Guidelines on Early Delivery, Extension & Cancellation of Forward Contract

Forward contract being an agreement to exchange currencies at a future date, it is likely that sometimes the customer may be unable to adhere to the contracted delivery schedule or the underlying transaction may itself get modified or cancelled. The importer/exporter may, therefore, in these cases request for

  1. Early delivery
  2. Cancellation

This article gives detailed Foreign Exchange Dealer Association of India (FEDAI) guidelines on the subject. Future articles will discuss the monetary impact of the same on importer/exporter.

FEDAI Guidelines

1. It is optional for the Bank to

  • Accept/give early delivery
  • Extend the contract

2. It is the responsibility of the customer to effect delivery or to request for cancellation, as the case may be, on or before the maturity date of the contract.

3. Early Delivery

If a bank accepts or gives early delivery, the bank shall recover/pay swap difference, if any.

4. Extension

Foreign exchange contracts where extension is sought by the customers shall be cancelled (at an appropriate selling or buying rate as on the date of cancellation) and rebooked simultaneously only at the current rate of exchange. The difference between the contracted rate and the rate at which the contract is cancelled shall be recovered from/paid to the customer at the time of extension. Such request for extension shall be made on or before the maturity date of the contract.

5. Cancellation

  • At Request of Customer:
    • In case of cancellation of a contract at the request of a customer, (the request shall be made on or before the maturity date) the Authorised Dealer shall recover/ pay, as the case may be, the difference between the contracted rate and the rate at which the cancellation is effected. The recovery/payment of exchange difference on cancellation of forward contracts before the maturity date may be either upfront or back-ended at the discretion of banks.
    • Rate at which cancellation is to be effected:
      • Purchase contracts shall be cancelled at T.T. selling rate of the contracting Authorised Dealer
      • Sale contracts shall be cancelled at T.T. buying rate of the contracting Authorised Dealer
      • Where the contract is cancelled before maturity, the appropriate forward T.T. rate shall be applied.
    • Notwithstanding the fact that the exchange contract between the customer and the bank becomes impossible of performance, for whatever reason, including Government prohibitory orders, the exchange contract shall not be deemed to have become void and the customer shall forthwith apply to the Authorised Dealer for cancellation,
  • In the absence of any instructions from the customer,
    • a contract which has matured shall be cancelled by the bank on the 7th working day after the maturity date.
    • Swap cost, if any, shall be recovered from the customer under advice to him.
    • When a contract is cancelled after the maturity date, the customer shall not be entitled to the exchange difference, if any, in his favour, since the contract is cancelled on account of his default. He shall, however, be liable to pay the exchange difference, against him.

6. Swap cost/gain

  • In all cases of early delivery of a contract, swap cost shall be recovered from the customer, irrespective of whether an actual swap is made or not. Such recoveries should be made either back-ended or upfront at discretion of the bank.
  • Payment of swap gain to a customer shall be made at the end of the swap period.

7. Outlay and Inflow of funds:

  • Authorised Dealer shall recover interest on outlay of funds for the purpose of arranging the swap, in addition to the swap cost in case of early delivery of a contract.
  • If such a swap leads to inflow of funds, interest shall be paid to the customer. Funds outlay/inflow shall be arrived at by taking the difference between the original contract rate and the rate at which the swap could be arranged. The rate of interest to be recovered/paid should be determined by banks as per their policy in this regard.

* Swap: Swap is the simultaneous buying and selling of identical amount of one currency in terms of another currency for differing maturities. The swap loss/gain is the difference between the rate at which currency is purchased and sold. If the Bank has to buy high and sell low, the difference is the swap cost (loss) recoverable from
the customer. Swap gain would accrue when in the vice versa, the Bank buys low and sells high.


  1. FEDAI Guidelines

Basics of Exchange Rate

What is Exchange Rate?

Exchange rate is a rate at which one currency can be exchanged into another currency. In other words, it is the value of one currency in terms of another. Say:

USD 1 = INR 70

Type of Transaction

All foreign exchange transactions undertaken have to be either a purchase transaction or a sale transaction for the bank. The type of transaction is to be determined based on whether the Bank dealing with the foreign exchange is buying or selling the same

Purchase Transaction

In a purchase transaction, the Bank receives a foreign exchange.

Example: Export remittance received in bank’s Nostro account. Bank buys dollar from the exporter and pays INR in exporters cash credit (CC) account.

Sale Transaction

In a sale transaction, the Bank parts with foreign exchange.

Example: Importer makes payment for import bill by buying USD from the bank. Bank debits CC account for the equivalent amount.

Type of Rates


TT Buying Rates (Inward Remittance)

The TT buying rate is applicable for:

  1. Inward remittances
  2. Proceeds of export bills
  3. Cancellation of forward sale contract on or after due date
  4. Conversion of RFC, EEFC, FCNR(B) deposits and PCFC/FC Loan into Indian Rupees

OD Buying (Bill Buying Rates )

The bill buying rate is applicable for purchase/discounting of bills and other instruments. Although the Bank on purchasing/ discounting the export bill immediately parts with the Rupee equivalent, the foreign exchange will be received (delivered) on a future date after realisation of the bill. In the case of usance bill, forward rate will be applicable.  However, in the case of sight bill, forward rates are not quoted even though transit period is involved, as bills are likely to be realised early.

TT Selling (Outward Remittance)

The TT Selling rate is applicable for :

  1. Outward remittance in foreign currency
  2. Cancellation of purchase
    • Bill purchased/returned unpaid
    • Bill purchased/transferred to collection a/c
    • Refund of inward remittances
  3. Forward purchase contract cancellation on or after due date
  4. Recovery of interest on PCFC/FC Loan

BC Selling (Bill Selling Rate)

The Bill Selling rate is applied for transactions involving transfer of proceeds of import bills.

Foreign Exchange Delivery

The foreign exchange quotation will also be determined by the date of delivery i.e. the date on which the transaction is completed. The delivery under a foreign exchange contract can be made in one of the following ways:

Type of Transaction Explanation Date of Deal Value Date
Cash / Ready Delivery on the same day i.e. on the deal date 03 Dec 2018, Monday 03 Dec 2018, Monday
TOM Delivery made on the next working day after deal date 03 Dec 2018, Monday 04 Dec 2018, Tuesday
SPOT Delivery on the second working day after deal date 03 Dec 2018, Monday 05 Dec 2018, Wednesday
Forward Delivery subsequent to SPOT date 03 Dec 2018, Monday Any date after 05 Dec 2018

Computation of Rates

The Bank is a trader in foreign exchange. Purchases are made at a lower price and the sale at a higher price, with the differential being the exchange profit. Banks arrive at a quote based on base rate, exchange margin, spread, and forward premium.

Base Rate

Base rate is the rate derived from ongoing interbank spot rates. For merchant transaction on cash basis (i.e. value Today), the base rate will be adjusted to the extent of cash/spot differences.

Exchange Margin

Banks adds exchange margin above the base rate for quoting rates for different types of merchant transactions e.g. TT Buying/Selling, Bill Buying/Selling etc.  Margin offered to the importers/exporters differs based on overall relationship value, volume in foreign exchange etc.


Spread is the difference between TT Selling rate and TT Buying rate of a given currency. FEDAI has stipulated that the spread should not exceed the following limit from the mean rate:

USD 1%
All other currencies Minimum possible spread

TT Buying Rates

USD INR 70 / 70.05
Base Rate in TT Buying Rate 70
Cash / Spot Difference -0.02
Less: Exchange Margin -0.05
Rate for Exporter 69.93

Bill Buying Rates (OD Buying)

USD INR 70 / 70.05
Base Rate 70
Add premium/deduct discount as the case may be, for the period of delivery/realisation.
Premium for 3 months say Rs.0.60
Less: Exchange Margin -0.05
Rate to Exporter 70.55

TT Selling (Outward Remittance)

USD INR 70 / 70.05
Base Rate in TT Buying Rate 70.05
Cash / Spot Difference – 0.02
Plus: Exchange Margin +0.05
Rate for Importer 70.08

BC Selling (Bill Selling Rate)

USD INR 70 / 70.05
Base Rate in TT Buying Rate 70.05
Cash / Spot Difference -0.02
Plus: Exchange Margin +0.15
Rate for Importer 70.18

Hours of Business

The hours during which forex business will be transacted are the normal banking hours of AD branches expect on Saturdays and Sunday.


  1. HDFC Bank Forex Rates
  2. Financial Benchmarks India Pvt Ltd
  3. Exchange Rate Mechanism

How to Prepare and Check Letter of Credit Documents

Purpose of Letter of credit (“LC”) is to give payment security to the beneficiary subject to documents presented under the LC complying with the requirements of the LC.

To check if documents are compliant, banks examine the required documents based on:

  • The terms and conditions of the documentary credit.
  • The applicable rules of UCP 600.
  • The applicable content of ISBP 745.

A generic checklist is given below to assist parties involved in the transaction in preparing compliant documents. Kindly note the below checklist is only illustrative and not exhaustive.

Initial Scrutiny

  1. All documents called for in LC are submitted.
  2. All documents are submitted in the requisite number of copies.
  3. Documents are issued and signed by the persons specified/required to issue those documents.
  4. Documents, where necessary and stipulated, are dated. If they are dated, the dates should be consistent with the terms of LC.
  5. Documents, where necessary and stipulated, are manually signed.
  6. Material alterations/additions on documents are duly authenticated.
  7. The requisite and stipulated documents are originals or marked as originals and appear to be signed.
  8. All documents, on their face appear to be in compliance with the terms and conditions of the credit.
  9. Shipment is effected within the time stipulated. If it is an installment credit whether the requisite quantity is shipped within the stipulated time schedule and is as per the terms of the LC.
  10. Any partial shipment is effected? If so whether it was permissible under LC. If yes, ensure that the partial shipment effected is as per the terms of the LC.
  11. Documents are presented at the place of expiry stipulated in the LC.
  12. Documents are presented within the expiry date (validity) of the credit. If documents are presented to the nominated bank on an extended validity date in terms of provisions of Article 29(a) of UCP 600, the nominated bank should confirm on its covering schedule that the presentation at their counters was made within the time limits extended in accordance with Article 29(a) of UCP 600.

Bill of Exchange (Draft)

  1. It should bear a date.
  2. It should be drawn by the beneficiary or any other person authorized in this regard.
  3. It should be signed by the drawer or his authorized representative.
  4. It should be drawn unconditionally and should be free from any extraneous conditions and should contain the reference to LC.
  5. It should be drawn for a specified amount and should be consistent with the terms of the drawing permitted in the LC.
  6. It should be drawn payable to a specified payee as mentioned in LC and properly endorsed.
  7. It should be drawn payable for tenor specified in the LC.
  8. It must indicate that it is drawn under the subject LC.
  9. It should, unless otherwise specified, be drawn in the same currency of invoice/LC.


  1. It should be made out by the beneficiary or other authorized person(s) as stipulated in the LC.
  2. It should unless otherwise specified be made out in the name of the applicant.
  3. Description of goods specified must correspond with the description in the LC.
  4. The quantity of goods, unit prices, delivery terms etc. must correspond with the LC terms and be consistent with other relative documents.
  5. It should be drawn in the same currency of LC, unless otherwise specified.
  6. It should not include any charges which are not permitted by LC. As per the stipulations of LC, the gross value of invoice should not exceed the credit amount.
  7. It should show deduction towards agency commission payable etc. as applicable.
  8. Arithmetical calculations should be accurate, (compare unit price and quantity).
  9. The final amount of invoice or the percentage of drawing as permitted in LC should correspond with the draft amount.
  10. If partial shipments are effected, amount of drawings should correspond to proportionate quantities shipped (where only quantity is mentioned without unit prices etc.)
  11. Invoice being a ‘documents of contents’, the details stated therein must correspond/be consistent with details appearing on all other documents.
  12. It must confirm to facts like IEC No. and ITC(HS) classification No. etc. as stipulated in the LC.
  13. If invoice is issued for an amount in excess of the amount permitted by credit (when not specifically prohibited by terms of LC), the nominated bank or the issuing bank has the option to accept a commercial invoice issued for an amount in excess of amount permitted by the credit, and its decision will be binding upon all the parties, provided the bank in question has not honoured or negotiated for an amount in excess of that permitted by the credit as per Article 18(b) of UCP 600.

Bill of Lading

  1. Be issued by a named carrier or his authorized agent.
  2. Bear a distinct number.
  3. Indicate the place of issuance.
  4. Indicate the date of issuance.
  5. Be signed by the named carrier or his authorized agent.
  6. Indicate the name of consignor and his address.
  7. Indicate the name of consignee and his address.
  8. Indicate brief description of goods being carried/shipped.
  9. Indicate port of loading or taking charge (in case of Marine BL, it should indicate a definite port of loading and in other cases, it can be shown as an ‘intended’ port).
  10. Name of the vessel and voyage number.
  11. Be presented in full set of originals (full set comprises two or more originals, all of which are marked as ‘ORIGINALS’ and signed. The number of copies of originals issued is to be indicated on the BL itself). Similarly, transport documents marked as Original, Duplicate, Triplicate etc. are all to be treated as originals.
  12. Meet all other stipulations of the credit.
  13. Must indicate whether ‘Freight Prepaid’ or ‘Freight Payable’.
  14. Must bear the number of the LC.

A Bill of Lading should not (Unless Otherwise Specified by Terms of LC)

  1. Be a Charter party Bill of Lading.
  2. Indicate that the carrying vessel is propelled by sail only.
  3. Be issued by a freight forwarded (unless he himself acting as a carrier or his agent). However, if LC permits Freight Forwarder’s Receipt it can be accepted if issued by IATA approved agent.
  4. Must not indicate that the goods are or will be loaded on ‘deck’. A clause on a transport document stating that the goods may be loaded on deck is acceptable, Article 26(c) of UCP 600.
  5. Be a claused Bill of Lading.

Bill of Lading can (Unless Otherwise Prohibited or is Inconsistent with Other Terms of LC)

  1. Be a short form or blank backed BL if the LC permits.
  2. Indicate a place of taking charge is different from the port of loading and/or a place of final destination different from the port of discharge.
  3. Indicate that the goods are carried in Container(s) Trailer(s) / or ‘LASH’ barge(s), if LC permits.
  4. Indicate that the goods will be trans-shipped provided the same BL covers the entire carriage.
  5. Be a ‘Freight Payable’ BL.
  6. Evidence freight prepayment by a stamp or otherwise on BL to that effect like ‘Freight Prepaid’.
  7. Bear reference by stamp or otherwise to the costs additional to freight charges.
  8. Show clauses such as ‘shippers load and count’ or ‘said by shipper to contain’ etc. with reference to goods covered by the BL.
  9. Show shipper as a third party other than beneficiary.
  10. Be deemed as ‘Clean on Board’ if it is an onboard BL without any superimposed clauses or notations expressly declaring the defective condition of the goods and or the packaging.

Other aspects of BL

  1. An ‘OnBoard’ BL must indicate the name of the carrying vessel/voyage number.
  2. A transport document issued by a freight forwarder can be accepted provided freight forwarder has issued the same in his capacity as a carrier or his agent and all other requirements are met with and is issued by IATA approved agent.
  3. Received for shipment BL can be accepted, if affixed with ‘ON BOARD’ notation duly signed or initialed and dated by the carrier or his agent.
  4. If LC calls for a ‘Marine BL’ without specifying whether it should be ‘On Board; or ‘Received for shipment’, only ‘ON BOARD’ BL will be accepted.
  5. Date of issue of BL / ‘ON BOARD’ notation should be dated on or prior to the shipment date permitted under the LC.
  6. Shipping marks, gross/net weight etc. specified on BL must correspond to those specified in other documents.

Airway Bill or Airconsignment Note

  1. Must show flight number and date.
  2. Must show the name of the carrier.
  3. Must be issued by a named carrier or his authorized agent.
  4. Must indicate the place of issuance.
  5. Must indicate the date of issuance.
  6. Must be signed by a named carrier or his authorized agent (in case of HAWB (House Airway Bill) by the Air Cargo (Consolidator himself).
  7. Must indicate the name of the consignor and address.
  8. Must indicate the name of the consignee and address as per LC terms (and not that of the consignor or his order).
  9. The AWB submitted must be ‘ORIGINAL No. 3’ meant for shipper/consignor.
  10. Must indicate Airport of loading and discharge.
  11. Must give a brief description of the goods being carried and should not be inconsistent with other documents.
  12. Must comply with all other specific requirements of LC.
  13. Must indicate ‘notify parties’ as stipulated in the LC.
  14. Should not be claused (it should be clean AWB).
  15. Unless prohibited by the LC, following are acceptable/permitted
    • Short form AWB or blank backed AWB.
    • Can bear reference by stamps or otherwise to cost, any thing additional to freight charges.
    • It can contain words like ‘said by shipper to contain’ or ‘shippers load and count’ etc.
    • It can show the consignor as a third party other than beneficiary.
  16. It must show the shipping marks of packages, number of packages, gross weight, net weight etc. and they must be in accordance with other documents containing similar details.
  17. It must indicate whether freight is prepaid or payable at destination.
  18. In case of HAWB (whether specified) it must show the name of Airlines, Master Airway Bill number, the flight number, consolidator’s IATA registration number.
  19. It should be remembered that unless credit calls for flight date, even if flight date is shown on AWB, the date of issue of AWB is considered as date of shipment.

Insurance Document

  1. Must be issued only by Insurance Company or underwriters or their authorized agents.
  2. It should not be issued by brokers.
  3. It must be signed by the issuer.
  4. It must be dated.
  5. Date of issuance must be on or before the date of shipment or it must be evidenced by specific notation that the cover is effective from the date of shipment.
  6. The currency of insurance must be same as the currency of LC.
  7. Must indicate the name of the assured.
  8. Must indicate brief details of the goods insured.
  9. Must indicate the mode of conveyance (Air, Sea, Road etc.) the name of the vessel, voyage number etc.)
  10. Must indicate the nature of risks covered and should be those specified in the LC.
  11. Should be in a negotiable form.
  12. Unless otherwise specified, should be issued for an amount of 110% of CIF/CIP value of the goods. If such value is not determinable from the documents on their face, it should be for the minimum amount of negotiation requested for or the amount of invoice value whichever is greater.
  13. If issued in more than one originals, all originals must be submitted (no. of negotiable copies issued are indicated in the insurance policy/certificate).
  14. Should be endorsed in blank by the assured, if required as per terms of LC.
  15. Should indicate the port of shipment and destination or point of insurance coverage and point of termination of insurance coverage.
  16. Should not contain any clause affecting the interest of the assured/assignees.
  17. Must cover all additional risks as specified in the LC.
  18. The goods are on ‘Deck’, Deck shipment risks such as jettisoning or washing over board should be covered.
  19. If LC allows transshipment, such risk must be covered.
  20. Claims should be made payable in India or in the specific city specified in the LC.

Other Documents

A letter of credit may call for variety of other documents like Health Certificate, Pre-shipment Inspection Certificate, Packing List, Shipping Company’s Certificate, Beneficiary’s declarations / undertaking etc. Whenever such documents are called for under LC, the following aspects must be checked in the documents.

  1. Whether issued by the person or authority specified in the credit or authorized to issue. If no specific mention is made regarding issuer of the document, Bank can accept document issued by any person provided their data content is not inconsistent with any other stipulated document presented.
  2. Whether dated and signed by the person/authority concerned.
  3. Whether they relate to the goods/shipment covered by the documents or not.
  4. Whether the document certifies the facts required as per LC or not.
  5. Whether the document contains wordings or data content as specified in the LC or not.
  6. Whether the details mentioned in such certificates/documents are consistent with other documents called for.

Certificate of Origin

  1. It must be issued and signed by an independent authority such as a Chamber of Commerce etc. indicating the origin of goods, as per LC stipulations.
  2. The country of origin certified must be as per LC requirement and consistent with the declaration given by the beneficiary in the invoice/other documents.
  3. It must indicate the description of goods and should be consistent with other documents.
  4. Details appearing in the Certificate of Origin must be consistent with the details appearing in the other documents.

Road, Rail or Inland Waterway Transport Document

  1. Signed as required by UCP 600 article 24, noting that if an agent signs on behalf of a carrier, the agent must be named and indicate the capacity in which it is signing i.e., ABC Co. as agent for the carrier, XYZ Co.
  2. Appear to indicate the name of the carrier.
  3. Indicate the place of shipment and the place of destination stated in the documentary credit.
  4. Indicate receipt of the goods by signature, stamp or notation.
  5. Goods description does not conflict with the documentary credit.
  6. Indication of freight payment is in accordance with the requirements of the documentary credit.
  7. If the document does not state the number of originals, the number presented will be taken as the full set.
  8. Road transport documents must appear to be the original for consignor or shipper.
  9. Rail transport documents marked ‘duplicate’ will be accepted as originals.
  10. Rail or inland waterway transport documents do not need to be marked as original in order to be accepted as original.
  11. Data is not to conflict with that shown in any other document.
  12. Otherwise meets the requirements of article 24

Documents Under Letter of Credit

Documents under Documentary Credit (letter of credit) are broadly  classified into four categories namely;

1. Financial Documents: Bill of Exchange

Financial documents perform the function of obtaining finance, collection of payment etc. The most common financial document used is a Bill of Exchange.

Bill of exchange has three primary parties namely Drawer, Drawee and Payee and has following five important characteristics :

  • It is an instrument in writing
  • It is an unconditional order signed by maker (Drawer)
  • It is a direction given to a specific person (Drawee)
  • It is a direction to make payment of a specific or fixed amount
  • It is made payable to a certain person or to his order or bearer

Type of Bill of Exchange

  • Sight Bill of Exchange: Under such a Bill of Exchange the drawee
    has to make payment on presentation/ sight/ demand
  • Usance Bill of Exchange: The drawee is directed to make payment
    after a stated number of days

2. Commercial Documents

Commercial documents are those that provide the applicant with the information that it needs regarding goods shipped, their unit prices, the packing conditions, weights and data concerning the quality or standard of the goods that have been shipped.  Some of the commercial documents required under LC are:

  • Proforma Invoice
  • Commercial Invoice (UCP 600 Article 18)
  • Consular Invoice
  • Customs Invoice
  • Legalised Invoice
  • Combined Certificate of Origin and Value
  • Packing List
  • Weight Certificate
  • Certificate of Analysis and Quality
  • Certificate of Inspection
  • Health Certificate

3. Transport Documents

Whenever a documentary credit is issued covering a shipment or dispatch of goods, a form of transport document will be required to evidence the occurrence of that event. Each form of transport document will have its own characteristics with regard to function and content.

Based on Mode of transport, below articles of UCP 600 will be applicable:

  • More than one mode of transport – Article 19
  • By sea – Articles 20, 21 and 22
  • By air – Article 23
  • By road, rail or inland waterway – Article 24
  • By courier or post – Article 25

Type of Transport Documents are:

  • Bill of Lading
    • Received for Shipment Bill of Lading
    • On Board Bill of Lading
    • Short Form Bill of Lading
    • Long Form Bill of Lading
    • Clean Bill of Lading
    • Claused Bill of Lading
    • Through Bill of Lading
    • Straight Bill of Lading
    • Charter Party Bill of Lading
    • Container Bill of Lading
    • Combined Transport Bill of Lading
    • Lash Bill of Lading
    • Crocka Bill of Lading
    • House Bill of Lading
  • Airway Bill
    • Air Consignment Note
    • House Airway Bill
  • Postal Receipt
  • Combined Transport Document
  • Inland Waterway Transport Documents
  • Road Transport Documents
  • Rail Transport Documents

4. Risk Covering Documents: Insurance Policy (UCP 600 – Article 28)

Documents represent the insurance cover against transit risks. In international trade, marine insurance is the most common document obtained either by exporter or importer for the safety of goods. Type of insurance documents are

  • Specific Policy
  • Open Policy
  • Insurance Cover Note

Above is the summary of documents required under the Letter of Credit. Will be publishing articles on each of these documents separately.

PNB scam fallout: Outstanding buyers’ credit shrinks by $25 b

The Hindu Business Line Published our report on Buyers Credit Outstanding going down by $25 Billion on today’s front page.

Published with Approval: Original Article Link

PNB scam fallout: Outstanding buyers’ credit shrinks by $25 b


In the aftermath of the 12,600-crore scam at state-run Punjab National Bank, access to overseas credit has become increasingly difficult, especially for small and medium enterprises (SMEs). In fact, the overall outstanding buyers’ credit has shrunk by 1.72-lakh crore (or $25 billion) since June 2017.

Most of this has run down after March 2018, when the Reserve Bank of India banned letters of undertaking (LoUs).

According to data compiled by trade finance firm, overall outstanding buyers’ credit (OBC) stood at 3.43-lakh crore (or $49.4 billion) as of June-end 2018, compared to 5.15-lakh crore or $74.21 billion as of June-end 2017.

The most affected are State Bank of India, Bank of Baroda, and Bank of India.

“There is a big gap in financing, and trade finance of less than $1 million is hardly taking place, which is a big problem for small and medium enterprises,” said Sanjay Mandavia of

Alternative instruments such as bank guarantees and letters of credit are expensive and time-consuming.

The RBI had barred banks from issuing letters of undertaking (LoUs) and letters of comfort (LCs) after it was found that these facilities were allegedly used by billionaire jewellery designer Nirav Modi and his uncle Mehul Choksi to make fraudulent transactions of over 12,600 crore.

Prior to the ban, in September 2017, the OBC was pegged at close to $91 billion.

According to the data, which is based on banks’ first-quarter results, the OBC for the overseas branches of SBI was down to 4.92 per cent of total advances, as against 24.09 per cent earlier. In fact, the OBC of the bank is estimated at 13,132 crore at the end of June 2018, against 67,218 crore a year ago.

Similarly, the outstanding buyers’ credit for Bank of Baroda shrank by 30,244 crore to 16,654 crore at the end of June 2018 from a year ago.

“For overseas branches of Bank of Baroda, OBC used to contribute 42 per cent of total advance, which is down to 17.38 per cent,” said the report.

For international branches of 10 other banks, including Punjab National Bank, ICICI Bank, Allahabad Bank and IDBI Bank, advances have reduced by 17.3 per cent to 2.41-lakh crore by June-end 2018 as compared to June 2017.

“With the available data, it is clear that buyers’ credit used to be a major chunk of business of overseas branches of Indian banks. Alternative products like letter of credit and bank guarantee have failed to pick up as predicted,” said the report, adding that the outstanding balance will see a further run-down in the next quarterly results as buyers’ credit taken against raw material import gets repaid.

Published on August 23, 2018
Hindu Article

Buyers Credit Outstanding Down by $25 Billion

Since RBI Stopped Buyers Credit Transactions against LOU and LOC, few questions kept on coming up regularly

  1. What was the outstanding amount of buyers credit in overseas branches of Indian Bank as RBI data did not provide bifurcation products wise ?
  2. What is the run down in books of these bank since 13 March 2018 RBI Circular ?
  3. What is its impact on Libor based finance available to Indian importers ?

In this article we have provided the data and analysis which will answer the first two questions.


  1. Overall Buyers Credit Outstanding is down by Rs. 172413 Cr ($25 Billion) since June 2017 and most of these run down is post March 2018 RBI decision. Above amount will be still higher as the available data does not include :
    • HDFC Bank and Axis Bank Overseas Branches Outstanding.
    • Offshore banking unit (International Financial Service Centre  i.e. IFSC based in GIFT City) outstanding is not separately provided in the quarterly results. Many banks like Yes Bank, Kotak Bank, ICICI Bank, HDFC Bank etc were increasingly using IFSC branches for buyers credit business.
    • Buyers Credit Outstanding data for Foreign banks is not available
  2. SBI, BOB and BOI are the main banks affected.
  3. With available data, now it is clear that Buyers Credit used to be a major chunk of business of Overseas branches of Indian Banks. With this option closed, pace of consolidation of overseas branches of Indian will increase.
  4. Alternate products like Letter of Credit and Bank Guarantee which were supposed to be alternative of LOU / LOC have failed to pick up as predicted. Thus taking a toll on Indian Importers.
  5. Simultaneously it has also somewhere impacted the below two :

SBI, BOB & BOI Buyers Credit Outstanding – June 2018

Rs. In Crores

Sr. No Bank Branches June 18 June 17 Reduction
1 SBI 52 13132 67218 -54086
2 BOB 50 16654 46898 -30244
3 BOI * 29 72059 109492 -37433
Total 101845 223608 -121763
Total in $ (69.5) 1465 3217 -1752
  1. Buyers Credit Outstanding is down by Rs. 1,21,763 Cr ($17.52 Billion) for these 3 banks.
  2. For SBI overseas branches buyers credit outstanding used to contribute 24.09% of total advances which is down to 4.92%.
  3. For BOB overseas branches buyers credit outstanding used to contribute 42% of total advance which is down to 17.38%.
  4. Outstanding balance will see further run down in the next quarterly results as buyers credit taken against raw material import gets repaid. Post which pace of run down will reduce as outstanding amount will be related to capital goods import. Buyers credit was allowed for upto 1 year for raw material import and for capital goods import it was allowed for tenure upto 3 years with LOU / LOC.

* BOI Data is for overall advance in overseas branches, as bifurcation of buyers credit outstanding is not provided.

Reference: SBI June 2018 Quarter Result, BOB June 2018 Quarter Result, BOI June 2018 Quarter Result

Rest Banks Overseas Branches Total Advance Outstanding : June 2018

  1. For rest of the banks international branches advances has gone down Rs. 50650 Cr ($7.29 billion) in last one year and more so after RBI ban on LOU/LOC
  2. Outstanding balance will see further run down in the next quarterly results as buyers credit taken against raw material import gets repaid. Post which outstanding amount will be related to capital goods import.

Rs in Crore

SrNo Bank Branches June 18 June 17 Reduction
1 IOB 7 10403 12545 -2142
2 PNB 3 31854 41123 -9269
3 Allahabad Bank 1 10183 13125 -2942
4 IDBI Bank 1 15139 22739 -7600
5 Union Bank India 4 19789 29492 -9703
6 Canara Bank 8 49595 55302 -5707
7 Indian Bank 4 6142 6319 -177
8 Syndicate Bank 1 34444 39302 -4858
9 UCO Bank 4 19164 22610 -3447
10 ICICI Bank 12 44792 49598 -4806
11 HDFC Bank 3
12 Axis Bank 5
Total 184 241504 292155 -50650
Total in $ (69.5) 3475 4204 -729

Reference: Quarterly Results are taken from BSE India

  • For the above banks, outstanding amount is total advance of their international branches, as specific bifurcation of their buyers credit outstanding is not provided.
  • Data may or may not include offshore banking unit outstanding as quarterly result does not provide any clarification on the same (International Financial Service Centre based in GIFT City).
  • Number of branches data is based on Jan 2018 RBI data. Post which many branches have been closed.
  • ICICI Bank Data was in $ terms, conversion taken at 69.50 rate
  • For HDFC Bank and Axis Bank, their international branches advance outstanding is not available in quarterly result and thus it has been kept blank. Will update it as an when further information is available.


Why are Indian Banks Closing Overseas Branches ?

Indian Banks have closed 37 Overseas branches till date and another 60 – 70 branches are under review. This article gives an overall summary of Indian banks presence internationally, reason for reducing number of branches and bankwise update on branches closed or in process of closing.

Summary of Indian Banks Presence Internationally

Formation Number of Locations Remarks
Overall Presence 302 State Bank of India : 92
Bank of Baroda : 70
Bank of India : 38
Rest others
Branches * 185 United Kingdom : 32
Hong Kong : 13
UAE : 13
Singapore : 12
Rest others
Subsidiary 26 Data does not include branches of subsidiaries
Joint Venture Bank 8
Representative Office 48
Other Offices 35 Electronic Banking Service Unit; Extension Counter; Indian Visa Centres; Marketing office; Sub office; Remittance centre; Regional Head Office

41 branches were in loss in the financial year 2016-17

Rationalisation of Overseas Operation of PSBs

Public Sector Banks (PSBs) Manthan was held on November 11-12, 2017 in which below recommendations were made related to overseas operations of nationalized banks.

AP-14. Rationalise overseas operations within and across PSBs for cost &  efficiencies and synergies in overseas markets:

(a) Based on competitive strength and viability

(b) Draw up Business-Unit-wise Board-approved plan, for time-bound closure/consolidation as per due procedure, to:

(i) Close non-viable branches;

(ii) Consolidate operations in the same geography, taking into account operations of other PSBs; and

(iii) Consolidate equity stake in joint venture having multiple PSB partners

Impact on Buyers Credit & Suppliers Credit

  1. Less number of branches, means less competition. Overall costing of transaction will go up.
  2. Over a period of time, branches had their niche in market. Like there are few branches dealing only in small ticket transaction (< $1 lac). With closure of any of these niche branches, it will become difficult for arranging funds for small ticket transactions.

Bankwise update on Closure / Merging of Overseas Branches

State Bank of India Overseas Branches Latest Update

Overseas Location Closure Date
SBI Paris Branch 30 September 2018
SBI Tianjin (China) Branch 30 September 2018
SBI Jeddah (Saudi Arabia) Branch 30 June 2018
SBI Muskat (Oman) Branch 31 March 2019
SBI Jaffna (Sri Lanka) Branch 30 September 2018
State Bank of India (Botswana) Ltd 31 March 2019
SBI London Converted Into Subsidiary

Reference: DNA Article

Bank of India Overseas Branches Latest Update

Overseas Location Status
Bank of India Bostwana Subsidiary To Be closed
Bank of India Myanmar (Yangon) Representative Office To Be closed
Bank of India Phnom Penh Branch, Cambodia To Be closed
Bank of India, Shenzhen Branch, China To Be closed
Bank of India Kisumu Branch, Kenya To Be closed
Bank of India Jersey Branch, Channel Islands To Be closed
Bank of India Beijing Representative Branch, China To Be closed
Bank of India Manchester Branch, UK To be Merged with Birmingham Branch
Bank of India Eastham Branch, UK To be Merged with London Branch

Reference: Business Today, The Hindu Line

Canara Bank Overseas Branches Latest Update

Overseas Location Status
Canara Bank Shanghai Branch Merging with Canara Hong Kong Branch
Canara Bank Bahrain Branch Merging with Canara Dubai Branch
Canara Bank Leicester Branch Merging with Canara London Branch
Canara Bank Russia (Joint Venture) Selling to SBI Russia
Canara Bank Johannesburg Branch Closing Down


Bank of Baroda Overseas Branches Latest Update

Overseas Location Closure Date
Bank of Baroda Hongkong Branch To be closed
Bank of Baroda South Africa Branch Closed
Bank of Baroda Nassu Branch, Bahamas 6 July 2018
Bank of Baroda Mutrah Branch, Oman Merged with Greater Mutrah Branch
Bank of Baroda Bahrain Branch 28 June 2018
Bank of Baroda UK Branches Formation of subsidiary at UK viz. Bank of baroda (UK) Ltd. is at advanced stage and necessary approval has been received from Prudential Regulatory Authority

Reference: BSE IndiaEconomic Times ArticleBusiness Today,

Indian Overseas Bank Overseas Branches Latest Update

Overseas Location Status
IOB Dubai Branch To be closed

Reference: Business Today

IDBI Bank Overseas Branches Latest Update

Overseas Location Status
IDBI Dubai Branch To be closed

Reference: Business Today

Punjab National Bank Overseas Branches Latest Update

Overseas Location Status
PNB Sydney Representative Office Looking to Close
PNB Dhaka Representative Office Looking to Close
PNB Dubai Representative Office Looking to Close
PNB Shanghai Representative Office Looking to Close
PNB Kowloon Branch 17 August 2018

Reference: Money Control, First Post

Union Bank of India Overseas Branches Latest Update

Overseas Location Status
Union Bank of India Shanghai Representative Office Closed

Reference: Business Today

Andhra Bank Overseas Branches Latest Update

Overseas Location Status
Andhra Bank Dubai Branch Closed

Reference: Business Today

Allahabad Bank Overseas Branches Latest Update

Overseas Location Status
Allahabad Bank Hong Kong Branch To be closed

Reference: Economic Times

UCO Bank Overseas Branches Latest Update

UCO Bank to merge branches in Hong Kong 


  1. RBI : Country-wise branches of Indian Banks at Overseas Centres as on January 31, 2018
  2. Responsive & Responsible PSBs Banking Reforms Roadmap for a New India

LoU/ LoC should be restored with proper safeguards: Standing Committee Report

Department Related Parliamentary Standing Committee on Commerce Chaired by Shri Naresh Gujral, presented it report on 06 August 2018 on “Impact of Banking Misappropriation on Trade and Industry

The report extensively covers  RBI Ban on LOU / LOC and its impact on the Industry and committee’s recommendations. In summary,  Committee  has recommends that LoU/ LoC should be restored at the earliest albeit with proper safeguards.”

Relevant extract from the report are given below.


2.1 The banks assign both fund based and non fund based credit limits for the purpose of trade finance. The traditional and the most commonly used methods of non-fund based trade finance is a Bank Guarantee or a Letter of Credit. The importers have also been availing Buyers Credit against Letters of Undertaking (LoUs) issued by their banker. Inasmuch as fund based trade finance is concerned, credit instruments like working capital loan/Rupee Export Credit Loans have been in vogue. Another way of financing the trade is through assignment of receivables i.e. factoring, which is in infancy in the country.

2.2 The RBI being mindful of the need to simplify the procedures related to trade finance to bolster trade and to liberalise the foreign exchange regime has progressively delegated more powers to Authorised Dealers (banks) for undertaking foreign exchange related transactions. Accordingly, one of the measures adopted on November 1, 2004 in order to promote investment activity and to further liberalise the procedures related to trade credit for imports, was to grant general permission to Authorised dealers to issue Guarantees/Letter of Undertaking (LoU)/ Letter of Comfort (LoC) in favour of overseas suppliers, banks and financial institutions up to an amount of USD 20 million per transaction.

2.3 The RBI has, however, discontinued the practice of issuance of Letters of Undertaking (LoUs)/ Letters of Comfort (LoCs) for Trade Credits for imports vide Para 2 of RBI Circular No 20 dated March 13, 2018. Para 2 reads as under:

On a review of the extant guidelines, it has been decided to discontinue the practice of issuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits for imports into India by AD Category –I banks with immediate effect. Letters of Credit and Bank Guarantees for Trade Credits for imports into India may continue to be issued subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No. DBR. No. Dir. BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co-acceptances”, as amended from time to time.

2.4 The Committee was informed that the Buyer’s Credit has been disrupted on account of the RBI Circular dated 13 th march, 2018. Buyer’s credit is a short term credit available to an importer (buyer) from overseas lenders such as banks and other such financial institution enabling the importers to make good of the payments in due dates against goods they have imported. Buyer’s credit helps local importers gain access to cheaper foreign funds that may be closer to LIBOR rates as against local sources of funding which are more costly due to higher rates of interest and suffers with  uncertainty in terms of availability. Buyer’s credit has several advantages for the importer. On the one hand the overseas exporter gets payment on due dates, on the other hand, the importer gets extended date for making an import payment as per the cash flows. The importer can negotiate a better discount and use the buyer’s credit route to avail financing.

2.5 As per a study of India Ratings published in Hindu Business Line (Apr 23, 2018), the total outstanding buyer’s credit of the top 160 importers as of 31st March 2017 was over INR 330 billion of which INR 312 billion of credit was availed by large importers and remaining (INR 19 billion) by SME importers. It also stated that unlike large corporate, the level of dependence on buyer’s credit in total debt of SMEs is very high.

2.6 The Committee was informed that there is a decline in export credit to the tune of 24.4% ending fiscal 17-18 and as a percentage of priority sector lending (PSL) it was only 1.74%. The Year-On-Year decline in export credit was 29.6% in 2018. The Committee felt that such a sharp decline in exports credit along with discontinuance of the issuance of LoU/LoC might not augur well for the future and will impact exports adversely. It is a matter of deep concern and deserves immediate attention in order to avert likely disruption to trade and industry.

2.7 In response to the Committee’s concern over the likely disruption to trade and industry on account of discontinuation of issuance of LoUs/LoCs, the Department of Financial Services has stated that discontinuation of issuance of Letters of Undertaking (LoUs)/ Letters of Comfort (LoCs) does not mean discontinuation of trade credit as a means of Trade Finance. Trade Credits, including Buyer’s credit can be availed of as a form of clean credit, apart from availing Bank Guarantee for Trade Credit, subject to extant trade credit guidelines and RBI circulars. It has been further stated that as before, Letters of Credit (LC) and Bank Guarantee continue as forms of Trade Finance. Existing LoUs/LoCs (Letters of Understanding / Letters of Comfort), issued prior to the RBI Circular dated 13.03.2018, discontinuing LoUs/LoCs, may also continue till their original validity, although no roll-over is permitted.

2.8 The Committee held interactions with FIEO, Chambers of Commerce, Export Promotion Councils, Industry Associations, etc. to understand the disruption, if any, caused to the trade and industry in the context of the ban imposed by the RBI on issuance of LoUs/LoCs.

*** For Industry view recommendation, please refer attached report

Committee Views and Recommendations

2.31 In view of the above submissions, it is amply clear that after the discontinuation of issuance of LoUs/LoCs, there has been a decline in trade finance as well as rise in the cost of credit. It is feared that such a development will hobble the performance of our trade and industry. The Committee notes that though the exports figure as of now does not show a downward slide as a result of the ban on LoUs/LoCs yet it is not too far in time when the effect of the ban on LoUs/LoCs will reflect in terms of decline in exports. The  Committee, however, has been informed that there has been a slight dip in diamond trade.

2.32 The Committee finds that the immediate casualty on account of the ban on LoUs/LoCs has been the ability of importers to secure a low interest short term credit in foreign currency. The curb on LoUs severely impacts their liquidity and raises the funding costs. The Department of Commerce has shared an analysis carried out by FIEO which shows that the cost of credit for industry has increased:

2.33 Even the banks during interaction with the Committee have unanimously agreed that the impact of discontinuation of LoU/LoC on the cost of credit is to the extent of 2 to 2 1⁄2 per cent which is substantial in absolute terms and is much costlier than the LC products or the funded limits made available by the Indian banks as a substitute to the LoUs and LoCs.

2.34 Besides the considerable increase in the cost of funds for domestic exporters/importers, the Committee notes with concern that as for the LoUs already issued, a “risk premium” has already been set in for any Indian paper. The Committee was informed that foreign lenders have reduced credit exposures for short term dollar loans to local counterparts. Accordingly, foreign lenders have become reluctant to accept the guarantees from their local counterparts. Banks such as, Citigroup Inc., Deutsche Bank AG, Standard Chartered Plc and HSBC Holdings Plc are declining / reducing exposure to these transactions, used by smaller companies to access short-term dollar funding. It was informed that the premium on Indian paper has shot up by 10-50 bps. LoU-based short-term loans are coming in at a premium of 10-30 basis points, and in some cases it has gone up to even 50 bps. Similarly in case of Supplier’s credit, there is a marginal hike in the interest loaded by the Supplier. But since the LoUs were issued against all types of imports such as Import Bills under Collection, Direct Imports done by the Importer apart from the FLC bills, its prohibition has led to decrease of finance for such imports. It has also put the competitiveness of the local businesses vis-à-vis traders from other countries under strain. Further in the aftermath of the fraud, the overseas financial lenders are keenly monitoring the aspects such as Regulatory Compliances, KYC details and detailed verification of underlying transactions.

2.35 The embargo on issuance of LoUs has caused imports bills getting pending for payments and clearance of import consignments have got stalled. It has been submitted that companies have already started considering cutting down on their raw material sourcing due to increased costs and this will have an impact on their overall turnover.

2.36 Moreover, after the discontinuation of LoU/LoC, the importers will have to convert their rupee loans into foreign currency to make payments to their foreign suppliers. This will cause a spurt on the spot demand of the dollar in currency market. There is all likelihood that the spurt will lead to high conversion cost causing hardship to the importers. On the other hand, the Banks have the ability to raise foreign currency from overseas at a very reasonable rate due to their credit worthiness and capital adequacy. The banks could pass on the benefit of low interest rate raised by them through LoUs/LoCs. Now, the importers are left to fend themselves. The Committee expresses its deep concern on the present situation when the rupee is weak, the rise in spot demand will prove to be onerous on importers. It recommends that RBI may take measures to enter into bilateral currency swap agreements with major trade partners to meet spot demand and buy back exporters’ receivables. This will enable the smooth currency movement in the market and further it will not impact the forex reserves.

2.37 The Committee enquired about the accessibility of other trade finance instruments and it was informed that getting letters of credit (LC) is a time-consuming process as various rules need to be complied by the beneficiary and verified by the bank. A lot of documentation is required which results in consumption of huge resources of the applicant. These instruments involve a commission fee along with a so called acceptance charge which is not the case with LoUs as they only involve a guarantee fee. The Committee recommends that necessary interventions may be made to streamline and simplify the procedure in processing of LCs. The Committee also desires that maximum concessions may be offered on LC charges especially to MSMEs.

2.38 The Committee further notes that no banks except State Bank of India (SBI) have come up with an alternate instrument which could be as cost effective and accessible to the importers as LoUs/LoCs. The Committee welcomes that State Bank of India has developed a new reimbursement product with systemic and compensatory controls which is being extended presently to the AAA and AA rated large corporate customers and will gradually over a period of 6 months be extended to the SME borrowers as well. The Committee recommends that SBI must ensure that SME borrowers are not left out for want of desired credit ratings and hopes that other banks shall also come up products which can provide convenience similar to LoUs/LoCs.

2.39 The Committee enquired about the reasons/basis for the RBI to discontinue issuance of LoU/LoC and the likely impact of such a measure on the trade and industry of the country. The RBI has informed that subsequent to their interaction on 5 th March, 2018 with the Foreign Exchange Dealers Association of India (FEDAI) it was advised to the RBI that there was neither a standard format for LoUs/LoCs nor a standard protocol like the one prescribed by the ICC in respect of LCs/Documentary Credit (viz., Uniform Customs and Practices for Documentary Credits). In the interest of the stability of the banking system and to strengthen the existing mechanisms, it was decided to discontinue issuance of LoUs/LoCs for trade credit with effect from March 13, 2018. The RBI has stated that since LCs and Bank Guarantees, which are standardized and internationally used instrument of trade credit, are readily available to the trading community through the banking system and are also subject to well-recognised norms of the ICC, it is expected that the needs of the industry would be catered to adequately.

2.40 The RBI has further stated that due to the sizable fraud recently reported by the Punjab National Bank, related to misuse of LoUs, the Department of Financial Services, Ministry of Finance requested on March 6, 2018 the RBI to consider the need to continue LoUs, especially since an option like Letter of Credit (LC), governed by a set of rules issued by International Chamber of Commerce (ICC), Paris was already available for supporting international trade.

2.41 The Committee is not convinced with the justification proffered by the RBI for discontinuing issuance of LoUs/loCs. The Committee notes that the RBI has stated that it was advised by FEDAI to discontinue LoUs/LoCs as there was neither a standard format for LoUs/LoCs nor a standard protocol like the one prescribed by the ICC in respect of LCs/Documentary Credit (viz., Uniform Customs and Practices for Documentary Credits).

2.42 During its interaction with the representatives of both public and private sector banks, many of whom being FEDAI members, the Committee was told that LoUs/ LoCs has been an effective instrument for raising short term credit in foreign currency. All the banks, including FEDAI PSB members, have unanimously accepted that the LoUs/ LoCs were not flawed instruments. Instead, these were means of raising cheaper finance for trade. They informed that LoUs and LoCs which were made available were within the sanctioned LC limits of the various borrowers. These were unique to India though the same is not approved under the UCPDC. The fraud was localized to only one bank, one branch and was committed and perpetuated by one family. It is significant that the other bankers have not suffered any loss under the LOUs and LOCs issued by them. The Committee notes that in line with the RBI instructions most of the banks have reduced their exposures under the LOUs and LOCs by more than 75 per cent.

2.43 The Committee strongly feels that the RBI has perhaps not held enough consultations before deciding to discontinue issuance of LoU/ LoC. The Committee notes that the RBI has in a response to the comments sought by the Department of Financial Services about the impact of discontinuation of LoUs/ LoCs on credit cost for short term foreign currency loan has stated that there is no comparative reporting to RBI of quantum or cost of trade finance through LoUs/ LoCs vis-à-vis other available avenues of raising short-term foreign currency finance. If this be the case, then the Committee is constrained to say that the RBI should have done more scrutiny before proceeding with the decision to ban LoUs/ LoCs. The Committee is of the view that the discontinuation of issuance of LoUs/ LoCs is a knee-jerk reaction by the RBI to the recent frauds. It is a typical case of throwing baby along with the bath water and it must be stopped. The Committee, therefore, recommends that LoU/ LoC should be restored at the earliest albeit with proper safeguards.


5.3 The Committee notes that RBI has responded to the banking misappropriation committed through fraud related to LoU at one branch of the Punjab National Bank by discontinuing the practice of issuance of Letters of Undertaking (LoUs) and Letters of Comfort (LoCs) for Trade Credits for imports into India. The Committee is of the considered opinion that discontinuation of the practice of issuance of LoU/LoC for trade credit by the RBI was a knee-jerk reaction. The Committee feels that the RBI got unnerved with the PNB fraud and it hastened the decision to ban LoU/LoC without much thought and consideration. It is significant to note that none of the stakeholders representing trade and industry including banks with whom the Committee held deliberations have suggested that LOU/LoC was a flawed trade document. Everyone has been unanimous that LoU/LoC was a widely accepted bank instrument globally. Its efficacy as a source of cost-effective short term credit of foreign currency for importers was unmatched. Its preference by the foreign supplier in comparison to LC is also well-recorded. Moreover, RBI has itself promoted it after thorough verification more than a decade ago. The Committee notes that there is also a unanimity that the ban of LoU/LoC has resulted in rise in the cost of credit by 2 to 2 1/2 %. This will certainly affect the cost competitiveness of country’s trade and industry and have a cascading effect on jobs. The loss of jobs is something the country can ill-afford.

5.4 The Committee strongly feels that the RBI should have engaged more in consultations with stakeholders on the matter before resorting to discontinuation of LoU/LoC. It is of the considered opinion that LoU/LoC should be restored at the earliest albeit with proper safeguards. Its restoration assumes more significance in the face of the fact that the content of imports is over 20% of India’s total exports. In present times when the currency is witnessing high depreciation, it is imperative that the cost of credit for imports must be minimal. The ban on LoU/LoC takes away the benefit of cheap source of funds availed by the importers. Costly imports shall lead to higher costs of production and erode the competiveness of the domestically produced goods. The loss of competitiveness takes away the gains that might have accrued to export on account of rupee depreciation.

5.5 The Committee also feels that discontinuation of LoU/LoC as a response to the fraud and misappropriation has set in a contagion of conservatism in banking sector. The banks have become very stringent in their operation and credit exposures. The caution has inadvertently made banks becoming inaccessible to MSME sector. The Committee is concerned that such an approach has the dangers of making banking services elitist and subservient to a few large corporates leaving out the vast majority of MSME units which are not able to measure to the standards and parameters laid down by external credit rating agencies for getting ‘AAA’ or ‘AA’ ratings. The MSME units are getting burdened with high cost of loan which is further accompanied with the demand of unreasonably high collateral by the banks. The Committee is constrained to state that such an approach also crowds out innovative, high risk, growth segments, which is not good for the economy in the long run. It recommends the Government to set things right and take necessary measures in all earnest for the purpose.


  1. Report: Impact of of Banking Misappropriation on Trade and Industry
  2. RBI Stops Buyers Credit Transactions (LOU &amp; LOC)

Letter of Credit Clauses Related to 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.

Continue reading Letter of Credit Clauses Related to Suppliers Credit

Letter of Credit – MT 700 Format

Earlier article “Types of Swift Message used in Letter of Credit and Suppliers Credit” discussed details related to Category 7 message. This article further explore MT700 used for Letter of Credit Issuance. This will help importers understand various fields in MT700, related UCP 600 reference etc.

Continue reading Letter of Credit – MT 700 Format

Major changes in ITR 1 (Sahaj) for AY 2018-19

Income Tax Return Form – 1 (Sahaj) is applicable to only Resident Individuals having Incomes from Salaries or Pension, One House property, Other sources and having total income upto Rs. 50 lakhs.  The new ITR-1 form is not applicable to Non-residents and Residents but not ordinarily resident (RNOR).

Continue reading Major changes in ITR 1 (Sahaj) for AY 2018-19

Revised Nature of Business or Profession Codes for ITR Forms – AY 2018-19

Nature of Business or Profession Code is required to be furnished in ITR 3, ITR 4, ITR 5 and ITR 6. In the new Income tax return (ITR) forms for A.Y 2018-19, below changes are made in Nature of Business or Profession Codes. 

Continue reading Revised Nature of Business or Profession Codes for ITR Forms – AY 2018-19

Legal Entity Identifier (LEI) Number

What is Legal Entity Identifier (LEI) ?

The LEI is a 20-digit, alpha-numeric code that identifies legal entities participating in financial transactions. Each LEI is unique and contains reference information that enables simple and quick identification of an entity. As an international standard (based on ISO 17442), all LEI information is openly published and accessible to all.

Continue reading Legal Entity Identifier (LEI) Number

How to Resolve IGST Refund Issues for Exporters

IGST refund for Exporters – Provisions

As per Rule 96 of the CGST Rules 2017, the shipping bill filed by an exporter shall be deemed to be an application for refund of integrated tax paid on the goods exported out of India. Being so, opting LUT/NA or mentioning “0” against “IGST Paid” field, will keep away the exporter to avail refund claim even if they have paid the IGST as the exporter himself has declared the same in the Shipping Bill. However, following Circular No. 8/2018-Cus dated 23.03.2018, an option has been made available by the DG Systems in ICES for sanctioning IGST refund in respect of those cases where the exporter has erroneously declared that the shipment is without payment of IGST, although they have declared and paid the IGST in GST Returns.

IGST refund Procedure for Exporters

Once the GSTR-1 and GSTR-3B are filed “CORRECTLY”, then the data dump will match with the GST Network and it will transmit the data to ICES (Indian Customs EDI Systems).

On receipt of the data from the GST Server, an integration between Shipping Bill and data received from the GST takes place.

If no mismatch / error is found while integration, Systems tagged the Shipping Bill as “Ready” for scroll generation. PFMS (Public Financial Management System) is the portal to remit the amount to the exporter’s account against the eligible shipping bills/invoices.

“Not Ready” tag is given to the Shipping Bill in two situations, namely:

A. Either the data pertaining to the Shipping Bill/Invoice, has not been sent by the GST Network to ICES (i.e. Customs Portal).

B. Or the data has been received from the GSTN, but the same has been stuck into some error code(s) while integration.

If systems notice any mismatch between Shipping Bill data and GST data, it generates Response Codes viz. SB001, SB002, SB003, SB004, SB005 and SB006.

GST Network does not transmit the data to ICES

There may be several reasons why GST Network does not transmit the data to ICES:

  1. Either GSTR-1 or GSTR-3B or both has not been filed with GSTN.
  2. Amount of IGST is more in GSTR-1 than the IGST amount shown in the GSTR-3B. So it is important that data pertaining to domestic supplies should also be in symmetry as far as matching of GSTR-3B and GSTR-1 is concerned.
  3. Amount of IGST is to be shown in 3.1(a) instead of 3.1(b) in GSTR-3B.  In GSTR – 3B column 3.1 Details of Outward Supplies and Inward Supplies liable to reverse charge; Amount of Export Turnover is to be filed in 3.1.(b) – Outward taxable supplies (zero rated) instead of it to be entered in 3.1.(a)
  4. Invoices of that particular month are not being filled up properly in Table 6A. (like Port Code, Shipping Bill Number, Shipping Bill Date etc.).

Solution: Data in GSTR -1 can be amended using Table 9A. It is worth mentioning that only single time amendment is allowed in an invoice in Table 9A. So while correcting the GSTR-1, exporters are advised to remain cautious and maintain 100% accuracy.

As far as correction in GSTR-3B is concerned where mistakenly amount of 3.1(b) has been shown against 3.1(a), Exporters can approach designated Customs officers at ICD/Ports for verification of GSTR data. The officer will fill up the information in Annexure A email the same to DG Systems.

Data has been received from the GSTN, but the same has been stuck into some error code(s) while generating IGST refund

If systems notice any mismatch between Shipping Bill data and GST data, it generates Response Codes (IGST Refund Error Codes)  viz. SB001, SB002, SB003, SB004, SB005 and SB006.

Response Code SB001 : It is generated when Shipping Bill Number or Shipping Bill Date at ICES is not matched with what is mentioned in the GSTR-1.

Solution: Same can be corrected by using Table 9A of GSTR-1.

Response Code SB002 : It is generated when Local EGM has not been filed or filed with some errors.

Solution: Same can be corrected with the help of Container/Shipping Line Agent.

Response Code SB003 : It is generated when GSTIN number is not mentioned in the Shipping Bill or mentioned partially.

Solution: Exporter may approach Customs Officers at the Ports/ICDs from where actual export took place and get the error corrected.

Response Code SB004 : Record already received from the GSTN.

For this Error no action is required from the exporter.

Response Code SB005 : It is generated when Invoice Number or Date of Shipping Bill does not match with what is mentioned in the GSTR-1

Solution: a. Same can be corrected by using Table 9A of GSTR-1.

b. Exporter may also approach Customs formation (from where export took place) alongwith Annexure ‘A’ (Concordance Table). Officers at Customs formations have been allotted physical interface to rectify the error. Earlier this facility was available for the Shipping Bills filed upto 31.12.2017, however, it has been decided by the Board to extend the facility to those shipping bills filed till 28.02.2018. However, it should be kept in mind that no further extension would be given in this regard.

Response Code SB006 : It is generated when either EGM at Gateway has not been filed or filed with some errors.

Solution: a. Get the EGM filed

b. If EGM at Gateway is filed with some errors get it corrected with the help of Shipping Line Agent.

You might get Error Code “C” which mean mismatch of Container Number. For this, officers at Gateway port has been given physical interface (PREV_OFF) to correct this error. Apart from this Error Code “M” (Gateway Port Code in Truck Summary is different from Actual Gateway Port) and Error Code “L” (Leo Date>Sail Date) may be corrected at Local Customs Locations.


  1. Tracing Shipping Bill

Statement of Financial Transaction (SFT / Form 61A) Preliminary Response

The due date for furnishing Statement of Financial Transaction (SFT) for Financial Year 2017-18 is May 31, 2018.

Communications are being received by the Income Tax Department for furnishing Form 61, Statement of Financial Transactions (Form 61A) / Statement of Reportable Accounts (Form 61B) on the Reporting Portal. Unlike last year the same was to be submitted on e-filing portal at

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Reserve Bank’s decision to ban LoUs will badly Impact SME

Reserve Bank’s decision to ban LoUs is a knee-jerk reaction; can backfire badly, warn traders

Article in printed with permission: 

An industry-wide practice that worked well until the end of business hours on Tuesday, which allowed D Dhanasekaran’s Tiruppur-based textiles firm — Abi Tex Mills — import machinery from Oman and boost production, has now gone haywire with the Reserve Bank of India’s (RBI) decision to bar banks from issuing guarantees in the form of letters of undertaking (LoUs) and letters of comfort. “My machinery took a year to be imported and has been installed in the factory for a few months now. But now with buyer’s credit cancelled, I am focused on how to make payments instead of my production,” Dhanasekaran said.

Continue reading Reserve Bank’s decision to ban LoUs will badly Impact SME

Reuters: Indian importers face funding crunch with clampdown on credit guarantees

Article in Reuters printed with permission: 

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Bank Audit – Buyers Credit and Nostro Account

A bank branch goes through four kinds of audits and inspection

  • Internal audit (done by bank staff) on regular basis
  • Concurrent audit (done by a third party), on monthly or quarterly basis
  • Statutory audit (done by the statutory auditor) on quarterly basis
  • Inspection by RBI (annual basis).

In relation to buyers credit transaction, below are the few audit point which are covered by above audits.

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Buyers Credit Secondary Market

During the PNB Fraud case, one of the Banks made a statement that:

“It is an active participant in the secondary market for buyer’s credit transactions and it has sold “all the referred transactions’’.

This article tries to throw some light on what is buyers credit secondary market, how the structure works and why banks do transaction in secondary market.

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RBI 2016 Circular : Frauds Related to Trade Finance Transactions – Misuse of SWIFT

RBI in its 2016 Circular to banks had mentioned problem in relation to process followed for issue and reconciliation of SWIFT messages related to Trade finance products and corrective actions banks should take to prevent any fraud. Worth a read.

Continue reading RBI 2016 Circular : Frauds Related to Trade Finance Transactions – Misuse of SWIFT

Implication on Buyers Credit because of PNB Fraud

Latest Articles:

  1. RBI Stops Buyers Credit Transactions (LOU & LOC)
  2. Indian Banks adds Additional Control to SWIFT System
  3. Bank Audit – Buyers Credit and Nostro Account

This article gives layman summary of the PNB fraud case and its impact on buyers credit product and various stake holders like Indian Bank Overseas Branches, Local Banks in India and Importers.

Continue reading Implication on Buyers Credit because of PNB Fraud

Interest Payment to Mauritius: 7.5% Withholding Tax

In earlier article “WHT (Withholding Tax) on Interest on Buyers Credit” and “Withholding Tax (WHT) on Suppliers Credit Transaction”, we had discussed that if buyers credit or suppliers credit is arranged from Mauritius based bank / branches, there was no withholding tax on interest payment as per Double Taxation Avoidance Agreements (DTAA).

India-Mauritius Tax Treaty was amended on 10 May 2016 and got effective from 01 April 2017. In this article, only amendment related to Interest Payment  (Article 11) is covered.

Continue reading Interest Payment to Mauritius: 7.5% Withholding Tax

Post Libor World – Impact on Buyers Credit

In earlier article we have discussed about various aspect of Libor and its Impact on buyers credit transaction.

In brief, Libor attempts to answer a fundamental question: What is the  cost of money? It does this for a range of currencies (dollars, euros,  pounds, etc.) and for a range of maturities.

Continue reading Post Libor World – Impact on Buyers Credit

Stronger Rupee Impact on Buyers Credit

Currency fluctuation is one of the factor effecting  Buyers Credit.


From 62 Level starting 2015, USD INR moved to 68 levels and since then has come back to 64 levels in 2017. This article explores impact of stronger rupee on importers who have availed buyers credit.

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Moratorium Period Impact on Buyers Credit

As per RBI Master Direction on External Commercial Borrowing and Trade Credit banks are allowed to sanction buyers credit on import of capital goods for  3 years with Letter of Undertaking.

In order to avail above buyers credit, Importer will have to get term loan sanctioned with buyers credit as sub-limit with his bank. As seen in earlier article “Buyers Credit on Capital Goods“, moratorium period is one of the factor which importer needs to take care at time of sanctioning of term loan. This article explains

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Rising Libor Rates and Its Impact on Buyers Credit

Buyers Credit transactions are funded on Libor rates. Thus any change in Libor directly impact overall costing of the transaction.

Libor rates started rising in 2015 and pace of which got picked up since beginning of 2017. Below 3 Month Libor and 6 Month Libor charts shows the trend. There are two charts for two range.

Continue reading Rising Libor Rates and Its Impact on Buyers Credit

Subsidy under CLCSS Cannot be Claimed Where Buyers Credit is Availed

Trigger for this topic is a question that a reader asked:

“MSME manufacturing  unit doing expansion of machinery by purchasing machinery from abroad   get credit linked capital subsidy scheme (CLCSS) from Central Government.

MSME unit avails buyers credit for payment to overseas buyer and sanctioned term loan is not utilised . Can the unit be eligible for subsidy? ”

Below article gives basic details about Credit Linked Capital Subsidy Scheme and revert to above query.

Continue reading Subsidy under CLCSS Cannot be Claimed Where Buyers Credit is Availed

Buyers Credit & Suppliers Credit in Rupee (INR)

RBI issued a circular on 10 Sep 2015, revising the policy on Trade Credit (Buyers Credit & Suppliers Credit). Summary of the same is given below:

As per revised guidelines, RBI has allowed resident importer to raise trade credit in Rupees (INR) within below framework after entering into a loan agreement with the overseas lender:

Continue reading Buyers Credit & Suppliers Credit in Rupee (INR)

Form 15CA & Form 15CB applicable on All Payment

Post below article CBDT has revised rules for form 15CA and Form 15CB effective from April 01, 2016. Refer article: Form 15CA and Form 15CB not Required for Import Payments

In revised notification issued by CDBT on 16th December 2015, effective 01’st April 2016, import payment has been made part of exempted list. Hence forth Form 15CA and Form 15CB will not required for the same during import transactions.

Continue reading Form 15CA & Form 15CB applicable on All Payment

Can Exporter Retain EEFC A/c Balance for Buyers Credit Repayment

Trigger for this topic is a question that a reader asked:

“Can Exporter retain dollar in EEFC A/c for buyers credit repayment ?”

Below article gives basic details about EEFC account and revert to above query.

Continue reading Can Exporter Retain EEFC A/c Balance for Buyers Credit Repayment

Difference Between Letter of Comfort and Letter of Undertaking

Letter of Undertaking in simple terms is bank guarantee issued by Indian bank against which overseas bank provide finance on Libor rates. Libor linked finance used by importers are Buyers Credit, Suppliers Credit, ECB etc. Libor linked finance used by exporters is PCFC (Packing Credit in foreign currency)

In earlier articles, terms Letter of Undertaking (LOU) and Letter of Comfort are used regularly. Below article gives difference between both these terms from perspective of buyers credit.

Continue reading Difference Between Letter of Comfort and Letter of Undertaking

Is Service Tax Applicable on Buyers Credit ?

The trigger for this topic is a question that a reader asked:

“I would like to know whether service tax is applicable under Section 66A of the erstwhile Act on availing Buyer’s credit? It is not only the interest which is paid but a number of other fees like the management fees, arrangement fees, hedging cost etc which is paid to banks by the importer”

Continue reading Is Service Tax Applicable on Buyers Credit ?

Meaning, Process, Procedure, RBI Regulation & More

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