Supplier's Credit

FAQs

• What is Supplier's credit?

  Supplier's credit is a facility of arranging funds for importers using bank risk (keeping LC as an underlying asset). This credit facility is extended to importers for imports into India by overseas suppliers or Financial Institutions. Letter of Credit issued by Indian Banks under Usance bills on behalf of their importers are discounted by Indian bank branches situated overseas or Foreign Banks.

• Can Supplier's credit be availed if I do not have a credit facility with any bank?

  No, you must obtain a credit facility (Non-Fund - Based Credit Limits) with your bank before availing Supplier's credit

• What is the Process flow?

  Following are the key steps involved in the process of supplier's credit:

  • Prior to LC opening client shares details with LC Bill Discounting
  • LC Bill Discounting identifies and offers best rates from off shore banks to client acceptance.
  • Upon acceptance of rate by Client, LC Bill Discounting notifies specific clauses to be incorporated in the LC.
  • Client's LC issuing bank to open an LC.
  • LC issuing bank opens and transmits the LC to off shore bank which in turn sends LC to beneficiary bank
  • Exporter ships the goods to the client on intimation that the LC has been received by their bank.
  • Exporter ships the goods to the client on intimation that the LC has been received by their bank.
  • Payment is made to the exporter by disbursing supplier's credit post acceptance from LC issuing bank prior to funding.
  • On due date, principal plus interest recovered from client remitted by LC issuing bank to offshore 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 + 50 bps p.a.", 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 + 0.50%. One should also check on what tenure LIBOR is used, as depending on tenure LIBOR will change. For example, as on Jan 2019 end, 3 months LIBOR is 2.75% p.a. and 6 months LIBOR is 2.82% p.a.

  Letter of Credit: Importer's Bank will charge this cost for issuing Letter of Credit which ranges in (typically 0.25% - 1.0% p.a.)

  Negotiation Charges: This is charged by Funding Bank for Negotiation/Handling/Postages.

• What are the documents required to avail Supplier's Credit?

  Following is the list of Documents Required

  • Request Letter giving complete import details and along with Acceptance of negotiation charges.
  • Offer Letter from overseas Bank (If Required)
  • Letter of Credit to contain clauses facilitating disbursement of Supplier's Credit + outlining the process/ pricing etc.
  • DNB/Credit/KYC reports of buyer and supplier.

• What are the Regulatory frameworks in this?

  • 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 port of capital goods: Up to 3 years from the date of shipment.
  • Trade credit for import of non-capital and capital goods up to USD 50 million or equivalent per import transaction are permissible.

• I need import funding for Capital goods, what options are available to me?

  Import funding for capital goods is provided by the overseas Banks of Indian origin or foreign banks as well. Maximum tenor for the loan is 3 years which is provided on 6/12 Months Libor Reset basis. In this type of loan the importer needs to pay the amount of interest at regular reset intervals upto 3 years and Principal + Interest for the last reset at the end of 3 years.

• I am an importer of Fasteners, I need LC, my supplier is ready to ship on LC. What should I do now?

  For opening of an LC the importer needs to have Non- fund based limits with his bank. After the Non- fund based limits are sanctioned by the issuing bank, the issuing bank will open the LC by charging their commission. If funding is required, the LC tenor needs to be extended to allow for Supplier's Credit.

• Can Supplier's Credit be availed only under an LC?

  Yes, Supplier's Credit can only be availed where an LC exists. Suppliers credit is totally a LC Backed product for which the client should have Non-fund based limits with his bank.

• What's deferred payment and how does it differ from a usance Letter of Credit?

  "Buy Now, Pay later"
  In Usance LC, Exporter need payment at sight which is paid by importer's bank and importer pays their bank on maturity. In Deferred payment mode the exporter gives some credit period, after maturity importer has to make payment to the exporter.

• We are interested in financing our import of Machinery & Raw material?

  For Import of Machinery (which can also be categorized as Capital good), an importer can avail financing for upto 3 years under Supplier's credit Or Buyer's credit (against SBLC) Route. For import of Raw materials, financing is available for upto 1 year only under the same two routes (Supplier's Credit or Buyer's Credit).

• We are a private limited company looking for back to back letter of credit?

  We arrange financing against LCs. Only banks can issue LCs and you will need an intermediary party in between who will be the issuer of an LC which is backed by another LC.

• We have exports of soyabean from Benin, Africa to India. LC is of State bank of India. Can we get funding for the same in Benin?

  Yes, LC can be discounted at sight or after a certain credit free period agreed by the concerned parties. The funds will be remitted to the beneficiary upon the agreed date.

• I am doing import business, I have Non- fund based bank limit. My supplier wants to get full payment before loading of goods, however my bank provides credit only on presentation of BL copy. What are my options?

  In this case, the applicant can open a confirmed LC under which the funds will be remitted to the Supplier as soon as the documents are presented on the desk of the funding bank (that is, before the issuing bank receives the underlying documents).

• What is the minimum number of days for which Supplier's Credit can be availed?

  Supplier's Credit can be availed for a minimum of 30 days upto maximum of 1 year in case of Raw material & 3 years in case of Capital goods.

• Can Supplier's Credit facility be availed for a new business?

  To avail Supplier's Credit facility, the applicant should have Non-fund based limits with his bank so that his bank can open a LC in favour of his supplier. Banks usually don't sanction Non-fund based limits to New Businesses because of lack of financial feasibility unless sufficient collateral is pledged. For queries related to Non-fund based limits, please contact your banking branch. If you can manage to obtain LC limits; you can enjoy supplier's Credit facility.

• In which SWIFT format is the LC issued?

  LC is issued in MT700 SWIFT message.

• Is it important to get the LC advised through funding bank?

  It depends on the condition & clauses prescribed by the funding banks. LC can also be directly advised to the beneficiary bank in case there is no RMA arrangement between funding bank and beneficiary bank. The funding bank needs to agree to this arrangement.

• What if my LC is issued and funding bank has no RMA arrangement with the beneficiary bank?

  In this case, the funding bank can re-direct the LC to the second advising bank who has RMA arrangement with the beneficiary bank. Alternatively, the funding bank can allow direct advising of the letter of credit with a copy to funding bank.

• My LC is going to expire soon & documents have not been lodged by the beneficiary with his bank?

  An amendment needs to be sent by the Issuing bank in favour of the LC stating the extension of LC date of expiry & latest date of shipment.

• Beneficiary's bank has sent the documents directly to the issuing bank without forwarding it to the funding bank, what will happen now?

  In this case, following needs to be sent by the Issuing Bank to the Funding Bank

  • Scanned copies of import documents via official email ID.
  • MT799 featuring all transaction details.
  • Acceptance of payment via MT754/32.

  After receiving the aforementioned documents, the funding bank will remit the funds to the beneficiary.

• Beneficiary's bank has couriered the documents, but issuing bank has not received the documents till now?

  Under Supplier's Credit, the documents are routed through funding bank for due diligence of the transaction & record keeping. Once the documents are couriered by the funding bank, they share a tracking number. It is suggested to factor additional couple of days in the document handling process.

• How much time will it take to arrange Supplier's Credit if the LC is going to be issued soon?

  Depending on the various time zones of the funding banks, the arrangement is made at the earliest. For example, if the LC is to be opened by today evening, the arrangement can be done from a funding bank in Asia within an hour, but for arranging a US based Funding Bank the applicant has to arrange the Supplier's Credit at least a day before the LC is going to be issued.

• What if I do not pay to the Funding bank on date of maturity?

  It is your liability to pay on the due date. More importantly, it is the issuing bank's liability to honor their acceptance under the LC. In rare cases of delays, Funding bank charges Overdue Interest over and above Libor plus interest agreed at the time of opening of the LC.

• When should the acceptance of the payment be sent to the funding bank by the Issuing bank?

  In case of Sight payment, acceptance needs to be sent immediately after receiving the documents by the applicant. In case of credit free period given by the supplier, acceptance can be sent on or before the due date of the payment.

• Is it necessary to send the acceptance to funding bank?

  In case of unconfirmed LCs, it is necessary to send the acceptance from LC issuing Bank via MT754/32/99 to the funding bank on or before due date.

• Can I avail payment of partial shipments through Supplier's Credit route under LC?

  Yes, payments of partial shipments are permitted through suppliers credit route.

• Can I avail payment of transhipment through Supplier's Credit route under LC?

  Yes, payments of transhipment are permitted through Supplier's Credit route.

• Can I avail Supplier's Credit in case the LC has been issued?

  Yes, Supplier's Credit can be availed in case the LC has been already issued by the Issuing bank. An amendment will be send in the LC via SWIFT enlisting all the necessary clauses of the funding bank.

• I don't have an LC. Can I still avail Supplier's Credit facility?

  No, Supplier's Credit is a LC backed facility.

• Can I avail Supplier's Credit in case supplier (exporter) is residing in US / UN sanctioned countries?

  No, you cannot avail Supplier's credit for such transactions.

• Can I avail Supplier's Credit for Local Bill discounting?

  No, Supplier's Credit cannot be availed for local bill discounting.

• My supplier is not agreeing on the usance clauses of the LC. What to do now?

  In this case, you need to guide the supplier to Field 41c of LC where it is clearly written that he will be paid on sight (or at the end of existing agreed credit period) regardless of the credit period you are availing from the funding bank. This is a fairly standard international way of obtaining financing in such transactions. The supplier can be requested to take an opinion from their relationship bank to clarify that their interests are being protected.

• What is maximum amount for which a LC can be opened?

  There is no limit for LC amount, however Supplier's credit can be extended for a maximum amount of USD 50 Million per shipment.

• What is the maximum interest rate a bank can charge for discounting a LC?

  Under Supplier's Credit A bank can charge upto L + 250 basis points per annum for discounting of LC.

• Can I avail suppliers credit through foreign banks like Standard Chartered, J P Morgan, etc.?

  Yes, you can avail Supplier's Credit through foreign banks also. In this type of transaction, the applicant has to bear the With-holding Tax (WHT) on interest payment

• Is Supplier's credit more expensive than INR borrowing?

  No, Supplier's credit transactions are generally cheaper than borrowings in INR.

• What is the minimum amount of availing Supplier's Credit?

  There is no prescribed minimum amount for availing Supplier's Credit, but overseas banks generally only entertain the transaction(s) which are above USD 25000.

• How will I get the payment confirmation of the funds which are remitted to the beneficiary by the funding bank?

  The funding bank will share a copy of SWIFT MT202 with the issuing bank enlisting the payment confirmation, value date of the remittance along with Interest advice of the payment which is due to be paid on maturity by the applicant.

• What are the benefits of supplier's credit to importers and Exporters

  For Importers

  • Availability of cheaper funds for import of raw materials and capital goods
  • Ease in getting credit in short term.
  • Able to meet the Suppliers requirement of payment at sight.
  • Ability to negotiate better price with suppliers due to sight payment (to the exporter).

  For Exporters

  • Realize at-sight payment
  • Avoid the risk of importer's credit by making settlement with letter of credit.

• What are the regulatory frameworks in Supplier's Credit?

  No, Supplier's credit transactions are generally cheaper than borrowings in INR.

  • 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: L + 250 bps p.a.

• Can we take Supplier's Credit for services?

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

• What are overseas banks? How are these banks different from Indian banks?

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

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

  When the importer has Non-fund based limits in the bank along with good credit history.

• Any bank can give guarantee or should the importer have an account with the bank?

  Importer must have non fund based limit with the bank to be able to issue a guarantee. Banks that provide such facility would insist on the importer(s) to have a bank account with them (as this is a credit based facility).

• What 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 import documents and the importer bank transfers the funds to exporter's bank.

• What is with-holding tax (WHT)? When is it imposed?

  The customer has to pay with-holding tax (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 suppliers credit through their offshore offices.

• Your minimum Service charge seems to be 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.

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

  • Interest in case of Supplier's Credit depends on the LIBOR and Spread.
  • LIBOR depends upon the currency market which can have impact on the interest rate.
  • As the cost of borrowing will vary; spread will vary.
  • Hence change in currency rate does impact rate of interest.

• 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 prices so it is rare to have better pricing. In case you get better rates than us, please inform us and we can further negotiate it on your behalf.

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

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

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

  Supplier's Credit is usually cheaper than Cash Credit / Direct Payment.

• 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.

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

  Supplier'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.

• 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.

• My LC is opened under supplier's credit route for a period of 180 days in which 120 days of credit is provided by the exporter. The exporter discounts the LC at sight by this bank. Now I want to change field 41c (Available with) in the LC in which funding bank name is incorporated. Is it possible to get the LC discounted by the exporter at sight by his bank & after 120 days by the funding bank so that I can get full 180 days of credit?

  Normally, two banks cannot extend funding for the same transaction based on different timelines. However, given that it is not double financing, and if the funding banks agree, it is possible in this case to get the LC discounted by the supplier by his bank on sight & discounted by the funding bank at the end of 120 days. For this arrangement field 41c available with will be amended by writing 'Any Bank'in place of the name of any specific Funding Bank.

• Recently RBI issued some guidelines on Trade Credit for operators in Special Economic Zone (SEZ), is it true that Supplier's Credit be 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 Special Economic Zone (SEZ) can avail Supplier'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).

• Using a Letter of Credit, what is the procedure for availing credit in foreign currency for purchases within same Special Economic Zone (SEZ)?

  Keeping in mind the physical movement of goods is within the territory of India, documentary flow needs to be monitored to avoid unnecessary delays in funding and payment. While vanilla Supplier's Credit is still a viable option, in our opinion, the most preferred route for transaction is Reimbursement against Acceptance Financing under the LC. In this case, neither the LC needs to be advised through the negotiating bank, nor do documents be needed to be routed through the negotiating bank. The reimbursing bank extends financing under scanned copy of purchase documents along with authentic messages via SWIFT messaging system.

• 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.

  • 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.
  • Documentation Even though borrowing in INR comes with simpler documents, FCY borrowings are simple & convenient and are usually bundled together with the documentation on exports/imports as prescribed by RBI.

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

  Yes, while supplier's credit (or RA financing) is not possible without LC, client can avail SBLC backed Buyer's credit facility if underlying import documents are routed through banking channel. For this, the client will need their bank to issue an SBLC to overseas funding bank for availing Buyer's Credit.