Buyers Credit against Standby Letter of Credit (SBLC)

Buyers Credit against Standby Letter of Credit (SBLC)

23 Aug 2019 04:49 PM
 

As per Ex Finance Minister of India, Mr Arun Jaitley’s detailed report presented in the parliament, there were fraudulent letter of undertakings (LOUs) issued by Nirav Modi’s companies between March 2011 and May 2017. Furthermore, 16 fake LOUs per month over the course of six years were traced contributing to fraud perpetuated by jewellers Nirav Modi and Mehul Choksi. This was then that RBI had decided to discontinue the practice of issuance of Letter of Undertaking (LOUs) / Letter of Comfort (LOCs) for trade credits for imports into India with immediate effect. (Source:-Report)

However, considering the fact that India is an import driven country, the Reserve Bank of India(RBI) circular clearly stated that banks may continue to issue Letter of Credit (LCs) and issue bank guarantee for Trade Credit subject to compliance with RBI guidelines. Thus, bank guarantees (also known as Standby letter of Credit - SBLC) backed Buyer’s Credit is what Importers in India have started availing in order to access affordable cost of borrowing to make timely payments to their supplier for goods imported.

(For detailed reference to know the difference between Suppliers Credit and Buyers Credit, do refer to our previous article).

SBLC Backed Buyer’s Credit-Insight

Ever since the Reserve Bank of India had decided to discontinue the process of issuance of LOU/LOC for Buyers Credit, it is now the use of Standby Letter Of Credit (SBLC) which is used to arrange Buyer’s credit.

This facility is provided to the importers by few Indian Bank situated overseas (funding banks) as per the guidelines issued by the RBI. It is a guarantee issued by banks in India on behalf of the clients. The issuing bank guarantees the payment to the funding bank if the client fails to make the payment.

Importers importing capital goods can raise funds under the Buyer’s Credit against SBLC route for up to three years. Those businesses importing non capital goods can raise funds for up to one year or less based on the varying requirements of the individual business.

The RBI had introduced changes in the existing Trade Credit norms recently by issuing A.P. (DIR Series) Circular No. 23 dated March 13, 2019. Myforexeye’s Trade Finance Research department had covered the changes in the circular for your reference. Click here to get the highlights in detail.

Why is SBLC being transmitted inMT760 and notMT799?

The primary logic behind the moving of MT799 to MT760 is mainly due to the contributing factors-

  1. Swift MT760 message format is far more auditable in nature.
  2. MT760 is a more structured message format as against MT799 that is more an open
  3. The MT799 is usually used as a pre-notification message usually followed by a return MT799 as acknowledgment whereas MT760 is a one-sided structured notification of a financial obligation.
  4. Unlike MT799 which is a ‘free format Swift Message’, MT760 provides report generation facility.

How can Myforexeye Assist you?

Myforexeye is an emerging Fintech start-up dedicatedly working towards helping the MSMEs and large corporates in managing both FOREX and trade finance needs in best ways. We assist companies in addressing the unmet demand in terms of credit and financial guidance. With our latest technology and manpower assistance offered by veterans from trade finance industry, many businesses have benefitted largely in unleashing their business growth prospects. For better insight, feel free to view our customer testimonials.

We can arrange quotations from 99+ offshore banking institutions including both Foreign and Indian Origin Banks towards Trade Credit for our clients. These transactions are completely backed by SBLC issued by the banks in India or under an LC issued by banks in India.

Assistance from our trade finance experts helps in streamlining the overall process required to obtain trade credit in foreign currency. Through our secure and user-friendly digital platform- which includes a web portal and mobile app, clients can view instant quotes as well as calculate interest cost.

We aim at helping clients save big by providing them the lowest rate and avoid paying any hidden commission fee to the banks. For any queries, we have a dedicated support team assisting the clients in addressing their issues by offering relevant information.