Meaning of Buyer’s Credit: Buyer’s Credit refers to a financing instrument arranged on behalf of the importer in India through an overseas bank or an Indian bank having branch overseas. The benefit of buyers credit is that importer can extend the date of payment to its suppliers as per its cash flow and liquidity position. It’s a better scenario where the importer can avail the facility in LIBOR, result in lower interest cost. The importer can use this financing mode for any form of trade viz. open account, collections, or LCs.
Process: Suppose importer opens the letter of credit (usance) in favour of exporter. Now the exporter on submission of required documents’ can discount the LC or stays away i.e. hold the LC as it is. The exporter will send the documents along with goods to the destination. The importer will get released the goods by accepting the documents. But due date of payment has not yet come i.e. LC is not expired. Now the importer wants to postpone the payment. What is the solution now?
The buyer may avail the “Buyers Credit” route if accepted by all the parties involved in the transaction. The process may be described as under:
1. The importer will identify overseas bank/financial institution (or an Indian bank having its branch overseas) (say X). The importer will request for availing the facility of buyers credit with all the details about transaction. On satisfaction, the bank (X bank) will generate the Offer in favour of the LC issuing bank (i.e. importer bank or say Y bank)
2. On the basis of the Offer, the importer approach to its bank (Y bank) for issuance a Letter of Comfort in favour of X bank against this LC. The Y bank will charge some fees for the services. Here Y bank works as a broker. But the bank will continue to hold the LC by marking the facts on its face.
Now the importer takes this Letter of Comfort and approach the X bank which will give payment to Y against this Letter of Comfort or make payment directly to supplier bank as instructed.
It’s a totally secured transaction where security do not change hand except letter of comfort moves from importer bank to facilitator bank.
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