Supplier's Credit - Overview

Supplier's Credit: 

 

I would like to restrict this topic considering Importer in India. Overall concept remains same. However local regulation shall be applied as per importer’s country.

First of all, we need to check how Reserve Bank of India (RBI – India’s central bank) has defined a trade credit. “Trade Credits (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. Depending on the source of finance, such trade credits include suppliers’ credit or buyers’ credit. Suppliers’ credit relates to credit for imports into India extended by the overseas supplier, while buyers’ credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers’ credit and suppliers’ credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines”     

Overall concept remains same. Suppliers Credit is a financing arrangement under which supplier (seller) extends credit to a foreign importer (Buyer).

Through Supplier’s credit importers can avail cheaper loan pegged to LIBOR rates and agreed margin. This margin should be within range as prescribed by central bank of importer. In India as on date (26/03/2014) ceiling is 6M Libor + 350 bppa. Present market rate being offered may be much lower than the ceiling rate mentioned. 

Investopedia defines LIBOR as “An interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.”

Amount and Maturity:

Authorised Dealers/ banks are permitted to approve trade credits for imports into India up to USD 20 million per import transaction for imports permissible under the current Foreign Trade Policy of the DGFT with a maturity period up to one year (from the date of shipment). For import of capital goods as classified by 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 less than three years (from the date of shipment). No roll-over/extension will be permitted beyond the permissible period.

The companies in the infrastructure sector, where “infrastructure” is as defined under the extant guidelines on External Commercial Borrowings (ECB) by RBI have been allowed to avail of trade credit up to a maximum period of five years for import of capital goods as classified by DGFT subject to conditions that the trade credit must be abinitio contracted for a period not less than fifteen months and should not be in the nature of short-term roll overs. However, the condition of 'abinitio' buyers'credit would be for 6 (six) months only for trade credits availed of on or before December 14, 2012.

AD banks shall not approve trade credit exceeding USD 20 million per import transaction.

The period of trade credit should be linked to the operating cycle and trade transaction

Why Suppliers Credit:

Cheaper Loan

Extended Credit Period

Various cost associated with Suppliers Credit:

There ain't no such thing as a free lunch. Let’s see various costs associated.

A. Financing Cost

• LIBOR : Libor rate of the agreed date. 
• Spread over LIBOR : Interest charged over and above the LIBOR. Care: Ensure this spread is within limit approved by central bank.

B. Operational Costs

• LC Opening Charges: As agreed with importer’s bank
• Hedging Charges: When the importer wants to restrict the liability of the Supplier Credit in local currency, he can do so by booking a forward contract / option on the same and the forward premium / option cost to be added to the total cost of availing Suppliers Credit
• Funding Bank LC Confirmation Cost
• Acceptance Charges
• LC Advising and/or amendment cost
• Negotiation Cost
• Postage and Swift Charges
• Reimbursement Charges

 

 

Reference: RBI Master Circular on External Commercial Borrowings and Trade Credits