Buyer's credit

Buyer's credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the Letter of comfort (a Bank Guarantee) issued by the Importers (Buyer's) Bank. Importers Bank / Buyers Credit Consultant / Importer arranges buyers credit from international branches of Indian Bank or other international bank. For this services Importers Bank / Buyers credit consultant charges a fee call arrangement fee. Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates. Buyers credit can be availed for 1 year in case the Import is for trade-able goods and for 3 years if the Import is for Capital Goods. Every six months the interest on Buyers credit may get reset.

Benefits of Buyer's Credit to Importer

1. The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows 2. The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing. 3. The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer. 4. The importer can use this financing for any form of trade viz. open account, collections, or LCs. 5. The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.

Steps involved in buyer's credit

1. The Indian customer will import the goods either under DC, Collections or open account 2. The Indian customer request the Buyer's Credit Arranger before the due date of the bill to avail buyers credit financing 3. Arranger to request overseas bank branches to provide a buyers credit offer letter in the name of the importer. Best rate is quoted to importer 4. Overseas Bank to fund your existing bank nostro account for the required amount 5. Existing bank to make import bill payment by utilizing the amount credited (if the borrowing currency is different from the currency of Imports then a cross currency contract is utilized to effect the import payment) 6. On due date existing bank to recover the principal and amount from the importer and remit the same to Overseas Bank on due date.

Cost Involved
1. Interest cost: This is charged by overseas bank as a financing cost 2. Letter of Comfort / Undertaking: Your existing bank would charges this cost for issuing letter of comfort / Undertaking 3. Forward Booking Cost / Hedging Cost 4. Arrangement fee: Charged by person who is arranging buyer's credit for you. 5. Other charges: A2 payment on maturity, For 15CA and 15CB on maturity, Intermediary bank charges. 6. WHT (Withholding Tax): The customer has to pay WHT on the interest amount remitted overseas to the Indian tax authorities. <The WHT is not applicable where Indian banks arrange for buyers credit through their offshore offices>

Indian Regulatory Framework

Banks can provide buyers credit upto USD 20M per import transactions for a maximum maturity period of 1 year from date of shipment. Incase of import of capital goods banks can approve buyers credits upto USD 20M per transaction with a maturity period of upto 3 years. No roll over beyond this period is permitted. RBI has issued directions under Sec 10(4) and Sec 11(1) of the Foreign Exchange Management Act, 1999, stating that authorised dealers may approve proposals received (in Form ECB) for short term credit for financing by way of either suppliers' credit or buyers' credit of import of goods into India, based on uniform criteria. Credit is to be extended for a period of less than three years; amount of credit should not exceed $20 million, per import transaction; the `all-incost' per annum, payable for the credit is not to exceed LIBOR + 50 basis points for credit up to one year, and LIBOR + 125 basis points for credits for periods beyond one year but less than three years, for the currency of credit. All applications for short-term credit exceeding $20 million for any import transaction are to be forwarded to the Chief General Manager, Exchange Control Department, Reserve Bank of India, Central Office, External commercial Borrowing (ECB) Division, Mumbai. Each credit has to be given `a unique identification number' by authorised dealers and the number so allotted should be quoted in all references. The International Banking Division of the authorised dealer is required to furnish the details of approvals granted by all its branches, during the month, in Form ECB-ST to the RBI, so as to reach not later than 5th of the following month. (Circular AP (DIR Series) No 24 dated September 27, 2002. As per RBI Master circular on ECB and Trade Finance 2010, the all in cost ceiling for interest is now 6 month L + 200bps for buyer's credit arrange for tenure upto to 3 years. All cost ceiling includes arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.