Buyers Credit Interest Rates

Buyers Credit Interest Rates

05 Dec 2018 03:20 PM
 

Buyer’s Credit Interest Rate- How Is It Determined?


Buyer’s credit is a short term credit available to an importer from overseas lenders such as banks and other financial institutions for goods they are importing. on the basis of an Standby Letter of Credit (SBLC)  issued by the importer’s bank, the overseas banks lends the funds to an importer by crediting the nostro account of the Issuing bank. The funds received are used to make payment to exporter’s bank against import bill on the due date. These funds are charged close to LIBOR rates, this is less expensive than the local source of funds. They are calculated as LIBOR + Margin rates

LIBOR (London interbank offered rate) is a benchmark rate that represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. LIBOR is an average value of the interest-rate which is calculated from estimates submitted by the leading 11 to 18 global banks on a daily basis..Libor is calculated for five currencies and seven maturities which leads to a total of 35 different LIBOR rates calculated and reported each business day at 11:45 am IST.

The cost involved in buyer’s credit includes Interest cost. This is charged by overseas bank as a financing cost. LIBOR + Spread (maximum 250 bps)& Swift& Negotiation Charges (Charged voluntary by bank) and Withholding Taxes (in case availing trade credit from foreign Banks). Normally it is quoted as say “3M L + 250bps”, where 3M is 3months, L is LIBOR, and bps is Basis Points (A unit that is equal to 1/100th of 1%). To put it simpler: 3M L + 3.50%. One should also check the tenure which is used for LIBOR, as depending on tenure LIBOR will change.

You must fulfill the following conditions in order to avail Buyers credit:

  1. Maximum duration of Buyers credit facility for capital goods is 3 years.
  2. Maximum duration of Buyers credit for Non Capital goods is 1 year.
  3. Maximum credit limit per Buyers credit transaction is $150 Million.
  4. Maximum Maturity in case of import of capital goods for companies classified as Infrastructure sector is up to 5 years from the date of shipment.
  5. No financing is allowed for advance imports.
  6. Ceiling cost of Buyers credit is LIBOR +250BPS (L+250BPS)

Interest rate is calculated by the following process:
Bank mentions interest rate on Offer letter as follows:

  1. 3M L + 50 BPS (volume along with specific Tenure will be mentioned)
  2. 6M L + 50 BPS (volume along with specific Tenure will be mentioned)

For instance, if a customer avails Buyers credit of $100k from financial institution for 90 / 180 days, below interest will be applicable in above two situations

1 USD = INR 69
BPS (Basis Point) = 0.5%
3 Months LIBOR = 2.7%
6 Months LIBOR = 2.8%

Case 1:-

  1. 3M L + 50 BPS = 3.2%

= 100000*69*3.2*90/360*1/100 = 55200

Case 2:-

  1. 6M L + 50 BPS = 3.3%

=100000*69*3.3*90/360*1/100 = 56925

Buyer’s Credit: Advantages

  1. Importers get access to foreign funds at a much cheaper costs as the rate of interest against Buyer’s credit is linked with Libor or Euribor rates are relatively economical than the interest rate of his native country.
  2. Where exporters get paid on the due date of the bill, the importer gets an extended date for making import payments.
  3. The funding currency is dependent on the choice of the customer in any convertible FCY.
  4. Buyer’s credit can be used by an importer to finance imports by way of open account, documentary collections or under an LC.
  5. The funding of currency can be different from that of the currency of imports which allows an importer to take a favourable view of a particular currency.
  6. Payments for goods are normally received by the supplier as per the LC payment terms.
  7. Rollover of buyer’s credit can be requested by the buyer (provided overall tenor is within the regulatory framework).

Buyers Credit Process

In order to avail credit to finance import payments the customers should be an existing current account holder in a bank. Buyer’s credit can be availed on a transaction basis. The RBI, in its circular on external commercial borrowing and trade credit has laid down some parameters on the process flow for importers to access buyer’s credit.

The process flow is represented in the info-graphic mentioned below.


Buyer’s Credit: Expenses Involved in it

  • Interest Costs: Whatever charges that the seeker of this type of credit has to pay overhead the Libor rates are the total cost of finance by the banks. It varies with the funds borrowed. Here, the rates are calculated with libor rates as the base price, which is quoted as (Libor+Margin rates) “3M L+ 250 bps” (here 3M implies 3 month, L is Libor and bps is basis points)

BPS- “Basis Point” is a quantity which is equal to 1/100th of 1% and this is put across as 3M L+ 2.50%
Libor- This differs with the tenure.

  • Hedging Cost:It is a charge the credit seeker needs to pay for hedging transactions to safeguard themselves from risks caused due to volatile currency fluctuations in the market.
  • Currency Risk Premium: This charge is quantified on the risks perceived on the transactions.
  • SBLC/LC- It is a charge that one needs to pay to the local banks for the issuance of SBLC.
  • Withholding Tax (WHT): Itis an extra cost that’s subtracted as tax on the interest paid on the loans borrowed. The rates charged by the overseas lenders are net of taxes. This is therefore grossed up while the calculation of interest is made.
  • Export Credit Agency (ECA) Guarantee Charges: It is a charge paid mainly to avail the facility of credit insurance or financial guarantee.
  • Additional Charges: On maturity, one needs to make A2 payments, charges for documents 15CA and 15CB, intermediary bank charges, out of pocket charges etc.

For Forex risk management and transaction forex risk advisory, you need to consider taking an expert solution offered by reliable Forex and Trade Finance service providers.

Benefits of Taking Buyer’s Credit via Vital Support from Myforexeye

One of the vital aspects of deriving this kind of credit facility is to keep a tap on the interest rate cost. While negotiating with the banks can stand out to be a great challenge for any importer, with the help of Myforexeye however this challenge too can be mitigated in best ways. We are in this service business for quite some time now. We make a gamut of transactions and for this; we generally reach out to overseas banks. This therefore allows us to negotiate with banks to lower their interest rates on buyer’s credit. Quick check on how we can help you out to finance your import payments-

  1. We are India’s first and leading technology platform that offers buyers attractive and lowest quotes for buyers credit interest rate from 99+ banks.
  2. We cut down overspent time on price discovery and also eliminate unnecessary bargaining and negotiations with multiple brokers/banks to derive best rates.
  3. Import clients get a chance to access the client web portal in order to book import financing transactions from any place that he is situated in.
  4. Get benefitted with the help of live chat support with dealers as well as back office support too. We also provide speedy auto quote support in case of transaction roll over.
  5. Avail support from pro active team operating in all time zones within 7am to 11pm

Why wait long? Add your deal now and get benefitted in deriving credit facility to finance your import payments.

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