All posts by Sanjay Mandavia

Buyers Credit & Suppliers Credit Consultant

Buyers Credit Against Standby Letter of Credit (SBLC)

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

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

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

What is Stand By Letter of Credit (SBLC)

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

Technical definition:

Standby letter of credit means any letter of credit, or similar arrangement however named or described, which represents an obligation to the beneficiary on the part of the issuer

  1. To repay money borrowed by or advanced to or for the account of the account party, or
  2. to make payment on account of any indebtedness undertaken by the account party, or
  3. to make payment on account of any default (including any statement of default) by the account party in the performance of an obligation*.
  • As defined above, the term standby letter of credit would not include commercial letters of credit and similar instruments where the issuing bank expects the beneficiary to draw upon the issuer, which do not “guaranty” payment of a money obligation of the account party and which do not provide that payment is occasioned by default on the part of the account party.

The development of SBLC took place in the United States where the banks do not have the power to issue performance bonds and first demand guarantee.

What is Buyers Credit Against SBLC?

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

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

Reason from moving from MT799 to MT760

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

Process Flow

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

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

Applicable Conditions

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

Documents Required

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

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

Cost Involved

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

Applicable Rules

Issues with SBLC Structure

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

What should Importer Do ?

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

Reference

  1. Cornell Law School: Standby letters of credit
  2. SWIFT was not compromised but misused, says Alain Raes
  3. Standby Letter of Credit
  4. RBI Master Direction: ECB and Trade Credit
  5. Revised Guidelines for Trade Credit
  6. Guidelines on Early Delivery, Extension & Cancellation of Forward Contract
  7. Bank Insisting of Forward Booking for Buyers Credit Exposure

Revised Guidelines for Trade Credit

RBI revised Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 on December 17, 2018 (link in reference). Revision is made to ECB guidelines, Trade Credit, borrowing by banks outside India and others.

This articles covers changes made to Trade Credit guidelines.

Continue reading Revised Guidelines for Trade Credit

Reimbursement Finance (Usance LC Reimbursement at Sight)

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

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

Continue reading Reimbursement Finance (Usance LC Reimbursement at Sight)

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

Continue reading Guidelines on Early Delivery, Extension & Cancellation of Forward Contract

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.

Continue reading How to Prepare and Check Letter of Credit Documents

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.

Continue reading Buyers Credit Outstanding Down by $25 Billion

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.

Continue reading Why are Indian Banks Closing Overseas Branches ?

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.”

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

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

Types of SWIFT Message used in Letter of Credit and Suppliers Credit

SWIFT system is used for Bank to Bank communication and Bank to Corporate communication. There are different type of Swift messages format related to specific purpose. This article focuses on Category 7 message.

Continue reading Types of SWIFT Message used in Letter of Credit and Suppliers Credit

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

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 firstpost.com 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: 

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

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.

Continue reading Bank Audit – Buyers Credit and Nostro Account

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.

Continue reading Buyers Credit Secondary Market

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

Suppliers Credit Process Flow

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). Importer and Overseas Bank will have to follow below process

Continue reading Suppliers Credit Process Flow

EU list of Non-Cooperative Jurisdictions : No Impact on Buyers Credit

On 5 December 2017, European Union (EU) Council approved and published a list of non-cooperative jurisdictions. Criteria used were:

  • Tax Transparency
  • Fair Taxation
  • Implementation of Anti – BEPS (Base Erosion and Profit Shifting) standards

Continue reading EU list of Non-Cooperative Jurisdictions : No Impact on Buyers Credit

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.

Chart: www.xe.com

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.

Continue reading Stronger Rupee Impact on Buyers Credit

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

Continue reading Moratorium Period Impact on Buyers Credit

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

Form 15CA and Form 15CB not Required for Import Payment

As seen in earlier article “Form 15CA & Form 15CB applicable on all payment“, except the exempted list, Form 15CA and Form 15CB was required for all type of payment. This resulted into lot of paper work for importers during regular import transactions.

Continue reading Form 15CA and Form 15CB not Required for Import Payment

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

Clubbing Import bills for Single Buyers Credit Transaction

Importer regularly gets multiple bills from same supplier and from multiple suppliers. Clubbing these multiple import bills to a single Buyers Credit transaction will reduce overseas bank interest cost.

Continue reading Clubbing Import bills for Single Buyers Credit Transaction

Should Importer accept Buyers Credit Quote including LOU charges

In earlier article we have discussed about costing of buyers credit, list of which is given below.

Continue reading Should Importer accept Buyers Credit Quote including LOU charges

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 ?

Buyers Credit on Import of Non Capital Goods

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

We have a processing facility of granite. Can we use buyers credit for consumables (our banker refusing for consumables). As per them only raw material is allowed for buyer credit

Continue reading Buyers Credit on Import of Non Capital Goods