What are the compliance /norms requirement under ECB-Buyers' credit and consequences of non-compliance under this.
3 Replies
(Guest)
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Trade Credits’ (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers’ credit and suppliers’ credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines.
a) Amount and MaturityAD banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment). For import of capital goods as classified by DGFT, AD banks may approve trade credits up to USD 20 million per import transaction with a maturity period of more than one year and less than three years (from the date of shipment). No roll-over/extension will be permitted beyond the permissible period. AD banks shall not approve trade credit exceeding USD 20 million per import transaction.
b) All-in-cost Ceilings
The current all-in-cost ceilings are as under : All-in-cost ceilings over 6 Libor (* for the respective currency of credit or applicable benchmark) for the tenure upto 3 years has been capped at 200 bps
The e all-in-cost ceilings include arranger fee, upfront fee, management fee, handling/ processing charges, out of pocket and legal expenses, if any.
c) Guarantee
AD banks are permitted to issue Letters of Credit/guarantees/Letter of Undertaking (LoU) /Letter of Comfort (LoC) in favour of overseas supplier, bank and financial institution, up to USD 20 million per transaction for a period up to one year for import of all non-capital goods permissible under Foreign Trade Policy (except gold, palladium, platinum, Rodium, silver etc.) and up to three years for import of capital goods, subject to prudential guidelines issued by Reserve Bank from time to time. The period of such Letters of credit / guarantees / LoU / LoC has to be co-terminus with the period of credit, reckoned from the date of shipment.
Ritesh
(Job)
(22 Points)
Replied 16 December 2011
Buyer’s Credit
What is a Buyer’s Credit : A buyer’s credit a foreign fund made available to an importer by a Bank to meet the payment of the importer to his exporter.
Why is it used : Clients use Buyers Credit for making the payment against their Imports. Imports can be in the nature of Capital goods imports or revenue goods imports.
Maximum tenure of a Buyer’s Credit : As per the trade guidelines published time to time by the Reserve Bank of India, a capital goods importer can avail a buyers credit for the maximum tenure of 3 years and a revenue goods importer can avail a buyers credit for the maximum tenure of 360 days. However, where the client has used LC, the total tenure cannot exceed 3 years or 360 days respectively.
Benefit of a Buyer’s Credit : The client is interested in making the payment by way of buyers credit because the client can use cheaper sources of funds.
Terminologies included in a Buyer’s Credit : The buyer’s credit is quoted in “L+Spread” format where L is London InterBank Offer Rate and Spread is interest cost over and above the Libor cost. Presently the LIBOR is 0.40 for 3 months, 0.80 for 6 months and 0.95 for 1 year. However, depending on the market conditions, LIBOR and Spread over LIBOR keep on varying. The maximum spread that can charged by a bank to its client is capped at 6ML+350 bps by RBI. (6 months Libor plus 3.50%)
Other than the LIBOR and Spread over LIBOR, the following costs are involved
- LOU issuance charges (Letter of undertaking, issued by the regular working capital banker in the favour of the bank providing Buyers credit. May Range between 0.25% to 0.50%)
- Bank Commission (May or may not be charged, May Range between 0.25% to 0.50%)
- Forward cover Charges. (To hedge the client from the movement in the dollar exchange rate. Depends on the market scenario, presently 4.25% p.a.)
Total Cost about 7-9 percentage. Way below the normal cash credit / working capital cost.
Example: We will take the example of XYZ Limited and ABC Limited
XYX limited & ABC Limited have imported goods of USD 1 mn Dollars against Sight LC. ABC Limited has got trade credit limits and and XYZ Limited will use the cash Credit account for making the payment. The payment has to be made on 1.1.2011. Bank for both the clients is AAA.
XYZ Limited : Assuming the current Cash Credit rate for XYZ Limited is 13% p.a. , as the Imports arrived, the client made the payment from the CC account and the bank will charge an interest of 13% p.a. On 1.1.2011 the USD/INR Spot rate is 45.00. therefore the client’s account is debited for 4.50 crs (1 mn USD * 45.00)and payment made to the exporting party. Total Interest Cost incurred by the client for 6 months in this case works out to Rs. 29,25,000/- (4.50 Crs * 13% / 2)
ABC Limited : ABC Limited is an informed client. On 25.12.2010, 7 days before the payment has to made, ABC Limited check with AAA the availability of the Buyers credit and if available, the spread over LIBOR at which the buyer’s credit is available. AAA quotes they a rate of L+320 bps. The company accepts the quote from Bank and asks them to arrange for an “Offer Letter” for the quote. Bank Arranges for the Offer Letter and LOU Format. AAA Provides LOU in the format and the payment is made to the exporter on the due date. ABC Limited simultaneously books a forward contract with the bank to hedge the payment to be made on the due date of payment of the buyer’s credit.
· ABC Limited incurred the following costs:
- Libor (0.65%)
- Spread Over Libor(3.2%)
- LOU Issuance Charges and Commission ( 0.50%)
- Forward Cover (3.50%, since the client has to retire the liability of Buyers credit after 6 months and the payment has to be made in $, hence hedging the Currency Exposure)
Total Cost : 7.85%
Interest Saved Rs. 1158750
Cash Rich Clients : The clients can make a fixed deposit at higher rates and make the payment by way of a Buyer’s credit locking in an arbitrage for the company.
I am CA Premal N Saraogi, a practicing chartered accountant. This is an original artice written by me and nor copied from anywhere. You can reach me at ca.premal.saraogi @ gmail.com or 9724895616 for any queries or further understanding. My membership number is 122350.Buyer’s Credit
What is a Buyer’s Credit : A buyer’s credit a foreign fund made available to an importer by a Bank to meet the payment of the importer to his exporter.
Why is it used : Clients use Buyers Credit for making the payment against their Imports. Imports can be in the nature of Capital goods imports or revenue goods imports.
Maximum tenure of a Buyer’s Credit : As per the trade guidelines published time to time by the Reserve Bank of India, a capital goods importer can avail a buyers credit for the maximum tenure of 3 years and a revenue goods importer can avail a buyers credit for the maximum tenure of 360 days. However, where the client has used LC, the total tenure cannot exceed 3 years or 360 days respectively.
Benefit of a Buyer’s Credit : The client is interested in making the payment by way of buyers credit because the client can use cheaper sources of funds.
Terminologies included in a Buyer’s Credit : The buyer’s credit is quoted in “L+Spread” format where L is London InterBank Offer Rate and Spread is interest cost over and above the Libor cost. Presently the LIBOR is 0.40 for 3 months, 0.80 for 6 months and 0.95 for 1 year. However, depending on the market conditions, LIBOR and Spread over LIBOR keep on varying. The maximum spread that can charged by a bank to its client is capped at 6ML+350 bps by RBI. (6 months Libor plus 3.50%)
Other than the LIBOR and Spread over LIBOR, the following costs are involved
- LOU issuance charges (Letter of undertaking, issued by the regular working capital banker in the favour of the bank providing Buyers credit. May Range between 0.25% to 0.50%)
- Bank Commission (May or may not be charged, May Range between 0.25% to 0.50%)
- Forward cover Charges. (To hedge the client from the movement in the dollar exchange rate. Depends on the market scenario, presently 4.25% p.a.)
Total Cost about 7-9 percentage. Way below the normal cash credit / working capital cost.
Example: We will take the example of XYZ Limited and ABC Limited
XYX limited & ABC Limited have imported goods of USD 1 mn Dollars against Sight LC. ABC Limited has got trade credit limits and and XYZ Limited will use the cash Credit account for making the payment. The payment has to be made on 1.1.2011. Bank for both the clients is AAA.
XYZ Limited : Assuming the current Cash Credit rate for XYZ Limited is 13% p.a. , as the Imports arrived, the client made the payment from the CC account and the bank will charge an interest of 13% p.a. On 1.1.2011 the USD/INR Spot rate is 45.00. therefore the client’s account is debited for 4.50 crs (1 mn USD * 45.00)and payment made to the exporting party. Total Interest Cost incurred by the client for 6 months in this case works out to Rs. 29,25,000/- (4.50 Crs * 13% / 2)
ABC Limited : ABC Limited is an informed client. On 25.12.2010, 7 days before the payment has to made, ABC Limited check with AAA the availability of the Buyers credit and if available, the spread over LIBOR at which the buyer’s credit is available. AAA quotes they a rate of L+320 bps. The company accepts the quote from Bank and asks them to arrange for an “Offer Letter” for the quote. Bank Arranges for the Offer Letter and LOU Format. AAA Provides LOU in the format and the payment is made to the exporter on the due date. ABC Limited simultaneously books a forward contract with the bank to hedge the payment to be made on the due date of payment of the buyer’s credit.
· ABC Limited incurred the following costs:
- Libor (0.65%)
- Spread Over Libor(3.2%)
- LOU Issuance Charges and Commission ( 0.50%)
- Forward Cover (3.50%, since the client has to retire the liability of Buyers credit after 6 months and the payment has to be made in $, hence hedging the Currency Exposure)
Total Cost : 7.85%
Interest Saved Rs. 1158750
Cash Rich Clients : The clients can make a fixed deposit at higher rates and make the payment by way of a Buyer’s credit locking in an arbitrage for the company.
I am CA Premal N Saraogi, a practicing chartered accountant. This is an original artice written by me and nor copied from anywhere. You can reach me at ca.premal.saraogi @ gmail.com or 9724895616 for any queries or further understanding.
amit jain
(account)
(21 Points)
Replied 22 February 2016
please advise on the following: my company has their lc limits in X bank and has taken a usance lc 90 days. now my company is shifting to another bank, say Y bank. the lc falls due after about 20 days. can Y bank issue LOU/LOC for availing buyer's credit on this transaction where the original lc was ssued by X bank?
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