18/05/2016
Buyer's Credit Consultant
BUYER’S CREDIT
What is Buyer’s Credit?
Importer avails a credit from an overseas bank for making payment on the due date for his import. Importer can avail buyer’s credit against letter of credit (LC) or cash against documents (CAD) or document against advance (D/A), document against payment (D/P) from overseas banks. For availing buyer’s credit, you need to have Cash Credit Limit (CC Limit) or Buyer’s Credit limit (BC Limit). Also, you can avail it against your Fixed Deposit (FD). Buyer’s credit is a LIBOR rates based funding which allow Indian importers to avail cheaper foreign funds.
How Does It Work? (CLICK HERE)
Buyers Credit Consultant Role
After receiving the details of your import document, buyers credit consultant arranges buyer’s credit quote at the cheapest rate from their network of banks (International branches of a Nationalized Bank or International banks in foreign countries). For this service, buyer’s credit consultant charges a fee called a Buyer’s Credit fee.
RBI Master Circular External Commercial Borrowing and Trade Credit
Buyers credit helps local importer to gain access to cheaper LIBOR base funds which are quite cheaper than the INR funds.
For raw material 360 days and for capital goods 5 years, from the date of shipment, is allowed for Buyers Credit. Though banks may have some problem issuing LOU after 3 years.
Trade credit or tenor should follow the RBI guideline on Operating-cycle.
All in cost ceiling is L+350 bps for both 1 year or 5 years tenor. Every six months, the interest on buyer’s credit may get reset.
An importer can avail maximum $20 million, per transaction, as a trade credit.
Advantages of Buyers Credit
Importers always want credit period and Suppliers always want payment on sight. Supplier’s credit balance out this situation.
There won’t be any LOU charges from a bank.
As the importer is making payment on sight giving him a better opportunity to negotiate with the supplier.
When importer imports CAPEX bank would push the client to avail term loan in lieu of Suppliers Credit. As the bank can earn huge amount of interest if term loan is availed instead of cheaper LIBOR rate funds.
Roll Over of Suppliers credit is also allowed. It gives the importer to extend the period of credit. But as mentioned earlier, it can’t exceed 360 days (Raw Material) or 5 years (Capex)
Buyers Credit in cross currency can be done to avail benefits of arbitrage.
Any form of trade is available to the importer viz. open account, collection or LC’s.
Costing
Interest cost: Cost charged by overseas bank or financing bank (LIBOR+SPREAD)
Letter of Comfort / Undertaking: Charged by your banker for issuing LOU or LOI (LOU Sample)
Forward Booking Cost / Hedging cost: As per the rates prevailing in the market.
Arrangement fee: Fee of the Buyers Credit Consultant
WHT (Withholding tax): It is only applicable when you have arranged buyer’s credit quote from an International bank or Foreign bank. WHT depends upon local tax authorities depending on local tax regulations. It could be in the range of 10-20% on the interest amount. In a case of overseas Indian bank, WHT is not applicable.
Hedging Cost
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