Buyers Credit against Standby Letter of Credit (SBLC)

(This article was originally published on Myforexeye Fintech Pvt Ltd)

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.

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.

Source Reference: Click Here

How Prolonged Inflation Can Affect Foreign Exchange Rate

Inflation is not just one factor which causes volatility in foreign exchange rate, yet it is considered to be one of the major influencing factors. This is mainly because, inflation hits hard on the value of a currency through its negative effect. A particular currency of any country becomes weaker compared to the other currencies as its purchasing demand lowers down.

Inflation- Meaning

Common explanation of the term inflation refers to a persistent rise in prices over time. It indicates a free market principle of supply and demand. When the demand for a product is greater than the supply (in a free and open market) in such situations, the prices of that product tends to increase. Inversely, when supply is greater than demand in such a situation we find prices go down. Simply put, with too much of product supply in the market each unit loses value.

Technically speaking, inflation is not so much about an increase in prices, but the decrease in the buying power of the dollar. Investors who deal with international goods or services are hugely affected by forex rates. The higher inflation rates can cause exchange rate depreciation, potentially leading to higher import prices.

It even leads to higher inflation and more depreciation in the foreign exchange rate. This is relatively a rare situation and should not be often observed, provided that periods with high inflation are usually met with an increase in domestic interest rates.

This article was first published by Myforexeye

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