Buyer's credit is a short-term credit available to importers (buyers) from foreign lenders such as banks and other financial institutions for the goods they import. Overseas banks usually lend importers (buyers) based on convenience mail (bank guarantees) issued by the importer bank. For this service, an importer bank or a buyer credit consultant imposes a charge called setting fee.
The buyer's credit helps local importers gain access to less expensive foreign funds that may be closer to the LIBOR level than with more expensive local funding sources.
The buyer's credit duration may vary from country to country, in accordance with local regulations. For example, in India, a buyer's credit may be disbursed for one year if the import is for tradable goods and for three years if the import is for capital goods.
Video Buyer's credit
Benefits for importers
The buyer's credit has several advantages for the importer. Exporter is paid on due date; while the importer gets an extended date to make import payments according to cash flow. Importers can deal with exporters on the outlook, negotiate better discounts and use buyer credit routes to obtain financing. The funding currency may depend on the customer's choice and the availability of the LIBOR interest rate on the foreign exchange market. Importers may use this financing for any form of payment mode, such as: open an account, collection, or LC.
Maps Buyer's credit
The steps involved
- Customer requests Credit Arranger Buyer to arrange credit before bill payment date
- Arrange to request a branch of a foreign bank to provide buyer credit offer letter on behalf of the importer. The best interest rates quoted by importers
- Overseas bank to fund Nostro bank Importer account for required amount
- The importer bank to make import bill payment using the credited amount (if the loan currency is different from the Import currency, then the cross currency contract is used to influence import payments)
- The importer bank will recover the required amount from the importer and send it to the foreign bank on the due date.
- This helps importers in working capital management.
Cost involved
Interest charges are charged by overseas banks as financing costs.
Risk involved
Buyer credit is associated with currency risk. Thus, Hedging may be necessary as it involves foreign currency, making Credit Buyers at risk at times.
Indian India regulatory framework
The Bank may provide buyer credits up to US $ 20 million (US $ 2 crore) per import transaction for a maximum period of one year from the date of delivery. In the case of capital goods imports, banks may approve buyer credits up to $ 20 million per transaction for a period of up to three years. No rollover beyond the allowed period.
As directed by RBI dated 11.07.13, upon the availability of trade credit, the trading credit period shall be related to the operating cycle and trade transaction. AD banks should ensure that these instructions are strictly adhered to.
The RBI has issued instructions under Sec 10 (4) and Sec 11 (1) of the Foreign Exchange Management Act, 1999, stating that authorized dealers may approve proposals received (in the form of ECB) for short-term credit for financing - either way supplier credit or buyer credit - imported goods to India, based on uniform criteria. Credit will be extended for a period of less than three years; the credit amount must not exceed $ 20 million, per import transaction; 'all-in-cost' per annum, the debt to the credit does not exceed 6 months LIBOR 350 basis points for credit up to one year, and LIBOR 125 basis points for credit for periods beyond one year but less than three years, for the credit currency.
All applications for short-term credits that exceed $ 20 million for each import transaction will be forwarded to the Chief of General Manager, Exchange Control Department, Reserve Bank of India, Head Office, External Commercial Lending Division (ECB), Mumbai. Each credit must be assigned a 'unique identification number' by an authorized dealer and the given number must be quoted in all references. The International Banking Division of authorized dealers is required to provide details of the approval given by all of its branches, during the month, in the ECB-ST Form to the RBI, so as to achieve no later than the 5th of the ensuing month. (Circular AP (DIR Series) No 24 dated 27 September 2002.
In accordance with the RBI Master Circular on External Commercial Loans and Trade Financing of July 1, 2011, all current cost limit for interest is six months L 200 bps (bps is Base Points equal to 1/100 of 1%) for buyer credits tenure to three years. All fee ceilings include regulatory fees, upfront costs, management fees, handling and processing fees, pocket expenses and legal fees, if any.
The ceiling above was revised on 15/11/2011 to 6 Libor Months 350 bps and extended further on 30/03/2012 to 30/09/2012. From 01-10-2012 Maximum 6 Months Libor 350 bsp limit has been extended to further review.
See also
- Trade credits
- Trade credit insurance
- External commercial loans
References
External links
- Buyers of credit related articles
- RBI Stops Buyers Credit Transactions (LOU & LOC)
- Implications for Buyer Credit for PNB Scams
- RBI Master Circular on External Commercial Loans and Trade Credits 2013
- RBI Master of Goods and Services Import Circular 2013
- Trade Credit for Import to India - Review of all ceiling charges: Dated 09-10-2012
- Trade Credit for Import to India: Date 11-09-2012
- Trade Credit for Import to India - All-in-charge pagu of July 11, 2013
Source of the article : Wikipedia
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