Let us start this topic with the broader perspectives first. The bank credit facilities from Scheduled Commercial Bank was INR 182.44 Lakhs crore as on 31st March, 2025. Credit growth of Scheduled Commercial Banks stood at 12.1% in FY25, reflecting a broadly based expansion driven primarily by the retail, services, and agriculture sectors. For corporate borrowers specifically, the overall trend was healthy — industrial credit grew, large infrastructure projects (especially power sector) continued to absorb significant bank lending, and MSME credit outpaced large corporate credit growth significantly. NBFC outstanding credit was Rs. 48.39 lakh crores. Now, let us explore how corporates and other entities raise bank credit facilities.
1. Bank credit: It is a broad term encompassing total amount of borrowed funds through various types of credit facilities from bank and other financial institutions. The facilities can be fund based or non-fund bank. The fund based credit includes cash credit (CC), overdraft (OD), Term loan, working capital demand loan and bill discounting and factoring. Non-fund based credit facilities include Letter of Credit (LC), Bank Guarantee (BG), Letter of Undertaking (LoU), Performance Guarantee and Deferred Payment Guarantee.
2. Cash Credit (CC) : It is a revolving facility. Bank gives corporate a sanctioned limit. Within that limit, one can borrow, repay and gain borrow. You will be charged interest on the amount actually utilized by you within that limit.
3. Overdraft (OD): Here, a corporate can raise the short term facility. But you will have to give specific collateral, which can be fixed deposit or receivables.
4. Term Loan: The loan is given to purchase capital assets like plant and machinery, buildings etc. It is usually for 3-5 years. For availing the term loan, your DSCR (Debt Service Coverage Ratio) must be greater than or equal to 1.25x. The acquired property must be mortgaged/hypothecated. You can repay the loan through EMI or structured instalments. The interest rate is repo linked to Marginal Cost of Fund based Lending Rate (MICR) based floating rate.
5. Working Capital Finance: First of all, your maximum working capital borrowing capacity is evaluated, based on Tandon Committee norm. Accordingly, from the net working capital requirements, 25% margin needs to be paid by you. The balance amount is the Maximum Permissible Bank Finance. This is your upper limit and the bank will finance within that, considering any outstanding loan.
6. Letter of Credit (LC): It is the widely used non-fund based credit facility. Herr, your bank (Buyer) gives a written undertaking that it will pay to the seller, a specified amount. The condition is the seller presents the documents as per LC. Let us understand LC through an example. You (Buyer) approaches your bank HDFC Mumbai branch to open LC for USD 2 million in favour a Saudi Company SABIC and it will be valid for 120 days. HDBC Bank issues LC and transmits it via swift to the bank of the seller, say, Arab National Bank. The seller ships goods to you and presents the specified documents to its bank Arab National Bank. The specified documents are Commercial Invoice, Packing List, Bill of Lading, Certificate of Origin, Insurance Certificate. Now, Arab National Bank after verification of documents, will send them to HDFC Mumbai. Your bank HDFC will pay to Arab National Bank and will send you the documents. You will pay your bank after specified period.
7. Regulation of LC: Terms of LC are governed by Uniform Customs and Practice for Documentary Credit. In case of foreign LC, Bill of Entry and Form A1/A2 needs to be filed for outward remittance.
Types of LC:
- Usance LC- Payment is deferred -from 30 to 180 days from B/L date or sight. This way, the buyer gets the credit.
- Standby LC- This is common in USA. It serves as a payment guarantee and can be invoked only on default.
- Red Clause LC- Advance is paid to the seller before shipment of goods. The amount is noted in red clause. This is common in commodity trade.
- Green Clause LC- Here, the advance is given for warehousing cost as well.
- Back to bank LC- The middle man opens master LC and uses it as collateral for opening LC for actual supplier.
- Confirmed LC- The confirming bank adds its own undertaking to the LC, if the issuing bank country is risky.
Cost Components of LC: While opening and managing LC, you will be required to pay certain charges.
- LC opening commission- 0.15% to 0.50% per quarter on LC value.
- LC amendment charges- Rs.1000 to Rs. 5000/- per amendment plus SWIFT charges
- Document negotiation/discounting charges- It varies from 0.15% to 0.25% per quarter.
- LC Confirmation Charge- 0.25% to 2% depending on issuing bank country risk.
- SWIFT Transmission- Rs. 500 to Rs. 2000/- per message.
- Usance (Period of use)/Acceptance charges- It is charged for deferred payment/acceptance commission.
7. Buyer’s Credit: It is like a credit given an overseas bank. You are an importer in India and importing some goods or services from a foreign country. The lending overseas bank pays to the seller on your behalf. You will repay to that bank in future. How does it work out? You approach your bank requesting for arranging Buyer’s credit in a particular country. Your bank will issue a Buyer’s Credit Confirmation Letter. That will be giving assurance to the overseas bank to pay to the seller on your behalf. The interest rate is based on SOFR (Secured Overnight Financing Rate, USA) / EURIBOR (Daily Reference rate in Europe) + spread.
Regulatory Framework for Buyers’ Credit: Buyer’s credit for imports comes under ECB/Trade Credit Guidelines issued by RBI under FEMA. Maximum all- in-cost ceiling is specified by RBI. The maximum tenure of import of capital goods is 3 yeas from the date of shipment. The AD bank reports to RBI on monthly basis.
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In case you have any concern and queries or need any support for raising fund/credit facilities, you may like to contact us.
Abhinarayan Mishra, FCA, FCS; LL.B, IP, RV, Partner, KPAM & Associates, Chartered Accountants, Dwarka, New Delhi; +9910744992, ca.abhimishra@gmail.com
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