Category Archives: Suppliers Credit

How to Prepare and Check Letter of Credit Documents

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

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

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

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

Initial Scrutiny

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

Bill of Exchange (Draft)

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

Invoice

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

Bill of Lading

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

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

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

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

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

Other aspects of BL

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

Airway Bill or Airconsignment Note

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

Insurance Document

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

Other Documents

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

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

Certificate of Origin

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

Road, Rail or Inland Waterway Transport Document

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

Documents Under Letter of Credit

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

1. Financial Documents: Bill of Exchange

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

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

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

Type of Bill of Exchange

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

2. Commercial Documents

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

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

3. Transport Documents

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

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

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

Type of Transport Documents are:

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

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

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

  • Specific Policy
  • Open Policy
  • Insurance Cover Note

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

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.

Summary

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

SBI, BOB & BOI Buyers Credit Outstanding – June 2018

Rs. In Crores

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

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

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

Rest Banks Overseas Branches Total Advance Outstanding : June 2018

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

Rs in Crore

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

Reference: Quarterly Results are taken from BSE India

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

Reference

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

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)

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.

Continue reading Relevance of Operating Cycle in Buyers Credit Transaction

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

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

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.

Continue reading Buyers Credit on Import of Precious and Semi Precious Stone

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.

Continue reading Buyers Credit on High Sea Sales Transaction

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.

Continue reading Buyers Credit with 6 Month Libor Reset

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

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.

Continue reading Prepayment of Buyers Credit

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.

Continue reading Difference Between EURIBOR & EUR Libor

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.

Continue reading OFAC Countries & Implication on Buyers Credit

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:

Continue reading Infrastructure Companies – Bridge Finance before availing ECB

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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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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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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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

RBI Trade Credit (Buyers/Suppliers Credit) Circular Extract

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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