Buyer's Credit

FAQs

• What is SBLC Backed Buyer's credit?

  SBLC Backed 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 (in some cases funds are directly remitted to the beneficiary) of the bank in India and the Indian bank uses the funds and makes the payment to the exporter's bank as an import bill payment on due date. The importer reflects the SBLC Backed buyer's credit as a loan on the balance sheet.

• Can SBLC Backed Buyer's Credit be availed if I do not have a credit facility with any Bank?

  No, you must obtain a Non-Fund Based credit facility with your bank before availing SBLC Backed Buyer's credit.

• What is the Process Flow?

  • The importer client shares details with LC Bill Discounting for offshore funding (Buyer's Credit).
  • LC Bill Discounting provides best quotes from offshore banks(s).
  • Best quote is accepted by client, sanction letter issued & agreement executed between client and offshore bank.
  • Shipment of goods.
  • The client approaches Issuing Bank to issue a SBLC in favor of offshore bank.
  • Issuing Bank sends SWIFT message to Offshore bank to pay the import bill.
  • Offshore bank makes payment to beneficiary (exporter) through the exporter's bank OR to the credit of the NOSTRO account of SBLC issuing bank (as the case might be).
  • Issuing Bank sends scanned docs evidencing shipment of goods, etc. to offshore bank and Offshore bank confirms funding date and loan maturity details.
  • On maturity date, Issuing Bank recovers amount from the client, remits Principal + Interest to Offshore bank & offshore bank releases SBLC via SWIFT to Issuing Bank.

• 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 + 250 bps, where 3M is 3 Month, L is LIBOR and bps is Basis Points (a unit that is equal to 1/100th of 1%).

  To put it simply: 3M L + 2.50%. One should also check on what tenure LIBOR is used, as depending on tenure LIBOR will change. For example as at Jan end 2019, 3 months LIBOR is 2.75% p.a. and 6 months LIBOR is 2.83% p.a

  For Issuing SBLC: Importer's bank will charge this cost for Issuing SBLC & SWIFT charges.

• What are the documents required at the time of availing Buyer's Credit?

  • Request Letter by client.
  • Offer Letter issues by Overseas Funding Bank.
  • Trade Credit Agreement (as per the prescribed format of Overseas Bank).
  • Scanned copy of import documents to be sent via official Mail ID of Issuing bank.
  • Issuing Bank sends SBLC by SWIFT MT760.
  • Issuing Bank sends funding request by MT799

• What are the regulatory frameworks in this?

  • Maximum Amount Per transaction: USD 50 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: 6m L+250 bps p.a.

• Why was Buyer's credit under LOCs / LOUs discontinued by RBI?

  As per the RBI circular dated 13th March, 2018, RBI discontinued the use of Letter of Undertaking (LOUs) & Letter of Comfort (LOCs) to provide Buyer's credit. The reason for discontinuance was the inappropriate use of LOUs by some big Indian importers which was fraudulent in nature.

• Is Buyer's Credit still banned in India?

  No, only one of the instruments that was most widely used to procure buyer's credit was banned. Earlier Buyer's Credit was available under the Letter of Undertaking (LOU) route where your bank would send an LOU to an overseas bank and the overseas bank would grant you a loan and pay your bank (into their Nostro A/c) for onward payment to the supplier. However, RBI has now banned this route of financing. Post this ban, RBI has clarified that importers can still avail funding from international sources under Letters of Credit or by way of issuing Guarantees (Stand-by Letters of Credit) to an overseas bank to issue an import loan.

• Was trade credit banned in India due to Ban of LOUs/ LOCs?

  RBI had issued a circular discontinuing the usage of LOUs for arranging Buyer's Credit to fund import transactions. It is important to note that RBI had banned the instrument for arranging the buyer's credit, not the funding mechanism (Buyer's Credit) in itself. Trade credit can still be arranged against Letters of Credit (Suppliers Credit backed by LC) or against bank guarantees a.k.a. Stand By Letter of Credit (SBLC). The latter is commonly known as Buyer's Credit backed by SBLC. Given the confusion surrounding the discontinuance of LOUs, RBI had issued a clarification through the FAQs route that it is permissible for overseas lenders to provide Buyer's Credit against SBLCs issued by ADs (refer Q.64 in the FAQs by RBI)

• What is the difference between Buyer's credit issued under LOUs/LOCs & Buyer's credit issued against SBLC?

  Earlier in buyer's credit, the underlying security against which the overseas bank remitted the funds into the NOSTRO account of the Issuing Bank was only LOUs/LOCs sent via MT799 (which is a free format).

  Buyer's credit which is issued against SBLC is a new and more secure structure. This is an internationally accepted product. Trade credit agreement is to be sent to overseas funding bank by issuing bank signed and duly attested. SBLC is now sent through MT760 which is a structured format in comparison to MT799 & easily auditable. The transaction is structured in such a way that the Indian importer is treated as a direct borrower by the overseas lender and the lending is backed by the SBLC as a collateral.

• Can I apply for SBLC Backed buyer's credit to import from UK to Kenya ?

  No, Buyer's credit facility can only be availed for imports into India. For transactions outside India, the regulations of the country in which funding is requested will need to be followed.

• At what rate can I get SBLC Backed buyer's credit?

  Pricing on this credit facility is totally dependent on the size and complexity of the transaction. As per the latest Guidelines issued by the RBI, maximum interest amount that can be charged to the applicant is L+250 bps p.a.

• I have purchased a machine from China on credit period from the supplier, the payment will be due soon, what can I do?

  You can avail Buyer's credit (Against SBLC) to pay for that import provided the overall tenor is lesser than 3 years.

• For what kind of goods can buyer's credit be availed?

  Raw Materials as well as capital goods are allowed as per government policies.

• Can we take Buyer's Credit for services?

  No, Foreign currency funding for services are not permissible under RBI guidelines.

• Why Buyer's credit? What are the advantages of buyer's credit? How is buyer's credit beneficial for me?

  For Importer

  • Availability of cheaper funds for import of raw materials and capital goods.
  • Ease of getting credit in short term.
  • Able to meet the Suppliers requirement of payment at sight.
  • Ability to negotiate better price with supplier's due to sight payment (for the supplier).
  • Avoid the risk of importer's credit by making settlement with letter of credit.

• How much time does this whole process take to complete? What is the time duration required in each process in SBLC Backed Buyer's Credit?

  The Time duration required to complete the process depends on different time zones of the funding bank & complexity of the transaction. On an average it takes around a day to arrange quotes and offer letter along with formats related to the transaction.

• What is as an overseas bank? How are these banks different from the Indian banks?

  Banks outside your country are known as overseas Banks. These banks can be branches of Indian banks and the foreign banks.

• What is the role of importer's bank in Buyer's Credit?

  Importer's Bank provides guarantee in case of default on behalf of its importer.

• When can the bank give guarantee on behalf of the importer?

  When importer has non-fund based limit (specifically, SBLC limits) with their bank along with good credit history.

• Can any bank give guarantee or importer must have an account in the bank?

  Importer must have non-fund based limits in the bank. Since it is a credit facility, the bank would also insist on the importer having a bank account with that bank.

• Which type of account importer needs to get bank's guarantee?

  Importer must have Current account with their Issuing bank.

• How are importer's bank and exporter's bank different from an overseas bank

  Overseas banks are banks which provide funds to importer's bank against imports documents (backed by a SBLC) and the importer bank transfers the funds to exporter's bank.

• What are the different ways through which Bank can give Guarantee on behalf of importer?

  Letter of Credit
  Standby Letter of Credit (SBLC)

• What is SBLC?

  Standby Letter of Credit (SBLC) is an irrevocable documentary commitment, issued by the bank to a third-party bank and promising to pay on behalf of the originator, upon demand, a specific sum of money. In other words, it is an unconditional financial guarantee that the issuing bank gives to beneficiary bank, on the basis of which, the beneficiary bank grants Buyer's Credit to the client of issuing bank.

• What is the cost of SBLC to the importer?

  No fixed rate, Importer's Bank decides with importer. It is dependent upon the credit quality, tenor and the size of transaction.

• What is the requirement of taking loan from overseas banks?

  In most cases, credit from overseas Bank is cheaper than loans in home country and the documentation process is reasonable which in turn reduces the turnaround time.

• What interest does an importer have to bear when taking buyer's credit?

  LIBOR + Spread (upto a maximum of 250 bps)

• Who gives SBLC and when?

  SBLC is issued by Importer's Bank and it is processed prior to funding.

• Which party bears SWIFT charge importer, exporter or bank?

  Importer.

• What are all the costs involved in SBLC Backed buyer's credit?

  Interest Cost plus SWIFT Charges plus SBLC issuance commission.

• What is the interest cost to the importer?

  LIBOR + Spread (maximum 250 bps)
  Swift Charge (voluntary by bank) Withholding Taxes (foreign Banks).

• What is withholding tax? When is it imposed?

  The customer has to pay WHT on the interest amount remitted to non-resident party overseas. It has to be deposited with the Indian tax authorities. The WHT is not applicable where Indian banks arrange for buyer's credit through their offshore offices.

• How much time it takes to show funds in the importer's Bank account after funding from overseas bank

  It takes around 24hours to reflect the funds in the importer's bank A/c, because specific currency's settlement is done at its home country. For example, all Dollar payment are settled through US clearing system in US.

• How much time does this whole process take to complete? What is the time duration required in each process in SBLC Backed Buyer's Credit?

  It takes just a few days to complete the one-time documentation and the subsequent disbursement. Once the maiden transaction has been completed, subsequent transaction takes 1-2 days on an average.

• Maximum amount in case of buyer's credit?

  USD 50 million.

• Maximum tenor of buyer's credit?

  Raw Material - upto 360 days
  Capital Goods - upto 3 years

• Your flat Service charges seem to be too high for lower amount transactions.

  Flat charges are kept considering the monthly volume and ticket size of transactions which can vary for lower amount transactions.

• Are there any other charges for your services except rate of interest and service charges?

  No, we only charge our service charges.
  Rate of Interest is charged by the overseas funding bank.

• Do I have to give any guarantee for buyer's credit (against SBLC) to you?

  Not to us, but to the overseas bank which will grant buyer's credit. In buyer's credit, overseas funding banks require SBLC from the importer's bank as a Guarantee.

• If a currency rate changes, what will be its impact on rate of interest of buyer's credit?

  • Interest in case of Buyer's credit depends on the LIBOR and Spread.
  • LIBOR depends upon the currency market which can have an impact on the interest rate.
  • As the cost of borrowing will vary, spread will vary.
  • Hence change in currency rate impacts the rate of interest.

• Why is the overseas bank doing KYC process?

  it is one of the mandatory bank norms that overseas banks have to follow.

• If my bank is giving me best quotes so why should we try you?

  Being specialized in Trade finance business we pool transactions and take it to overseas bank and negotiate for better price so it's rare to have better price.
  In case you get better rates than us then inform us we can further negotiate on behalf of you.

• If my funding is not done on the value date, what charges I will have to pay to bank?

  Overdue interest is to be paid that varies from bank to bank.

• Please provide me with your tie up bank details

  We have tie up with all the Indian banks & most foreign banks in different geographies.

• Why are BL & Invoice copy required?

  • These are the receipt of the goods.
  • These are said to be negotiable documents of title.
  • These documents are as good as money.

• Is it possible to avail SBLC Backed buyer's credit for advance payments?

  No, you cannot avail buyer's credit for advance payments.

• Why choose SBLC Backed Buyer's Credit for Payment to exporter?

  In most cases, it is cheaper than any other mode of financing.

• Why not use Cash Credit / Direct payment mode to make payment to exporters?

  Buyer's Credit is generally much cheaper than Cash Credit.

• What is the guarantee that the Overseas Bank will fund on time?

  If all things required in SBLC are up to the funding banks requirement then bank ensures the funding.

• Who will issue the SBLC?

  Importer's Bank will issue SBLC on behalf of Importer to Overseas Funding Bank.

• I have Cash Credit limit. Can I take SBLC Backed Buyer's Credit?

  You need to have non-fund based limits for SBLC issuance. It should be a separate SBLC limit in your bank (it may be a sub-limit of the CC limit). In case there is no separate SBLC limit, your bank may process the SBLC issuance by marking 100 % lien in your CC.

• In making payment through you, will it affect my relationship with my bank?

  No, as your bank will still need to issue the SBLC first. Your bank may also provide a Buyer's credit offer from its own network if they want. It provides a level playing field between parties.

• What happens if my bank does not allow me to take any external services?

  In that case we will not be able to provide you our services. You have to convince your bank.

• How do funds flow from funding bank to the importer? Does it happen instantly?

  • Funding Bank transfers Funds in the importer's bank's nostro account.
  • Importer's Bank makes payment to Beneficiary Bank's Account.
  • After funding it takes upto 24 hours to reflect amount in Nostro account of importer's bank.

• Why would any bank finance my import since I have no banking relationship with them?

  It is because of inter bank financing. Overseas Bank is extending you financing on the strength of guarantee (SBLC) from your bank to pay the amount in case of failure to pay on the due date.

• Why can my bank not finance my import liability locally which will save lots of time?

  SBLC Backed Buyer's credit is a cost effective procedure. Overseas funding banks enjoy lesser borrowing cost than our local banks, which enables them to lend funds at cheaper costs.

• In order to take the benefit of cheaper financing can I import anything which may not be my core business?

  No, you cannot borrow foreign funds if the import of goods is not related to your core business.

• Can I get financing for imports under high sea sales arrangement?

  Yes, you can get financing for imports under high sea sales arrangement.

• How much in advance should I plan for financing my import transaction?

  Buyer's Credit process usually takes 1 day time. There are some on-boarding formalities that need to be concluded prior to the first disbursement which may take a few days to complete.

• Does import financing disturb the financial health and the credit rating of the organization?

  Not at all. Your Organization's financial health and credit rating get disturbed in case of default in payment on due date. It is advisable to make payment within the due date.

• My bank is strong enough to help me for import financing, why do I need you?

  We are specialized in this service. We make pool of transactions and reach to overseas bank, which allows overseas banks to offer us competitive interest rates.

• My imports are structured in several ways, like 100% advance, partly in advance, under LC, DA/DP, etc. Considering these structures, is import financing standard in all cases?

  We can avail import financing on amount left after advance payment. Currently, buyer's credit is available for payments under LC and DA/DP. Open account transactions are not being considered by most overseas banks.

• I am into trading business in which import and export both happens cross border. What are the financing opportunities in this?

  Financing opportunities are available however, RBI's Merchant Trade guidelines will apply.

• How can you help us if buyer's credit is needed on the same day?

  We deal with the overseas bank of different time zones, In case funding is required on same day, we will provide quote from Asia and Europe. One time documentation needs to be in place prior to such support.

• My supplier gives me credit period for payment, hence do I need any other mode of financing?

  It depends upon your working capital cycle. If the credit period being given by your supplier is sufficient to take care of all your working capital requirements, then you may not benefit from borrowing. If however, you are still borrowing as your working capital cycle is longer, then buyer's credit should be considered as it is relatively cheaper than domestic borrowing.

• How are SBLC Backed Buyer's Credit and Supplier's Credit different & what are the various charges I have to bear in Buyer's Credit and Supplier's Credit?

  Buyer's Credit

  • Can be used for payment mode like LC, LC usance, DA, DP.
  • Can be arranged after documents have reached the bank or documents are received by importer directly.
  • SBLC issuance cost, interest Cost & SWIFT Charges.

  Supplier's Credit

  • Can be used only in case of LC transactions.
  • Has to be arranged at the time of opening LC or before shipment of goods.
  • Cost involved.
  • LC Advising Cost (in case of direct advising to beneficiary bank, these charges are altered).
  • LC Amendment Charges (in case the LC needs amendment).
  • Confirmation Cost (in case the LC needs confirmation).
  • Interest Cost + SWIFT/ Negotiation/ Documents Handling charges.

• I have CC limits, can I use that for buyer's credit?

  You will need separate SBLC limits which may be a sub-limit of CC or if your bank permits, CC limits can be marked and SBLC issued.

• Where do you take financing rates from?

  We arrange quotes from Nationalized banks situated Overseas & Foreign banks (as per the requirement of the transaction).

• Is non-fund based limit necessary?

  Yes, non-fund based limits (specifically, SBLC limits under non-fund based facility) from your bank are necessary to avail buyer's credit from an overseas lender.

• Can you provide interest rates without knowing the amount of my transaction?

  We are sorry. Rates are based on the amount and tenor so amount along with the tenor is required. If exact amount is not known in advance, we may consider working with an estimated amount to provide an indicative quotation which may be revised once the amount is known.

• How do you provide a cheaper interest rate than banks?

  We are specialized in this service. We make pool of transactions and reach out to overseas bank, which allows us to obtain competitive rates. Additionally, by reaching out to many banks, we are able to secure the lowest funding quotation on your behalf.

• Recently RBI issued some guidelines on Trade Credit for operators in Special Economic Zone (SEZ), is it true that Buyer's Credit can now be availed for purchases of a company operating inside a SEZ?

  RBI issued a notification on Dec 17, 2018 wherein it allowed a borrower operating in an SEZ to obtain Trade credits for purchases within the SEZ or from other SEZ entities. What this means is that any entity operating inside an SEZ can avail Buyer's Credit for the following

  • Physical imports (goods crossing into India) of the SEZ entity.
  • Purchases from another entity operating within the same SEZ (goods are moving within the same SEZ).
  • Purchases from another entity operating in another SEZ (goods are moving between two SEZs).

• What is the most preferred route of raising funds in foreign currency for purchases within same SEZ?

  The most preferred route for transaction depends upon the nature and transactional details of the transaction. For purchases within the same SEZ most preferred route can be Reimbursement against Acceptance Financing (here LC is required to be opened) & in case documents are routed through Banking Channel (that is, DA/DP documents or against LC) then SBLC backed Buyer's credit is the preferable route of Funding.

• What is the difference between borrowing in INR v/s borrowing in foreign currency (FCY)?

  Following are the key differences between raising funds in INR & Foreign Currency.

  • 1. Rates The INR cost of borrowing generally ranges around 9%-12 %, whereas the cost of borrowing in FCY ranges in 3.10- 4.00%. Even after factoring in the forward premium, there is benefit in borrowing in FCY.
  • 2. Documentation Even though borrowing in INR comes with simpler documents, FCY borrowings are simple & convenient and is usually bundled together with the documentation on exports/imports as prescribed by RBI.

• Can I avail Buyer's credit in FCY if date of maturity is within one week?

  If the current non-fund based permits SBLC issuance, it takes only 2- 3 days to arrange whole funding process of SBLC backed Buyer's credit before the date of maturity. Once the one-time documentation is completed, subsequent transaction can happen within 1 working day.

• Can I avail Buyer's credit in FCY if I don't want to open an LC?

  Yes, you can avail SBLC backed Buyer's credit facility if underlying import documents are routed through banking channel.