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Buyers Credit and suppliers credit

Buyers’ credit finance means finance for payment of imports in India arranged by the importer (buyer) from a bank or financial institution outside India. The suppliers’ credit means credits extended for imports directly by the overseas supplier instead of a bank or financial institution.  Although both buyers credit and supplier credit are credit facility to the importer, depending upon the sources of credit they are classified as Buyers’ credit or Suppliers’ credit.

Buyers credit:

The bank or financial institution outside India finances the importer based on a guarantee given by the importer’s bank. The guarantee, so given by the importer’s bank, is called letter of comfort. The buyers’ credit may be extended, either from an overseas branch of the domestic bank or an international bank in the foreign country.Buyers’ credit facilitates local importers gain entry to cheaper foreign funds, close to LIBOR rates, which is cheaper, compared to local sources of funding.
The amount and maturity allowed under trade credits (buyers’ credit / suppliers’ credit) under current credit policy of India are as under.

(a) AD banks are permitted to approve trade credits up to USD 20 million per transaction for the imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year from the date of shipment.

(b) For import of capital goods permissible under 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 up to five years from the date of shipment for industries of all sectors.

(c) The abinitio contract period should be 6 (six) months for all trade credits. It means buyers credit for capital goods can be taken and roll over in multiple of six months up to 5 years.

(d) No roll-over/extension will be permitted for trade credits (buyers’ credit/suppliers credit) beyond the permissible period.

(e) Banks can issue Letter of Credit (LC)/Letter of undertaking (LoU)/letter of comfort (LoC) in favour of overseas supplier, bank or financial institutions up to USD 20 million per transaction for a period of up to one year for non-capital goods and up to three years for capital goods permissible under Foreign Trade Policy.  It is important to note that as per existing guidelines ‘Buyers Credit/Trade Credits’ for capital goods are allowed up to five years, but banks  cannot issue LC/LoU/LoC  beyond 3 years from the date of shipment.

(f) The LC/LoU/LoC  has to be co-terminus with the period of credit reckoned from date of shipment  and are issued by Banks subject to prudential norms issued by RBI from time to time.

Previously, the tenure allowed for import of raw material was up to 360 days which was left to the discretion of AD Bank to decide on client-wise tenure (based on presumed operating cycle).  Therefore, prior to RBI circular July 13, 2013, many importers used to borrow under buyers credit for the period more than what operating cycle of a unit required. This was to take the advantage of cheap rates for trade credit. For  example, operating cycle of a manufacturing unit was six months but importer wants trade credit for twelve months to enjoy use of cheap funds in foreign currency. This type of tendency of the importers used to expose them to currency risks in the situation of volatile market conditions if the currency positions held unhedged.RBI circular dated July 13, 2013 states that ‘Period of Trade Credit (Buyers credit/suppliers credit) should be linked to the operating cycle and trade transactions’. This step was taken by Reserve Bank to clear the ambiguity of trade credit tenure and rationalize credit usage pattern. The impact of the new rule is that banks have stopped allowing credit to an importer beyond operating cycle. It also stopped roll over of buyers’ credit. It also stopped importers who were using buyers’ credit for Arbitrage to earn some profit out of it.The banks while sanctioning or renewing buyers’ credit limit to the importers shall show how the bank has decided the maximum tenure for buyers’ credit on the basis of operating cycle tenure.

Related article:

Important points to be borne in mind while handling import documents

2.Evidence for physical import of goods into India

3.All info on External Commercial Borrowings (ECB)
4.5.Different Kinds of letter of credits

5.. External Commercial Borrowings (ECB) – Clarification on hedging

6.Checklist for banks financing against LC/ Co-accepted bills

(14) Comments

  1. rajesh

    Thank you so much for giving detailed information on every topic. Request you to let me know the major difference between Buyer's Credit and Supplier's Credit even though bother are classified under Trade Credits..

    1. Surendra NaikSurendra Naik - Post author

      In buyers credit, a bank or financial institution from abroad finances the buyer(importer). In sellers credit, the credit extended directly by the overseas supplier (exporter) to the buyer (importer)instead of a bank or a financial institution.

      1. rajesh

        Sir, Thank you so much for your response and the kind of interest you are showing to create banking awareness among the people is really appreciated. We always pray to Almighty to give more strength and patience to enlighten most of the people on actual Banking concepts. Still i have few questions are tricking in my mind on Suppliers Credit: Buyer's Credit is extended by Importer to Exporter ( this could be under LC/COLLECTION BILLS/Direct Import Payments.) But, i read some where, Suppliers Credit is extended by Exporter to Importer to get the payment on sight basis under LC, even though LC is issued with Usance period. My only doubt here is, Suppliers credit applicable for only LC transactions? can't it would applicable to COLLECTION BILLS/DA/DP Please clarify....

        1. Surendra NaikSurendra Naik - Post author

          The suppliers’ credit means credits extended for imports directly by the overseas supplier.Therefore no question of exporter asking for payment under sight LC under supplier credit. It may be under Usance LC or usance collection bill (depending upon exporter's confidence in importer).

    1. Surendra NaikSurendra Naik - Post author

      The importer obtains the flexibility to pay for the purchases over a period of time, as stipulated in the terms of the buyer's credit facility, rather than up front at the time of purchase.

    2. Surendra NaikSurendra Naik - Post author

      Buyers' credits for imports are extended where payment terms can be sight or usance. The conditions to be fulfilled by the ADs are that: 1. The credit extended under buyers credit shall be for a period of fewer than three years and the amount of credit shall not exceed US$20 million per import transaction. 2. The `all-in-cost' per annum, payable for the credit shall not exceed Libor +50 basis points for credit up to one year and Libor +125 basis points for credits for periods beyond one year but less than three, for the currency of the credit or applicable benchmark.

  2. Vikas Kulkarni

    Dear Sir - could you please clarify the following: 1- in a suppliers credit transaction, is it necessary that the credit should be provided only by the supplier ie an offshore bank cannot provide credit directly to the Indian importer? Therefore does this mean that in the importers books, the offshore supplier will continue to remain a trade creditor? Alternatively, can an offshore bank provide credit directly to an onshore importer similar to purchase bill discounting?

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