What is Supplier’s Credit?
It relates to credit for imports into India extended by the overseas suppliers or financial institutions outside India. Usance Import Bills under Letter of Credit (LC) issued by Indian bank branches on behalf of their importers are discounted by Indian bank overseas branches or foreign bank. In simple terms, paying your supplier at sight against Usance bills under letter of credits.
What is the process flow?
- Importer inputs transaction details in the Myforexeye to get suppliers credit
- Myforexeye team gets an offer from overseas bank on the transaction
- Importer confirms on pricing to overseas bank and gets LC issued from his bank, restricted to overseas bank counters with other required clauses
- Supplier ships the goods and submits documents at his bank counters/
- Supplier Bank sends the documents to the negotiating Bank
- Negotiating Bank post checking documents for discrepancies sends the document to LC issuing bank for acceptance
- Importer accepts documents. LC issuing Bank provides acceptance to the negotiating Bank. LC guaranteeing payment on due date
- Negotiating Bank based on acceptance, discounts the bill and makes payment to the Supplier
- On maturity, Importer makes the payment to his bank and Importer’s bank makes payment to Supplier’s Credit Bank
What are the costs involved?
- Foreign bank interest cost / usance interest
- Foreign Bank LC Confirmation Cost (Case to Case basis)
- LC advising and or amendment cost
- Negotiation cost (normally in range of 0.10%)
- Postage and Swift Charges
- Reimbursement Charges
- Cost for the usance (credit) tenure. (LC issuing Bank Cost)
What are the necessary requirements in executing a Supplier’s credit transaction?
- Import transaction under LC
- Incoterms : FOB/CIF/C&F
- Arrangement has to be done before LC gets opened. In case of LC already opened, relevant amendment has to done.
- LC to be restricted to suppliers credit providing bank under 41D clause of LC/
- Under Payment Term: 90 days Usance payable at Sight (mention tenure according to tenure and offer received)
- At times foreign bank may insist on adding confirmation which would result into additional cost
What are the RBI Regulations in a Supplier’s credit transaction?
Supplier’s credit is governed by RBI Circular “Master Circular on External Commercial Borrowings and Trade Credits”.
- Amount and Maturity
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
Maximum maturity in case of import of capital goods: up to 5 years from the date of shipment
No Rollover / Extension will be permitted beyond permissible limits
Trade Credit should be linked to the operating cycle and trade transaction
2. All-in-cost Ceilings
- Up to 1 year: 6 Month Libor + 350 bps p.a.
- Up to 5 years: 6 Month Libor + 350 bps p.a.