Buyer Credit

Buyer credit is a form of trade finance in which a bank or other lender, usually in the exporter's country, lends money to the foreign buyer, or to the buyer's bank, so that the buyer can pay the exporter on cash terms. The exporter is paid on shipment or against contract milestones, while the buyer repays the lender over time under a separate loan agreement.

Buyer credit is the counterpart of supplier credit, in which the exporter itself grants deferred payment. Medium- and long-term buyer credits for capital goods and projects are often guaranteed or insured by an export credit agency (ECA). The term has a second, narrower meaning in South Asia: in India, "buyer's credit" usually refers to a short-term foreign currency loan from an overseas bank that an Indian importer uses to pay for imports.

When someone buys a car with a bank loan, the dealer is paid in full on the day the car leaves the showroom, and the buyer then repays the bank month by month. The dealer does not care whether the buyer later misses a payment; that is the bank's problem.

Buyer credit works the same way for international deals. The exporter is the dealer, the importer is the car buyer, and a bank in the exporter's country is the lender. Because a foreign buyer can be hard for that bank to judge, a government export agency often promises to repay the bank if the buyer fails. The arrangement lets large deals go ahead without the exporter having to wait years for its money.

1. The exporter and buyer sign a commercial contract on cash terms, with the buyer making a down payment, traditionally at least 15% for officially supported deals.
2. A lender signs a separate term loan with the buyer, or with the buyer's bank, for the remaining amount; large deals may use loan syndication.
3. An ECA guarantees or insures most of the loan against commercial and political default, charging a premium set under the OECD Arrangement.
4. The lender pays the exporter directly as shipments or milestones are completed, against documents such as invoices and bills of lading.
5. The buyer repays the loan, usually in equal half-yearly instalments, at a floating rate such as SOFR plus a margin, or at a fixed official rate.

A bank-to-bank variant, often called a line of credit, is extended to a bank in the importing country, which then on-lends to many smaller local buyers of goods from the exporting country. The ECA cover reduces the capital a lender must hold under Basel III, which is one reason banks price ECA-backed buyer credits tightly.

In buyer credit the exporter's balance sheet is clean: it has no long receivable and no exposure to the buyer after delivery, apart from its contractual duties to perform. The cost is more paperwork, because there are two separate contracts, the lender and the ECA examine the buyer and the project, and the exporter may need to meet content rules showing that enough of the goods come from the ECA's country. Supplier credit is simpler but leaves the exporter carrying, or arranging to sell, the credit. Larger and longer deals therefore lean towards buyer credit, while smaller deals use supplier credit refinanced through forfaiting or insurance.

In Indian practice, buyer's credit is a short-term loan in a foreign currency, typically US dollars, from an overseas bank or an overseas branch of an Indian bank to an Indian importer, used to pay the foreign supplier at sight or on maturity of a usance bill. Importers used it because overseas dollar rates were lower than domestic rupee rates. The Reserve Bank of India treats it as a trade credit under its rules on external commercial borrowings and trade credits, which limit purpose, period and cost.

The overseas lender traditionally relied on a letter of undertaking (LoU) from the importer's Indian bank. On 13 March 2018, after the Punjab National Bank fraud in which LoUs were issued without proper sanction, the Reserve Bank of India discontinued LoUs and letters of comfort for trade credits for imports. Letters of credit and bank guarantees remained permitted. The case remains a standard example of control failures in import trade finance.

• Credit and country risk. The lender, and the ECA behind it, depend on the buyer and on the country's ability to transfer foreign exchange; sovereign risk is central for public buyers.
• Currency risk. An importer borrowing in dollars while earning in local currency carries foreign exchange risk, often hedged with a forward contract.
• Interest rate risk. Floating-rate loans expose the buyer to rising rates, which is why some ECAs offer fixed rates.
• Debt sustainability. Large ECA-backed loans to governments can add to unsustainable public debt and end in debt restructuring.

• OECD: Export credits
• Reserve Bank of India