Buyer credit

Definition

Buyer credit is a short term credit available to an importer (buyer) from

overseas lenders such as banks and other financial institution for goods
they are importing. The overseas banks usually lend the importer (buyer)
based on the letter of comfort (a bank guarantee) issued by the importer's
bank. For this service the importer's bank or buyer's credit consultant
charges a fee called an arrangement fee.
Buyer's credit helps local importers gain access to cheaper foreign funds
that may be closer to LIBOR rates as against local sources of funding which
are more costly.
 Benefits of Buyer's Credit

Buyer’s credit benefits both the seller and buyer in a trade transaction. As
mentioned above, borrowing rates are generally cheaper than what an importer
may find with domestic lenders. The rates are typically based on LIBOR rates—
the point of reference for most short-term interest rates. The importer also gets
an extended amount of time for repayments, rather than having to pay upfront at
once directly to the exporter.

Another benefit extends to the exporter. Payment is made on time on the due
date or according to the terms of the sales contract with the importer without any
undue delays.
 BUYER’S CREDIT PROCESS

6.
Funding

5.LOU 7 IMPORT
BILL
OVERSEAS PAYMENT SUPPLIER
BANK IMPORTER BANK BANK

TRANS
3 4. ACTION
INDIC OFFER SETTED
ATIVE LETTER 5. LOU
PRICI
NG

4OFFER
LETTER 1 CONTRACT
SHIPMENT

2 QUOTE
 List of documents required:

• Request letter

• Form A1 and Form A2

• Copy of Invoice

• Copy of Transport document

• Board Resolution / Partnership Deed with Partner’s Consent Letter

• Memorandum relating to fixed deposit

• NOC from the concerned bank in case of bill booked in another bank.
NOC should state that all FEMA related aspects would be taken care by
the concerned bank
 WHY LOU BANNED IN INDIA?
A total 1,213 fraudulent letters of undertaking (LoUs) were issued to Nirav Modi's companies
between March 2011 and May 2017. That's over 16 fake LoUs a month over the course of six
years, which were the modus operandi of the Rs 13,578 crore - and counting - fraud perpetuated
by jewellers Nirav Modi and his uncle, Mehul Choksi.

In response, the RBI has "decided to discontinue the practice of issuance of LoUs/ LoCs [letters of
comfort] for trade credits for imports into India" with immediate effect.

They will now need higher finance limits for banks but the latter, still reeling from the country's
biggest banking fraud and piling up NPAs, are unlikely to be as generous as in the past.LoUs were
generally used by large players in gems and jewellery sector. LCs and bank guarantees continue to
be available, he believes the RBI's latest ban will have very little impact on trade.
RBI GUIDELINES
 CHARGES

HDFC Bank
Guarantee Issuance: 1.8% p.a. or min 500

Axis Bank
Arrangement of Buyers’ Credit, Issuance of a Guarantee/LOU/LOC, Payment to Supplier, Receipt of funding in
Nostro : 2.50% p.a. subject to a minimum of Rs.1000/- or as per existing sanction terms for importer plus Swift
charges as applicable/ actual courier charge

State Bank of Hyderabad

Backed by 100 % discharge of liability (Viz., cash margin, sanctioned term loan, guarantee of First Class bank, 100 %
lien on drawing power) : – 0.6875 % p.a.
Others – 2.75 % p.a. Minimum charges for 3 months will be recovered

State Bank of India (SBI)

As per existing customer, LOU / LOC charges of SBI is 2.10% p.a.
Canara Bank
Guarantee issued including for availment of Buyer’s credit: 0.55% per quarter or part thereof for
The specified period of liability calculated on the amount of liability under such guarantees at the
beginning of every quarter.
UCO Bank
Other Guarantees (Including issuance of letter of comfort for buyer’s credit: Rs.170 + 3.30% p.a. (Min. 170 +
1.65% charges for 2 quarters)

Punjab National Bank (PNB)

Incase buyers credit is taken from non PNB branches cost goes up by 0.60% on per annum basis.
Buyer’s Credit availed with PNB branches – 0.25% p.m. for specified period of liability with s min. of 0.40%,
subject to min. of Rs.1000/- per guarantee
Buyer’s credit availed with other banks – 0.30% p.m. for specified period of liability with a min. of 0.50%,
subject to min. of Rs.1000/- per guarantee

Vijaya Bank
0.1685% per month for the specified period of liability plus additional 3 months, subject to a minimum of
0.2809%.
Dena Bank
Letter of Comfort / Letter of undertaking / Letter of Guarantee etc for Buyers Credit Charges : 0.15%
p.m. ( Min. 0.25%)

:Bank of Baroda (BOB)

Letter of Comfort issued for availing Buyer’s Credit
Rating Upto One year
Raw Material &Capital Goods Above One Year
( Capital Goods)
AAA 1.00 p.a 1.50 p.a
AA 1.00 p.a 1.50 p.a
A 1.50 p.a 2.00 p.a
BBB 2.25 p.a 2.50 p.a
Below BBB & Unrated 2.50 p.a 3.00 p.a

Allahabad Bank
Letter of Comfort in lieu of Letter of Credit or Buyers’ Credit or Standby L/C: @ 3% P.A. with minimum for 2
Quarters.