Category Archives: Buyers Credit

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

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

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.”

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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

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

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.

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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)

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

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.

Continue reading Revised Guidelines for Merchanting / Intermediary Trade

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.

Continue reading Permitted Methods of Import Payment

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?

Continue reading Buyers Credit on Import of Second Hand Machinery

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.

Continue reading Relationship Management Application (RMA) and Buyers Credit

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.

Continue reading Buyers Credit for Co Operative Bank Customers

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.

Continue reading Period of Buyers Credit Linked to Operating Cycle

Change in LIBOR Tenures and Impact on Trade Finance

LIBOR scandal was discussed in the earlier articles like Pushing the reset button on LIBOR – Speech by Martin Wheatley and Impact of Libor Review on Trade Finance in India .

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Swift Code & Messages Used in Buyers Credit Transaction

Latest Article:

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.

Continue reading Myanmar Economic Sanctions – Background, Recent Relaxation & Trade Finance

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:

Continue reading Bank Finance for Purchase of Gold

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.

Continue reading Review of Trade Credit All-In-Cost Ceiling

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.

Continue reading Buyers Credit on Jewellery

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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