What is Buyer’s credit?
Buyer’s Credit refers to loans for payment of imports into India arranged on behalf of the importer through an overseas bank. The offshore branch credits the NOSTRO of the bank in India and the Indian bank uses the funds and makes the payment to the exporter’ bank as an import bill payment on due date. The importer reflects the buyers’ credit as a loan on the balance sheet.
Can Buyers Credit be availed if I do not have a credit facility with any Bank?
No, you must obtain a credit facility with your bank before availing Buyer’s credit.
What is the Process Flow?
- Indian customer imports the goods either under DC / LC, DA / DP or Direct Documents
- Indian customer inputs a deal in Myforexeye before the due date of the bill to avail buyer’s credit finance
- Myforexeye approaches overseas bank for indicative pricing, which is further quoted to Importer
- If pricing is acceptable to importer, overseas bank issue’s offer letter in the name of the Importer
- Importer approaches his existing bank to get LOU / LOC issued in favour of overseas bank via swift. A Letter of Comfort is a letter issued to lending institution by a parent company acknowledging the approval of a subsidiary company’s attempt for financing
- On receipt of LOU / LOC, Overseas Bank as per instruction provided in LOU, will fund the existing bank’s NOSTRO account
- LoU bank to make import bill payment by utilizing the amount credited
- On due date existing bank to recover the principal and Interest amount from the importer and remit the same to Overseas Bank on due date
What are the costs involved?
- Interest cost: This is charged by overseas bank as a financing cost. Normally it is quoted as say “3M L + 350 bps”, where 3M is 3 Month, L is LIBOR, & bps is Basis Points (A unit that is equal to 1/100th of 1%). To put is simply: 3M L + 3.50%. One should also check on what tenure LIBOR is used, as depending on tenure LIBOR will change. For example as on day, 3 months LIBOR is 0.33% p.a. and 6 months LIBOR is 0.50% p.a
- Letter of Comfort / Undertaking: Importer’s Bank will charge this cost for issuing Letter of Comfort / Undertaking
What are the documents at the time of taking of Buyer’s Credit?
- Request Letter giving complete import details and along with it authority to debit charges.
- Trade Credit / ECB Form.
- Offer Letter from overseas bank, Letter of Undertaking format Swift Address.
- Import Documents & Bill of Entry (In case of Direct Documents)
What are the regulatory frameworks in this?
- Maximum Amount Per transaction: USD 20 Million.
- Maximum Maturity in case of import of non capital goods: Up to 1 year from the date of shipment, however linked to trade cycle of the business.
- Maximum Maturity in case of import of capital goods: Up to 3 years from the date of shipment.
- Maximum Maturity in case of import of capital goods for companies classified as Infrastructure sector: Up to 5 years from the date of shipment.
- No financing is allowed for advance imports.
- Financing is linked to the operating cycle of the trade transaction.
- All-in-cost ceilings:
Up to 1 year: 6m L+350 bps p.a
Up to 5 years: 6m L+350 bps p.a