Trade Credit – Buyer’s Credit
In Indian context, this facility is provided by overseas banks / foreign branches of Indian banks to the importers of capital goods and raw material
through Indian Banks to its customers (importers) towards payment of imports in India. The overseas bank either (i) credits the amount of Buyer’s credit in the NOSTRO account of the Indian bank and the Indian bank remits the funds to the overseas supplier of the importer for payment of import bill or (ii) remits the funds to the overseas supplier of the importer for payment of import bill of the importer.
The typical flow of transaction of Buyer’s Credit (with underlying import through LC transaction) is as follows:
1) The borrower imports goods from foreign supplier against Foreign Letter of Credit (FLC) drawn in favour of foreign supplier;
2) The borrower either through its Indian bank or on its own approaches foreign bank (or overseas / foreign branches / offices of Indian banks) for availing Buyer’s Credit for payment to be made to the foreign supplier;
3) The Letter of Comfort is issued by Indian bank to the foreign bank on approval of terms and conditions through SWIFT message for the proposed
Buyers Credit;
4) The foreign Bank remits funds to the NOSTRO Account of Indian bank which is handling import transaction, on the strength of the Letter of Comfort (LoC)/ Letter of Undertaking (LoU) which is issued by the Indian bank in its favour;
5) The Indian bank remits the funds to foreign supplier through its NOSTRO Accounts;
6) The Indian bank subsequently retires and reverses the Letter of Credit in its book and passes another entry for creation of a non-fund based (contingent) liability of Letter of Comfort;
7) On the due date of Buyer’s Credit, the Indian bank remits the funds (inclusive of interest) to the overseas bank and recovers the similar amount from its customer;
8) With respect to liability towards Letter of Comfort, the Indian banks accounts for the same as a “Contingent Liability”.
The entries of the inward and outward remittances (specified in steps 3 and 4) are to be recorded in the books of accounts (NOSTRO Mirror Account) of the Indian bank.
Following documents are required to be verified by the statutory auditors during review of Buyers’ Credit Transaction and its accounting treatment in the Indian Bank’s books.
1) (Loan) Agreement, if any, entered between the Indian importer (borrower), overseas bank (lender), the Indian bank (facilitator);
2) SWIFT messages originated by overseas bank specifying the terms of Buyer’s Credit;
3) The calculation of contingent liability towards LoC/ LoU is inclusive of interest accrued on the Buyer’s Credit as on financial statement date;
4) Documentation / Agreement between overseas bank and Indian bank, and, any further confirmatory documents exchanged between overseas bank and Indian bank;
5) Review of documents specifying right of recovery against borrower, in case if the borrower defaults in repayment of Buyer’s Credit;
6) Balance confirmations obtained from the overseas bank;
7) Charge created in records of RoC related to the security offered for Buyer’s Credit vis-à-vis disclosure of Buyer’s Credit in the financials of borrowers as secured / unsecured loan;
8) Acknowledgement of debt, if any, obtained from the borrower;
9) The calculation of drawing power for working capital finance availed by the borrower is net of the Buyer’s Credit;
10) Form 15CA / Form 15CB compliance made by the borrower.