Now that the banks have been forbidden from issuing Letters of Undertaking for securing finance for imports into India the conclusion that was arrived at immediately was that tieing up finance at cheaper rates in a foreign currency is not possible at all. In the melee, the simple model of ACTUAL import financing was forgotten – either enjoying credit extended by the supplier himself or if he is not in a position to do so, arranging immediate discounting of the bills of the supplier against the usance letters of credit opened by the Indian Importer.
Supplier’s credit is a term used to refer financing of an import by an international bank at LIBOR rates. When a supplier is not intending to extend credit but still agrees to accept a LC on usance basis provided the terms of the LC include payment to him on sight basis the importer opens a usance L/C and an international bank (financing bank) discounts it in favour of the beneficiary (i.e.) supplier, and enable him to get the payment at sight basis. The importer has to pay, invoice amount and interest, to the financing bank after the usance period. The interest element is determined on the basis of Libor for the concerned currency. The spread over Libor at which the financing is done ranges from 0.20% to 1.00% depending upon various factors such as the size of the transaction, the usance period.
Why we go for Suppliers Credit:
Suppliers would ask for sight payment where as the buyer (i.e.,) YOU want credit on the transaction. In this model,you can avail cheap credit at LIBOR linked rates and your supplier would also not mind as he is getting funds at sight.
Benefits For Importer:
Availability of cheaper funds for import of raw materials and capital goods
Ease short-term fund pressure as able to get credit
Ability to negotiate better price with suppliers
Able to meet the Suppliers requirement of payment at sight
Benefits For Supplier:
Realize at-sight payment
Avoid the risk of importer’s credit by making settlement with L/C
Process Flow of Transaction
- With transaction details importer approaches “ arranger “ to get suppliers credit for the transaction
- Arranger get an offer from Foreign Banks/ Indian banks at foreign centres on the transaction
- Import confirms on pricing to Foreign Banks and gets LC issued from his bank restricted to Foreign Banks counters with other required clauses.
- Suppliers ships the goods and submits documents at his bank’s counters.
- Suppliers Bank sends the documents to Funding Bank.
- Funding Bank post checking of documents for discrepancies sends the document to importers bank for acceptance.
- Importer accept documents and on that basis Importers Bank provides acceptance to Funding Bank guaranteeing payment on due date.
- Funding Bank based on acceptance, discounts the bill and makes payment to Supplier.
- On maturity, import makes the payment to his bank and importers bank makes payment to Funding Bank.
Modus operandi of Supplier’s credit:
- The importer to open a 180-days L/C (or 60 – 180 days depending on the credit period desired) in favour of the supplier.
- Special clauses are inserted in the L/C for the purpose of financing ( we shall provide the exact wordings of the clauses to be inserted in the L/C )
- The supplier draws 2 drafts - one for the value of the materials and the other for the interest at the pre-determined rate stated in the L/C.
- On shipment the supplier presents the documents along with the drafts to the specified negotiating bank, which is the financing bank.
- The financing bank pays the supplier on sight basis, if the documents are free of any discrepancies.
- Thus the negotiation will be restricted to this financing bank and the bank can also add confirmation to the opening bank’s L/C (if required by the beneficiary).
- The clients opening bank account will then be debited on the 180th day for the invoice value and interest.
- The client will be charged interest only from the date of negotiation and will save interest from the period between the B/L and negotiation (typically a week to 10 days).
If the importer wants an all inclusive cost i.e. negotiation, confirmation and discounting/ financing to the openers account, it can also be arranged.
Sample clauses that are to incorporated in the L/C (Confirmed L/C) at the time of opening is as follows:
- Separate drafts are to be drawn on Funding Bank for 180-days from the date of Lading for the invoice value and interest.
- Credit available by drafts at 180 days from date of Bill of Lading for full invoice value drawn on Funding Bank and also a separate draft for interest from the date of negotiation upto due date (due date calculated at 180 days from the date of bill of lading) drawn on Funding Bank at Libor + Spread or the prime rate of USD whichever is lower. Interest is payable over and above LC value and is payable on due date by the openers.
- All bank charges outside India other than interest are to the account* of the beneficiary / opener (* as per the contract.)
- The L/C is restricted to Funding Bank for negotiation
- The L/C is to be advised through Funding Bank who will add their confirmation.
