Exporter’s prefers to sell merchandise on sight terms or a maximum usance period of 180 days from date of shipment. However, importers prefer to buy on a usance terms and at times, beyond 180 days depending on the cash flow position. This cash flow mismatch need can be taken care by the banks through an import buyers credit offering. The local bank through their offshore offices arranges foreign currency financing to pay off the exporter on due date of the transaction.
Definition of Buyer’s Credit as per Wikipedia, the free encyclopedia
Buyer’s credit is the credit availed by an Importer (Buyer) from overseas Lenders i.e. Banks and Financial Institutions for payment of his Imports on due date. The overseas Banks usually lend the Importer (Buyer) based on the letter of Credit (a Bank Guarantee) issued by the Importers (Buyer’s) Bank. In fact the Importers Bank brokers between the Importer and the overseas lender for arranging buyers credit by issuing its Letter of Comfort for a fee.
Buyers credit helps local importers access to cheaper foreign funds close to LIBOR rates as against local sources of funding which are costly compared to LIBOR rates.
Benefits of Buyers Credit:
The benefits of buyers credit for the importer is as follows:
• The exporter gets paid on due date; whereas importer gets extended date for making an import payment as per the cash flows
• The importer can deal with exporter on sight basis, negotiate a better discount and use the buyers credit route to avail financing.
• The funding currency can be in any FCY (USD, GBP, EURO, JPY etc.) depending on the choice of the customer.
• The importer can use this financing for any form of trade viz. open account, collections, or LCs.
• The currency of imports can be different from the funding currency, which enables importers to take a favourable view of a particular currency.
Process Flow for Buyers Credit on Bank Lines:
The process flow for availing buyer’s credit:
1) The Indian customer will import the goods either under DC, Collections or open account
2) The Indian customer request Bank in India before the due date of the bill to avail buyers credit financing
3) Importer arranges to send a co-acceptance (indemnity) from his existing banker to Bank in India
4) Importer’s existing banker marks his import limits and sends the co-acceptance (indemnity) to Bank in India
5) Based on this Bank in India will arrange funding by sending a co-acceptance to the funding bank.
6) The funding bank will credit the importer’s bank Nostro account for the required amount.
7) Importer’s existing banker will retire the import bill by utilizing the amount credited.
8) Bank in India to recover the principal and interest amount from the importer’s bank and remit the same to funding bank on due date.
The importer wanting to avail Buyer’s Credit from Bank in India should be an existing customer of the Bank holding a current account with them . Some banks offer this on transaction basis even without a current account.
The above are general guidelines , every Bank will have their own procedures and policies which might vary from Bank to Bank.
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