Trade Credits (TC) refer to the credits extended by the overseas supplier, bank, financial institution and other permitted recognised lenders for maturity, as prescribed in this framework, for imports of capital/non-capital goods permissible under the Foreign Trade Policy of the Government of India. Depending on the source of finance, such TCs include suppliers’ credit and buyers’ credit from recognised lenders.
Benefits of Buyer’s Credit
The benefits of buyer’s credit for the importer are:
- The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows
- The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
- The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
- The importer can use this financing for any form of trade viz. open account, collections, or LCs.
- The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.
Buyers Credit Process flow
- Importer enters into contract with supplier for import of goods under LC/DA/DP.
- 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.
- Importer requests the Buyer’s Credit Consultant before the due date of the bill to avail buyers credit quote.
- Consultant approaches overseas bank for indicative pricing, which is further quoted to Importer.
- 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.
- 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.
- Importer’s bank issues SBLC in the given format under SWIFTmessage format MT760.
- 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.
- 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.
- Importer’s bank to make import bill payment by utilizing the amount credited
- 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.
The cost involved in buyers credit is as follows:
- Interest Charges: which will be Libor + bps for period from date of financing to the maturity date.
- SBLC (MT760) Issuance Charges: Importer’s bank will charge for issuing SBLC. Varies from bank to bank.
- MT799 charges : Importer’s bank will charge. Varies from bank to bank.
- Forward / Hedging Cost: Forward premium as per market rate.
- Arrangement fee: Fees paid to trade finance consultant for his service.
- Other charges: A2 payment on maturity, Form 15CA and 15CB on maturity etc.
- Withholding Tax (WHT): For funds arranged from foreign bank, Importer has to pay WHT on the interest amount
Documents for Availing Fresh / Rollover of Buyers Credit
List of documents my vary from bank to bank. Given below is generic list:
- Customer Request Letter
- Offer Letter
- Loan Agreement (To be franked as per respective state law)
- Transaction Related Document copy
- Importer’s Bank SBLC by SWIFT – MT760
- Importer’s Bank Funding Request by MT799
- Verification and Confirmation Certificate (by Importer’s Bank)
- Repayment Schedule (where MT799 is not asked for)
- Trade Transaction Details (where MT799 is not asked for)
Documents at the time of Repayment of Buyers Credit
RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for short-term credit for financing — by way of either suppliers’ credit or buyers’ credit — of import of goods into India, based on uniform criteria.
Over the years there has been changes in norms. Summary of the same is given below and for further details please refer article “RBI Circular : Trade Credit – New Regulatory Framework“
- Maximum Amount Per Transaction :
- $50 Million
- $150 Million for oil/gas refining & marketing, airline and shipping companies
- Above $50 Million, RBI Approval required.
- Recognised Lenders
- Maximum Period from date of shipment
- No Rollover / Extension will be permitted beyond permissible limits
- All-in-cost Ceilings: 6 Month Libor + 250 bps
- SEZ, FTWZ, DTA units can avail trade credit.
- Master Direction – External Commercial Borrowings, Trade Credits and Structured Obligations: Updated on 26 Mar 2019
- RBI Circular : Trade Credit Policy – Revised framework: Dated 13 Mar 2019
- RBI Circular: New External Commercial Borrowings (ECB) framework : Dated 16 Jan 2019
- Old RBI Master Direction on ECB and Trade Credit: Updated till 22 Nov 2018
- RBI Master Direction: Import of Goods and Services: Updated 02 Feb 2018
- RBI FAQs on Trade Credit : Updated as on 26 Dec 2018
- SEZ Act, 2005
- SEZ Rules
- Foreign Trade Policy 2015-2020 : Free Trade and Warehousing Zone
- SEZ Online Manual Intra SEZ Transfer