Category Archives: Buyers Credit

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.

DISCONTINUATION OF LETTERS OF UNDERTAKING / LETTERS OF COMFORT

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.

Conclusion

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.

Reference

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

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

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  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.

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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.

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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.

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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.

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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.

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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:

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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.

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Difference Between Letter of Comfort and Letter of Undertaking

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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.

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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”

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Credit Rating and Buyers Credit

What is Credit Rating ?

A credit rating represents the rating agency’s opinion on the likelihood of a rated debt obligation being repaid in full and on time. Usually alphanumeric symbols are used to convey a credit rating. Credit rating can be Internal Rating (Banks rate customers internally) or External Rating by external agencies like CRISIL, ICRA and others.

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Relevance of Operating Cycle in Buyers Credit Transaction

Incase of raw material imports, RBI had delegated approving powers to Authorised Dealers (Banks) for Trade Credit (Buyers Credit / Suppliers Credit) for a tenure upto 1 year from the date of shipment. Bank’s based on internal policies decided customerwise tenure. Because of variation in policies between banks,  few importers used buyers credit for arbitrage.

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Revised Guidelines for Merchanting / Intermediary Trade

Further to article published below, RBI received suggestion from merchanting traders and trade bodies, based on which guidelines on merchanting trade transactions have been further reviewed on 28th March 2014 and with effect from 17th January 2014. Summary of the changes are given below.

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Permitted Methods of Import Payment

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

Since Foreign Trade Policy allows imports in INR (Indian Rupees) also, what are the regulations related to buyer’s credit in respect of an import invoice which is in INR ?

Above question is more of an academic question as INR denominated import transaction are very limited but it will help in throwing light on concept of permitted methods of import payment.

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Buyers Credit Tenure Extended to 5 years for Import of Capital Goods

Trade Credit for Import into India

In earlier article “Trade Credit Extended Upto 5 Years for Infrastructure Firms” we had seen that RBI had allowed buyers credit to infrastructure firms till 5 years subject to conditions.

Continue reading Buyers Credit Tenure Extended to 5 years for Import of Capital Goods

Buyers Credit on Import of Second Hand Machinery

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

Question : What are the RBI guidelines for availing Letter of credit facility and/or buyers credit facility for the import of second hand capital goods? Is it possible for a company to avail these facilities for second hand machinery?

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Relationship Management Application (RMA) and Buyers Credit

Using Swift Codes Banks and Financial Institutions send and receive swift messages. But there must have been times where you might have come across your bankers coming back to you stating that they do not have swift key arrangement with buyers credit bank. Thus they will not be able to send Letter of Undertaking (LOU) / Letter of Comfort (LOC) authenticated swift message (MT799) to buyers credit bank. Below article gives a brief about why situation arise.

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Buyers Credit for Co Operative Bank Customers

Importers banking with Co operative Bank’s both AD Category and Non AD Category, face issues with arranging buyers credit because

  • In case of AD Category Co operative Bank: Limited Lines in International Market or No Lines
  • Non AD Category Co operative Bank: They cannot deal directly in Import or Export transaction but have to route the transaction through tie up bank.

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Period of Buyers Credit Linked to Operating Cycle

In the circular issued on 11th July 2013, RBI has made following two changes in relation to Trade Credit transactions:

  1. Period of Trade Credit (Buyers Credit / Suppliers Credit) should be linked to the operating cycle and trade transaction. 
  2. All in cost ceiling of 6 Month L+ 350 bps will continue to be applicable till September 30, 2013 and is subject to review thereafter.

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Swift Code & Messages Used in Buyers Credit Transaction

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What is SWIFT Code ?

SWIFT code (also known as ISO 9362, SWIFT-BIC, BIC code, SWIFT ID or SWIFT code) is a standard format of Business Identifier Codes approved by the International Organization for Standardization (ISO). It is a unique identification code for both financial and non-financial institutions. These codes are used when transferring money between banks, particularly for international wire transfers, and also for the exchange of other messages between banks.

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Transfer of Limits from One Bank to Another : Buyers Credit Rollover Process

Buyers Credit is arranged against Letter of Undertaking  (LOU) / Letter of Comfort (LOC) issued by Importer’s Bank. During this period if importer decides to shift his limits from X bank to Y bank, few complications arise.  For a Raw material transaction, importer may decide not to rollover the transaction to avoid complications; but for Capital goods  Importer has lesser options. If the buyers credit does not get rolled over, the same would get converted into term loan which would cost the importer higher rate of interest. This article provides details on process to be followed and what documents are needed for smooth transition. For understanding let assume,

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Buyers Credit on Import of Precious and Semi Precious Stone

In earlier articles, we had seen that, banks are permitted by RBI to approve Suppliers’ and Buyers’ Credit (Trade Credit) including the usance period of Letters of Credit opened for  Import of gold in any form including jewelery made of gold/ precious metal and or studded with diamonds /semi precious /precious stone not exceeding 90 days from the date of shipment.

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Myanmar Economic Sanctions – Background, Recent Relaxation & Trade Finance

Myanmar has been under various international economic sanction for more than a decade, which has crippled its international trade. Below article gives a background of economic sanctions on Myanmar, recent relaxations in these sanctions and what will be its likely impact on trade finance from Indian importers perspective.

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Buyers Credit on High Sea Sales Transaction

What is High Sea Sales ?

High Sea Sales (HSS) is a sale carried out by the carrier document consignee to another buyer while the goods are yet on high seas or after their dispatch from the port/airport of origin and before their arrival at the port/ airport of destination.

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Bank Finance for Purchase of Gold

The earlier article on Buyers Credit on Gold Import, specified rules and process under which buyers credit can be taken against gold import. RBI has recently come out with a circular which resulted in changes in financing of gold; which in turn would also affect buyers credit on gold import. This article gives extract of the circular and its impact on various stake holders:

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Buyers Credit with 6 Month Libor Reset

Note: Post this article there are changes in maturities for which libor is issued. This article might now be relevant for long tenure transactions (12 Months and Above). Refer link for more details on change in Libor: Change in LIBOR Tenures and Impact on Trade Finance

Banks and Importers consider various factors before going for Buyers Credit transaction for more than 6 months tenure. One such factor is buyers credit with 6 Month Libor Reset option.  The below article elaborates on these factors.

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Review of Trade Credit All-In-Cost Ceiling

After the expiry of deadline of 30-09-2012, there was a prolonged uncertainty for last 9 days on what is the all in cost ceiling for Trade Credit  (Buyers Credit / Suppliers Credit). Reserve Bank of India (RBI) issued a clarification or revised circular today clarifying the same. Summary of the same is given below

  1. Maximum Interest cap for Upto 5 Years : 6 Month Libor + 350 bps. This rate has been referred in it circular 11-09-2012 (Link given below)
  2. Until further review, the rate remains same. Thus, this time there is no deadline set for the review of the above rate to avoid any slippage like above.

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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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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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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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