New Article: What can be termed as Suppliers 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). Supplier’s credit internationally is also known as Usance Payable at Sight (UPAS) structure.

As mentioned in earlier article “Letter of Credit – MT700 format”, there are 40 fields in LC.  In relation to suppliers credit transaction,  Importer will have to get below fields modified as per the requirement of Overseas Bank. Bank to Bank fields and clauses might differ but overall below information needs to be captured.

MT700 Field – Suppliers Credit

1. Field 39C: Additional Amounts Covered

This field is added to cover usance interest amount over and above the LC amount captured in Field 32B. Some banks incorporate this field in LC while others add this condition in Field 47A

Example: Usance Interest for 180 days not exceeding 6 month Libor + 80 bps p.a. prevailing on the date of negotiation

2. Field 41A / 41D: Available With…By…

Overseas bank will expect the LC to be restricted at their counter and details will be added to Field 41A or 41D with By Negotiation.  By Negotiation means  Nominated / Overseas Bank will negotiate the draft drawn on the Confirming Bank / LC issuing Bank to part with the funds on sight basis or at a future date.

Example:

BANKBHUBXXX (Swift Address / BIC), Bank ABC (Singapore)
By Negotiation

3. Field 42C:  XXX day ( from BL date or Negotiation date)

Tenor of drafts to be drawn under the documentary credit. Usance tenor will depend on operating cycle of applicant (importer) and / or agreement between applicant and beneficiary (supplier). Tenor details has to be specific like tenor can be from date of BL, from date of invoice, from date of negotiation etc. Also suppliers may insist on mentioning Usance Bill Payable at Sight.

Example

• 180 Days from the Date of Shipment
• 180 Days from the Date of Shipment, Usance Payable at Sight

4. Field 47A : (Additional Conditions):

Depending on overseas bank, additional conditions may be added in LC. Below are two examples, one of Indian Bank overseas branch and another of Foreign Bank.

Bank A Clauses (Indian Bank Overseas Branch)

1. Discounting: L + xxx bps p.a. (From date of discounting till maturity of bill).
2. Fixed Charges @ USD xxx handling of documents and courier charges per set of Documents.
3. We, ……Bank, confirm that KYC and AML due diligence has been carried out by us for the applicant (Name of the Company) before issuing above letter of credit as envisaged by Reserve Bank of India and have been complied with. The accuracy and integrity of the transaction has been ensured with respective entry in Core Banking System and the transaction is found to be in order. Further, the transaction does not involve any banned / black-listed entity as per the latest list of sanctioned country/entity.
4. We, .…..Bank, certify that all applicable Reserve Bank of India Guidelines with regards to the said Letter of Credit Transaction have been complied with. The account of the importer is Standard as per IRAC norms.
5. We confirm that in case of delayed payment, USD 100 or equivalent as penal charges and overdue interest with Penal interest rate @ 10.50% over and above applicable Libor will be paid by us.
6. Documents Prior to the date of LC are not acceptable.

Bank B Clauses (Foreign Bank)

1. Interest from the Date of Negotiation till due at ‘Libor + ….. percent p.a.’ to be borne by Applicant.
2. LC Restricted for negotiation through Bank B, Singapore Branch
3. LC will be overdrawn to the extent of the above interest payable by Applicant
4. Bank B, Singapore Branch shall finance / pay beneficiary at sight with usance interest of  180 days on a/c of the applicant.

5. Field 78: Instructions to the Paying/Accepting/Negotiating Bank

In this field, issuing bank provide instructions to the paying, accepting or negotiating bank. Below is an example where Issuing bank is instructing the negotiating bank on how to handle the documents and process of negotiation.

Example: 

Presenting bank is required to dispatch documents with the original letter of credit and amendments to Bank B address___________. Such documents must reach the Bank B counters on or before the latest presentation period and within the LC expiry date. Bank B will forward the documents to …..(issuing bank address)….. Upon receipt of acceptance from issuing bank, Bank B is authorised to discount the bill with the discounting interest for usance period to be charged to applicant.

6. Field 71B: Charges 

Field list what charges are applicable and who will be responsible for which charge. Incase of suppliers credit, interest and other charges are usually  borne by the applicant.

Example:

All banking charges outside India is to the account of the beneficiary except interest and other charges of the USD XXX (Negotiation  +Swift+Courier) is to be borne by the applicant.

7. Field 49: Confirmation Instructions

Confirmation in simple terms is an undertaking  in addition to that of the issuing bank, to honour or negotiate complying documents as per LC.

Depending on what is the agreement between beneficiary and applicant, any of the below three code is added to LC.  Incase where LC is confirmed or May Add option is selected, field 71B will specify who will bare the charges for the same.

• Confirm. Incase of confirmed LC, getting confirmation and charges is applicant’s responsibility.
• May Add. Incase of May Add option, getting confirmation and charges is beneficiary’s responsibility.
• Without. Without means confirmation cannot be added to this LC.

8. Field 57A: ‘Advise Through’ Bank – FI BIC

LC has to be advised to beneficiary. Overseas bank may either insist of advising the same through their counter or may ask issuing bank to directly forward the LC to the beneficiary bank and provide a copy of the same in MT799 or MT999.  Depending on the overseas bank, this will contain details of advising bank.

Example

BANKCXXXHUB (Swift Code)
Bank C Sydney, Australia

Related Articles

1. Suppliers Credit Meaning and Process
2. Types of SWIFT Message used in Letter of Credit and Suppliers Credit
3. Letter of Credit – MT 700 Format