Buyers Credit on Jewellery

In earlier articles on Buyers Credit on Import of Gold and Import of Platinum, Palladium, Rhodium, Silver, as stated, Reserve Bank of India (RBI) had permitted banks to approve Suppliers and Buyers Credit (Trade Credit) including the usance period of Letters of Credit for import of rough, cut and polished diamonds, for a period not exceeding 90 days, from the date of shipment.

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Overdue Interest and Late Payment Charges on Buyers Credit

Overdue Interest is applicable for the period after due date on which payment of principal and interest is payable to the buyers credit bank. Some banks have been clearly stating these charges in their offer letter or in letter of undertaking format. Once the buyers credit get overdue, they have been raising demand for overdue interest / charges on lou issuing bank. While giving letter of undertaking (LOU), lou issuing bank gives unconditional undertaking than they would make the payment on due date, irrespective of importer’s ability to make the payment and incase of delay would pay over due charges. Thus are under obligation to make such payments.

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Prepayment of Buyers Credit

From Importer’s Perspective

There are various reasons because of which an importer would like to make a pre-payment of buyers credit. Such as:

  • USD-INR rate in favour of importer post buyers credit is taken.
  • Buyers credit is taken by way of keeping Fixed deposit as security and now importer wishes to free cash.
  • Importer wishes to free Non Funds based limits for other use.
  • Any other such reasons.

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Trade Credit Extended Upto 5 Years for Infrastructure Firms

Reserve Bank of India (RBI) issued a fresh circular on September 11, 2012 in relation to Trade Credit for Import into India. Please find below summary of changes made into existing policy:

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Difference Between EURIBOR & EUR Libor

EURO based buyers credit is currently funded by most of the banks using EURIBOR which is issued by European Banking Federation and ACI. A similar rate is issued by British Banking Association known as EUR Libor but is not often used by bankers for funding buyers credit transactions.

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Banks Insisting of Forward Booking for Buyers Credit Exposure

Of late few banks have started asking their clients to compulsorily book forwards against  their buyers credit exposure (existing as well new transactions). This change is because of earlier and current directives given by Reserve Bank of India (RBI). Summary of which is given below:

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Form 15CA & 15CB Not Applicable on Interest payment to Indian Bank Branches

As per Income Tax circular 04/2009 dated 29th June, 2009 (Circular Link provided below), Form 15CA and 15CB Certificate under Section 195 of Income Tax is required to be submitted in cases where payments are made to a non-resident.

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Basel III – Future Impact of Trade Finance

The Basel Committee on Banking Supervision (BCBS, or Basel Committee) is an institution created by the central bank Governors of 27 members from both developed and emerging economies. The most influential publications by the BCBS are Basel Accords. The key part of  Basel framework as commonly referred to, guides banking industry how to calculate risk-weighted assets (RWA) and capital requirements. The Basel Committee gave its  final text of Basel III on Dec 2010 of details of updated global regulatory standards on bank capital adequacy and liquidity, which was agreed by the Governors and Heads of Supervision, and endorsed by the G20 Leaders at their November 2010 Seoul summit.

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IMO Number and Its importance in case of Buyers Credit

What is IMO Number ?

The IMO ship identification number is made of the three letters “IMO” followed by the seven-digit number assigned to all ships by IHS Fairplay when constructed. This is a unique seven digit number that is assigned to propelled, sea-going merchant ships of 100 gross tons and above. It serves the purpose of identifying ships. It is a Unique number which does not change, even if when the ship’s owner, country of registry or name changes.

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Country-wise Double Taxation Summary Chart on Interest

Below Country-wise double taxation summary chart provides Tax rate and Article reference number applicable on interest payments to beneficiary outside India. Same will be useful at the time of filling up Form 15CA and Form 15CB

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Form 15CA and 15CB under Section 195 of Income Tax

Refer Revised Article :  Form 15CA and Form 15CB not Required for Import Payments

Post below article CBDT has revised rules for form 15CA and Form 15CB effective from April 01, 2016. Please refer above article for further detail.

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OFAC Countries & Implication on Buyers Credit

What is OFAC Sanctions ?

  • The Office of Foreign Assets Control (OFAC) is an office of the Treasury Department of United States of America (US).
  • OFAC administers and enforces economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries, organizations, entities, and individuals.
  • Regulations issued under Trading With the Enemy Act (50 U.S.C. App.§§ 1-44) or by the US President under authority delegated under the International Emergency Economic Powers Act.
  • The OFAC sanctions programs are implemented through restrictions on imports and exports, prohibitions on financial transactions, freezing of assets, and other means.

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Review of all-in-cost ceiling – Trade Credit

In its circular dated 30/03/2012, RBI has decided to continue with the enhanced all-in-cost ceiling for Trade Credit for further period of six months.

  1. Maximum Cap on Interest Rate for tenure Upto 3 years : 6 Month LIBOR + 350 bps
  2. Applicable Upto: 30/09/2012 (Subject to review there after) 

RBI Circular Copy

Buyers Credit All-In-Cost Ceiling may move back to L+200bps from 01/04/2012

In its Circular dated 15/11/2011, RBI had increased the all-in-cost ceiling for Buyers Credit  from 6 Month L+ 200 bps to 6 Month L + 350 bps subject to condition that is only upto 31/03/2012 and after subject to review there after.

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Buyers Credit for Imports Under Direct Documents

RBI Circular of External Commercial Borrowing and Trade Credit gives information about buyers credit. But with specific type of transaction, inference has to taken from other related circulars. For example, for Buyers Credit in case of import against direct documents received by importers, RBI Circular on Import of Goods and Services has to be referred along with Trade Credit Circular. RBI has put in various criteria under which such transactions are allowed.

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Difference between Buyers Credit and Letter of Credit (LC)

1. LC is one of the payment mode used in the International Trade between importer and exporter to cover third-party credit risk. Meaning if the importer defaults, his bank will have to pay on his behalf. Whereas, Buyers credit is a funding mechanism used by importer to funds his transaction. Continue reading Difference between Buyers Credit and Letter of Credit (LC)

Comprehensive Guidelines on Foreign Exchange Derivatives

RBI via circular dated 28/12/2010 revised the extant guidelines on OTC (Over the Counter) Foreign  Exchange Derivatives and which became effective from 1st February 2011. Below is the extract of the guidelines related to importers and exporters.

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Recent Changes to India’s Currency Forward Contract Norms for Hedging

RBI via circular dated 15/12/2011 made changes in Foreign Exchange Derivative Contacts with immediate effect until further review. Below is the extract of the same related to importers and exporters.

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RBI Increase Buyers Credit All-in-Cost Ceiling

RBI reviewing the developments in global finance markets and the fact that domestic importers are experiencing difficulties in raising Trade Credit (Buyers Credit / Suppliers Credit) within the existing all-in-cost ceiling, RBI has made below changes in the existing policy.

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Infrastructure Companies – Bridge Finance before availing ECB

Considering the specific needs of the Infrastructure sector, RBI under its circular External Commercial Borrowing (ECB) – Bridge Finance for Infrastructure Dated 23-09-2011, reviewed the ECB policy. An amendment was made in this policy on 21-09-2012. Brief summary is given below:

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Buyers Credit on Capital Goods

New Article: Moratorium Period Impact on Buyers Credit

Buyers Credit can be used both for Raw Material and Capital Goods. Below article gives complete detailed information along with process and sample sanction letters.

Process Flow of Buyers Credit for Capital Goods

Term Loan Sanction –> LC Issuance for import of Machinery –> On the due date of payment of LC convert it to Buyers Credit and rollover it for 3 years –> At end of 3 years convert to term loan

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Buyers Credit Interest Rate (LIBOR + Margin)

Change in LIBOR Tenures and Impact on Trade Finance

Earlier articles on Buyer’s Credit have provided details on total cost involved like, Interest cost, libor, lou charges, forwarding booking cost, arrangement fee, and others.

This article provides details on how interest cost (margin) is arrived at by Indian Bank Overseas Branches or Foreign Bank.

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Bankwise Letter of Comfort / Undertaking Charges

Below given are Letter of Undertaking (LOU) / Letter of Comfort (LOC) charges:       These charges detail information is as provided by respective bank’s website. These rates may vary from customer to customer, based on their negotiation with bank.

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LIBOR Rates: Brief, History, Currencies, Maturities

Post below article there has been change in Libor Guidelines. Refer article “Impact of Libor Review on Trade Finance in India” & “Pushing the reset button on LIBOR – Speech by Martin Wheatley

LIBOR in brief

LIBOR stands for London InterBank Offered Rate. LIBOR is an indicative average interest rate at which a selection of banks (the panel banks) are prepared to lend one another unsecured funds on the London money market. Although reference is often made to the LIBOR interest rate, there are actually 37 different LIBOR interest rates. LIBOR is calculated for 7 different maturities and for 5 different currencies. The official LIBOR interest rates (bbalibor) are announced once a day at around 11:45 a.m. London time by Thomson Reuters on behalf of the British Bankers’ Association (BBA).

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Transaction where Buyer’s Credit is Restricted

Type of Transaction Where Buyer’s Credit Cannot be Done

  • Incase of local trade
  • Advance payment for Imports:  Buyers Credit for any amount paid as advance either part or full is not allowed as RBI Caster Circular on External Commercial Borrowing and Trade Credit. Inference has to drawn the above circular. Circular says maximum tenure allowed for buyers credit from the date of shipment is (shipped on board date) upto 360 days in case of raw material and upto 3 years in case capital goods. Any Advance Payment always done before shipment of goods. And thus not allowed.
  • Not allowed for import of services

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Sample format of Letter of Undertaking / Comfort (LOU / LOC)

Latest Article: Implication on Buyers Credit because of PNB Fraud

As mentioned in article “Procedure for Buyers Credit“,  Post receipt of offer letter from Indian Bank overseas branch or Foreign Bank, Indian Bank has to send Letter of Comfort / Undertaking (a type of Bank Guarantee) to overseas bank as security before funding the transaction.

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Import of Platinum, Palladium, Rhodium, Silver

Reserve Bank of India (RBI) in its circular dated 28-08-2008 had revised guidelines for Import of Platinum, Palladium, Rhodium and Silver. Extracts of the circular are given below.

Suppliers’ and Buyers’ credit, including the usance period of Letters of Credit opened for import of Platinum, Palladium, Rhodium and Silver should not exceed 90 days from the date of shipment. The revised directions will come into force with immediate effect. 

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Buyer’s / Supplier’s Credit on Rough, Cut and Polished Diamonds

Reserve Bank of India (RBI) in its circular dated 06-05-2011 has revised guidelines for import of Rough, Cut and Polished Diamonds. Extracts are given below.

Supplier’s Credit and Buyer’s Credit (Trade Credit) including the usance period of Letter of Credit (LC) opened for import of rough, cut and polished diamonds has been restricted to 90 days from the date of shipment from immediate effect.

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Buyer’s Credit Rollover

At the time of taking Buyers Credit, one would consider availability of tenure by banks, price variation based on tenure, etc. to arrive at tenure for which buyers credit is to be availed.  On the due date, either the buyers credit is paid off or it can be  further rollover for additional tenure.

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Buyer’s Credit from Mauritius Based Foreign Bank

Since last week or so, Foreign bank branches based out of Mauritius are either not able to quote or are quoting above the RBI prescribed ceiling for 6 months LIBOR + 200 bps.

Reason being, low liquidity has resulted into high cost of funds.

Above will affect those importers who used to arrange funds from Mauritius based Foreign Bank which were somewhat cheaper than Indian Bank overseas branches but did not want to get into withholding tax. As per Double Taxation Treaty with Mauritius, withholding tax on interest payment to Financial Institution is nil.

Now options with them are either to take funds from Indian bank overseas branches at higher cost or from Foreign bank and pay withholding tax on due date.

Buyers Credit and Suppliers Credit Consultants

Who is Buyers Credit and Suppliers Credit Consultant ?

Person / Firm who co ordinates with Indian Overseas Branches or Foreign Bank and arranges best possible quote for transactions. They do not directly represent any of these bank. They are also known as Buyers Credit Brokers & Buyers Credit Agents

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Difference between Buyer’s Credit and Supplier’s Credit

Criteria Buyers Credit Suppliers Credit
Mode of Payment Can be used for payment mode like LC, LC usance, DA, DP, & Direct Doc Can be used only in case of LC transactions
LC Clauses No additional clauses or Amendment is required in LC At the time of opening LC or amending LC clauses given by Suppliers Credit bank needs to be changed. Like Negotiation Clause,  Confirmation Clause, Reimbursement Clause
Arrangement Can be arranged after documents have reached the bank or documents are received by importer directly Has to be arranged at the time of opening LC or before shipment of goods
Cost Interest Cost LC Advising Cost, LC Amendment Charges, Document Processing Charges, Courier Charges, Conformation Cost and Interest Cost

Buyers Credit in Cross Currency

Note: Since the time this article was written, 6 Month Euribor has come down from 1.79% (July 2011) to 0.070%. Concept of cross currency still holds but the example would change. Please take below example as reference only.

Question of Buyers Credit in Cross Currency comes up in below cases.

  1. International trade is carried out in USD, EUR, JPY and other currencies. But when it comes to arranging buyers credit, arranging buyers credit against USD and EUR is much easier, with better price range and more options of banks to choose from is  than in other currencies. But even with above understanding, at times it is not possible to transact in these currencies and thus cross currency buyers credit is required.
  2. Possibility of arbitrage. Meaning move transaction from say Euro to USD because of difference in costing may result in  some cost saving. Has been explained in detail further in the article with example.

Process flow for doing Cross Currency

At the time of receipt of the document, importer will book a cross currency Spot+2 or forward as per his comfort with his bank, to get the exact conversion from one currency to other currency. Rest of the process is same as buyers credit which importers already carry out.

Example of Cross Currency from Arbitrage perspective

Cross currency can at times, lead to cost saving. An Example of import payment due in Euro to buyer’s credit into Dollar  is given below.

Assumption

Transaction Value: EURO $100000
USD Value of Buyers Credit: $141713 (as per current market)
Tenure: 6 Months
Quote under both USD and EURO is L + 1.50%
LOU Charges are same for both transactions
Forward for both currency is booked (Rate taken from NSE India Website)

Market Rates – 15/07/2011

6 Month EURO Libor Rate: 1.79188%
6 Month USD Libor Rate: 0.41575%
6 Month EURO Forward Premium: 1.60 (64.64 – 63.07)
6 Month USD Forward Premium: 1.235 (45.73-44.49)

Calculations (LOU charges not are taken below, as per assumption that it is same in both transaction)

Currency Amount LIBOR Margin L + M 180       days INR Interest Cost Forward Premium In INR
EURO 100000 1.79 1.5 3.29 1646 106394 160000 266394
USD 141713 0.42 1.5 1.92 1357 62075 175016 237091
Savings 29303

Other factor to be considered before taking decision

Cross currency Foreign Exchange margin charged by bank on such transaction

Useful links in relation to Buyers Credit

1. ECB Form (Application Form for Buyers Credit /Supplier Credit)
2. Buyers Credit Cost Calculation Sheet
3. Current Exchange Rate
4. Future / Forward Rates of USD, EURO, GBP, JPY

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RBI Trade Credit (Buyers/Suppliers Credit) Circular Extract

New Article: RBI Circular : Trade Credit – New Regulatory Framework

Updated on 19 October 2016

Trade Credits refer to the credits extended by the overseas supplier, bank and financial institution for maturity up to five years for imports into India. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to the credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from overseas bank or financial institution. Imports should be as permissible under the extant Foreign Trade Policy of the Director General of Foreign Trade (DGFT).

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Buyers Credit – Meaning, Process, Cost & Regulations

Buyer’s Credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institutions outside India. Based on letter of undertaking of Importer’s bank, Overseas bank credits the Nostro of the importer’s bank which in turn uses the funds to make payment to the Suppliers bank against the import bill.

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Meaning, Process, Quote, Interest Rate, SBLC, RBI & More