). Example: L + 300 bps including LOU Charges
Question is “Should Importers prefer it ?”
Answer is NO
Of above two cost, LOU charges is fixed cost whereas Overseas Bank interest is variable cost and both are charged by separate entity. By showing both these charges together, LOU issuing bank convert LOU charges to variable cost. And whenever Overseas Bank cost are down, instead of passing the benefit to importer, they would increase LOU charges.
Example: Transaction Details: $50000, 90 Days, LOU: XYZ Bank
Buyers Credit Quote including LOU Charges: 3 Months Libor + 350 bps
Where both cost are charged separately:
- LOU Charges: 2.00% ,
- Overseas Bank Quote: 3 Months Libor + 100 bps.
- Total Cost: 3 Months Libor+300 bps
Thus instead of 2.00%, lou issuing bank increased lou charges to 2.50% because of non existing of break up. At times, instead of LOU charges it may also be adjusted towards arrangement fee.
What should importer do ?
In order to avoid such instance,
- Importer should negotiate LOU charges separately at the time of sanction of limits.
- Case where quote is arranged by LOU issuing bank, importer should insist on getting copy of offer letter provided by overseas bank.
With above details, importer will be able arrive at actual transaction cost.
Note: This will hold true in most cases when such clubbing of charges are done by LOU issuing bank but there can be exceptions too.