Usefulness Of Buyers Credit

Buyer's credit in India is a financing arrangement that allows an importer (buyer) to obtain short-term credit from a foreign lender or bank to finance the purchase of goods or services from overseas suppliers. It is a form of trade finance that helps Indian importers secure funding for their import transactions. Buyer's credit is typically used when the importer does not have immediate access to the required funds or wishes to take advantage of more favorable financing terms offered by foreign lenders.


Here are key features and aspects of buyer's credit in India:


1. Purpose:


  • Buyer's credit is used by Indian importers to finance the purchase of goods, machinery, equipment, or services from foreign suppliers. It is particularly useful when dealing with high-value imports.


2. Foreign Lender:


  • The credit is extended by a foreign bank or financial institution located in the exporter's country or another international financial center. The foreign lender provides the credit facility to the Indian importer.


3. Types of Buyer's Credit:


  • Buyer's credit can take various forms, including short-term loans, lines of credit, and other credit facilities. The specific structure of the credit arrangement can vary depending on the terms negotiated between the importer, exporter, and foreign lender.


4. Tenure:


  • Buyer's credit is typically short-term in nature, with repayment terms ranging from a few months to a few years, depending on the importer's needs and the terms agreed upon with the foreign lender.


5. Interest Rates:


  • The interest rates on buyer's credit are usually competitive and can be based on various benchmarks, such as LIBOR (London Interbank Offered Rate) or other reference rates. Importers can negotiate the interest rate with the foreign lender.


6. Payment Assurance:


  • Buyer's credit provides payment assurance to the exporter, as the foreign lender pays the exporter directly on behalf of the Indian importer. This assures the exporter that they will receive payment for the goods or services supplied.


7. Application Process:


  • Importers apply for buyer's credit through their Indian bank, which acts as an intermediary between the importer and the foreign lender. The Indian bank assesses the importer's creditworthiness and facilitates the credit arrangement.


8. Documentation:


  • To obtain buyer's credit, importers need to provide relevant documentation, including a letter of credit (LC) or a purchase order, as well as details of the import transaction. The Indian bank and foreign lender may also require additional documentation to evaluate the credit request.


9. Currency:


  • Buyer's credit is typically denominated in foreign currency, allowing the importer to pay the overseas supplier in the supplier's preferred currency. This can help manage exchange rate risks.


10. Repayment: - The Indian importer is responsible for repaying the buyer's credit facility to the foreign lender according to the agreed-upon terms. Repayment is typically made in the foreign currency.


11. Regulatory Framework: - The Reserve Bank of India (RBI) regulates and oversees buyer's credit transactions to ensure compliance with foreign exchange regulations and trade finance guidelines.


Buyer's credit provides Indian importers with a flexible and cost-effective financing option for their international trade transactions. It allows them to access funds from international lenders, negotiate favorable terms, and manage their cash flow effectively when importing goods or services from foreign suppliers.