Buyers Credit

Buyers Credit Against Standby Letter of Credit (SBLC) / Bank Guarantee

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Post RBI disallowed LOU and LOC for buyers credit transactions, importers and banks are trying different structures which can assist in  Import finance. Some of these structures are

  1. Suppliers Credit
  2. Buyers Credit Against SBLC (Standby Letter of Credit) / Bank Guarantee
  3. Reimbursement Finance (Usance LC Reimbursement at Sight)

This article is about Buyers Credit Against Standby Letter of Credit (SBLC), its meaning, process flow, documents required, costing, applicable rules, issues with the current structure and what should importer do to avail it.

What is Stand By Letter of Credit (SBLC)

In simple terms, SBLC is bank guarantee in LC format.

The standby credit is a documentary credit or similar arrangement however named or described which represents an obligation to the beneficiary on the part of the issuing bank to make payment on account of any indebtedness undertaken by the applicant, money borrowed or for any default by the applicant in the performance of an obligation.

These credits are generally used as a substitute for financial guarantees. In countries like USA, Japan it is not permissible to issue bank guarantees. Therefore, banks in these countries issue standby letter of credit in situations where normally a letter of guarantee should have been issued.

The document generally called for under such credits is a simple statement of claim as a certificate of non-performance. The standby works as a guarantee in the background of the underlying transaction and it is expected that it will never be drawn.

What is Buyers Credit Against SBLC?

Under earlier structure LOU / LOC (MT799) where the underlying security against which overseas branches were funding the transaction. (Refer earlier article: Buyers Credit Meaning and process)

Under the new structure, SBLC sent under MT760 will be underlying security against which overseas branches will fund the import transaction.

Reason from moving from MT799 to MT760

  1. Auditable.
  2. MT799 is open format where as MT760 is a structured format.
  3. Automatable.
  4. Ability to generate reports.

Process Flow

No standardized process is prescribed by RBI, thus each bank have their own process and requirement of documents before a buyers credit transaction is funded. A generalized process has been given below.

  1. Importer enters into contract with supplier for import of goods under LC/DA/DP.
  2. Suppliers ships the goods and submits document to supplier’s bank (as per agreed payment terms). Supplier’s Bank in turn submits documents for importer’s bank for payment.
  3. Importer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit quote.
  4. Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
  5. If pricing is acceptable to importer, overseas bank issues offer letter and shares all required format. Some overseas branches are asking for a separate request letter from importer before offer letter is issued.
  6. Importer accepts of the offer letter and execute loan agreement (2 copies). Importer’s bank emails scanned image of offer letter, loan agreement and photo copy import documents to Overseas Bank and followed by courier.
  7. Importer’s bank issues SBLC in the given format under SWIFT message format MT760.
  8. Importer’s bank issues  MT799 in given format containing details more or less same as earlier LOU format. Some bank instead of MT799 asking for details on bank letter head.
  9. On receipt of 6, 7, 8, overseas branches funds the buyers credit transaction to the Nostro Account of Importer’s bank and sends repayment details by MT799.
  10. Importer’s bank to make import bill payment by utilizing the amount credited
  11. On due date Importer’s bank to recover the principal and Interest amount from the importer and remit the same to Overseas Bank on due date.

Applicable Conditions

  1. Most Overseas branches are not accepting  Direct Import Documents and few are also not accepting DA/DP documents under this structure.
  2. Some Overseas Bank insisting on SBLC tenure to be buyers credit tenure + 15 days additional.
  3. Some overseas banks are insisting on receipt of original loan agreement before funding. (Except for their own local branches)
  4. Some banks are asking for loan agreement to be counter signed by the SBLC issuing Bank

Documents Required

List of documents my vary from bank to bank. Given below is generic list:

  1. Customer Request Letter
  2. Offer Letter
  3. Loan Agreement (To be franked as per respective state law)
  4. Transaction Related Document copy
  5. Importer’s Bank SBLC by SWIFT – MT760
  6. Importer’s Bank Funding Request by MT799
  7. Verification and Confirmation Certificate (by Importer’s Bank)
  8. Repayment Schedule (where  MT799 is not asked for)
  9. Trade Transaction Details (where  MT799 is not asked for)

Cost Involved

  1. Interest Charges: which will be Libor + bps for period from date of financing  to the maturity date.
  2. SBLC (MT760) Issuance Charges: Importer’s bank will charge for issuing SBLC. Varies from bank to bank.
  3. MT799 charges : Importer’s bank will charge. Varies from bank to bank.
  4. Forward / Hedging Cost: Forward premium as per market rate.
  5. Arrangement fee: Fees paid to trade finance consultant for his service.
  6. Other charges: A2 payment on maturity, Form 15CA and 15CB on maturity etc.
  7. Withholding Tax (WHT): For funds arranged from foreign bank, Importer has to pay WHT on the interest amount

Applicable Rules

Issues with SBLC Structure

  1. Buyers Credit against SBLC structure has to be approved internally by bank before it is offered to importer.
  2. Most importer do not have SBLC limits in existing sanction. Thus existing limits have to be modified.
  3. Not all payment mode is acceptable to overseas bank. Like direct documents and for some bank even DA/DP mode is not acceptable.
  4. Some bank are issuing SBLC only to their own overseas branches  and charging rates as high as 6 Month L+350 bps earlier and now with revised cap to 6 Month L+250 bps.
  5. TAT of completing the transaction is gone up. Earlier structure required only issuance of LOU/LOU, but under the new structure it requires signing of loan agreement, offer letter acceptance and courier originals to overseas bank. Additionally banks will have to send MT760 and in some banks case also MT799.
  6. Query are been raised by some local bank on few conditions in SBLC format. Thus delaying the process or limiting the number of bank from where quote can be arranged.
  7. Some banks are not doing buyers credit against SBLC for import for capital goods.
  8. Loan Agreement has to be executed for every transaction.

What should Importer Do ?

  1. Check if Buyers Credit against SBLC structure is approved internally by bank.
  2. Get SBLC limits sanctioned under existing limits as sub limit or get fresh limits sanction.
  3. Structure the payment terms (LC, DA, DP or Direct documents) with due consideration.
  4. Discuss with bank on the process and documentation that will be required from bank end.

RBI Regulations

Summary of the guidelines are given below. Further details please refer article “Revised Guidelines for Trade Credit“

Reference

  1. Cornell Law School: Standby letters of credit
  2. SWIFT was not compromised but misused, says Alain Raes
  3. Standby Letter of Credit
  4. RBI Master Direction: ECB and Trade Credit
  5. Revised Guidelines for Trade Credit
  6. Guidelines on Early Delivery, Extension & Cancellation of Forward Contract
  7. Bank Insisting of Forward Booking for Buyers Credit Exposure
  8. FEDAI Guidelines on Standby Letter of Credit: 2003
  9. FEDAI Special Circular SPL-75/standby/LC/05 dated 13th December 2005

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