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 facilities to the importer, depending upon the sources of credit they are classified as Buyers’ credit or Suppliers’ credit.
Suppliers Credit:
As per the regulatory RBI guidelines dated March 13, 2019, only that finance provided by the Supplier of goods located outside India can be termed as supplier’s credit. The finance provided by the supplier (supplier credit) can be a DA Document or Usance LC for 180 days etc. Under the revised regulation, banks can now issue guarantee / SBLC (Standby Letter of Credit) to any overseas banks/branches, FI, Foreign Equity holders, and IFSC Branches. To know more click on different types of standby Letters of 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 a letter of comfort. The buyers’ credit may be extended, either from an overseas branch of the domestic bank or an international bank in a foreign country. Buyers’ credit facilitates local importers to gain entry to cheaper foreign funds, compared to local sources of funding.
The amount and maturity allowed under trade credits (buyers’ credit/suppliers’ credit) under the 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 of up to one year from the date of shipment.
(b) Trade Credit can be availed by oil/gas refining & marketing, airline, and shipping companies. Per Transaction Maximum Amount permissible will be USD 150 Million.
(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. However, banks cannot issue LC/LoU/LoC beyond 3 years from the date of shipment.
(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 rolled 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 a Letter of Credit (LC)/Letter of undertaking (LoU)/letter of comfort (LoC) in favour of an overseas supplier, bank, or financial institution 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 the date of shipment and is 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 the RBI circular on July 13, 2013, many importers used to borrow under buyers’ credit for the period more than what the operating cycle of a unit required. This was to take the advantage of cheap rates for trade credit. For example, the operating cycle of a manufacturing unit is six months but the importer wants trade credit for twelve months to enjoy the use of cheap funds in foreign currency. This type of tendency of the importers is used to expose them to currency risks in the situation of volatile market conditions if the currency positions are 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 the Reserve Bank to clear the ambiguity of trade credit tenure and rationalize credit usage patterns. The impact of the new rule is that banks have stopped allowing credit to an importer beyond the operating cycle. It also stopped the rollover 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.
Bank Guarantees on Trade Credits:
Bank guarantees may be given by the ADs, on behalf of the importer, in favour of overseas lender of Trade Credit (TC) not exceeding the amount of TC. The period of such a guarantee cannot be beyond the maximum permissible period for TC. TC may also be secured by an overseas guarantee issued by foreign banks / overseas branches of Indian banks. Issuance of such guarantees i.e. guarantees by Indian banks and their branches/subsidiaries located outside India will be subject to compliance with the provisions contained in Department of Banking Regulation Master Circular No.DBR.No.Dir.BC.11/13.03.00/2015-16 dated July 1, 2015 on “Guarantees and Co- acceptances”, as amended from time to time.
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Excellent and very precisely given the explanation. Thank u sir
Very well explained…thanks.
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..
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.
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….
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).
Thank you so much….Sir
Really informative. Particularly if anyone wants to understand now how fraud in PNB has been perpetrated.
Thank you very much sir
Dear sir what are the payment terms applicable for buyer’s credit
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.
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.
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?
In supplier credit, the exporter will be the trade creditor.
Dear Sir
Is Supplier’s credit different from export factoring? Please explain if so. Also export factoring comes under trade credit? Please clarify
regards
shakila
Export factoring enables companies (exporters) to sell their outstanding book debts for cash. They sell invoiced receivables at a discount to the factor to raise finance for the working capital requirement. On the other hand, the suppliers’ credit means credits extended to importer directly by the overseas supplier instead of a bank or a financial institution.
Dear Sir
Does Export factoring comes under the broad Head of Trade Credit? In my earlier query referred above, importer is Indian and the exporter(outside India) has factored by selling his ‘accounts receivables’ to the overseas branch of an Indian bank. In such scenario, whether itis covered under Trade Credit (Sellerscredit or buyers credit),? If not ,then how the reporting should be done to Regulator?
regards
shakila
Import factoring is a service giving the client the possibility of obtaining a short-term buyer’s credit for goods he purchases from foreign suppliers without the need of issuing any kind of banker’s guarantee, letter of credit, bill of exchange, etc. The factor may be an overseas bank (including an overseas branch of an Indian bank) hence broadly it is a kind of trade credit. Whereas Export factor offers the credit facility to an exporter who supplies goods/services to Indian importer. So export factoring cannot be treated as trade credit.
Can a importer in India take supplier’s credit directly from the supplier without any LC or Guarantee if supplier is willing to give such credit facility? Can supplier give credit without LC in India?
The exporter can extend credit directly to the importer under documentary collection system. The importer need not open LC or LOU from his bank. I’m sharing following link for more information.https://bankingschool.co.in/foreign-exchange/documentary-collection-system-in-international-trade-explained/