Buyer's Credit: Meaning, Process, Cost and RBI Rules for Indian Importers

Buyer's credit is a short-term loan arranged for an Indian importer by an overseas bank, used to pay the overseas supplier upfront. The purpose of buyer's credit is to finance an import transaction, and the basis for granting it is a guarantee, usually a Standby Letter of Credit (SBLC) or Bank Guarantee, from the importer's own bank in India.

For an importer, buyer's credit solves a timing problem: the supplier wants payment on shipment, while your cash may only free up once you have sold the goods.

It is a form of trade credit, so it helps to understand that wider concept alongside it.

This guide covers how buyer's credit works, how it differs from supplier's credit, the security behind it, whether it is still allowed after the 2018 regulatory change, its cost in the post-LIBOR world, and the RBI limits that govern it.

This is general information, not financial advice. Trade credit terms and eligibility depend on your bank and RBI rules current at the time, so confirm with your authorised dealer (AD) bank.

Buyer's credit brings in a third party, an overseas lender, to fund the payment to your supplier. The flow runs like this:

• The importer agrees a purchase with an overseas supplier and needs time to pay.
• The importer's bank in India issues a Letter of Comfort or SBLC/Bank Guarantee in favour of the overseas lender, promising repayment.
• The overseas lender (often an offshore branch of a bank) pays the supplier on the due date, usually into the supplier's account through the importer's bank's nostro account.
• The supplier is paid in full, on time, and the trade proceeds.
• The importer repays the overseas lender at maturity, in foreign currency, along with interest.

Because the funding is in foreign currency and priced off international rates, it is typically cheaper than a rupee working-capital loan.

The trade-off is foreign-exchange risk, which is why importers often take forward cover to compare a locked cost against an open one before committing.

Both give the importer time to pay, but the lender differs. This is one of the most searched distinctions in trade finance.

In short, buyer's credit is financing arranged by the buyer's side through an outside lender, while supplier's credit is deferred payment extended by the seller's side.

Buyer's credit is only extended against a solid guarantee, because the overseas lender does not know the Indian importer directly. That guarantee comes from the importer's Indian bank in one of these forms:

• Standby Letter of Credit (SBLC): a bank promise to pay the lender if the importer defaults. This is the common instrument today. Our explainer on the standby letter of credit covers how it is issued.
• Bank Guarantee (BG): a similar undertaking by the importer's bank.
• Letter of Undertaking (LoU) / Letter of Comfort (LoC): the instruments once used for this purpose, now restricted (see below).

The guarantee is transmitted between banks over secure SWIFT messages such as MT760. It is the guarantee, not the importer's standalone credit, that makes the overseas lender comfortable to fund.

Yes, buyer's credit itself is permitted, but the way it is secured changed after a major fraud.

On 13 March 2018, following the Punjab National Bank fraud, the RBI discontinued the use of Letters of Undertaking (LoU) and Letters of Comfort (LoC) for trade credit. This is the single fact most older guides miss.

The important distinction: the RBI banned the specific instruments (LoU/LoC), not buyer's credit as a facility. Since then, buyer's credit is routed through SBLCs, Bank Guarantees or Letters of Credit, which carry stronger controls and reporting.

If a source still describes buyer's credit running on a Letter of Undertaking, it is out of date.

Buyer's credit is priced off an international benchmark plus a margin. Two changes matter here:

• LIBOR has been retired. Since mid-2023, benchmarks such as SOFR (for US dollars) or other alternative reference rates have replaced LIBOR. Any current buyer's credit quote is benchmark-plus-spread on one of these.
• The all-in-cost ceiling. Under the RBI's framework for trade credits, the all-in cost is capped at the benchmark rate plus 250 basis points per annum, as of the RBI Master Direction in force. Confirm the current ceiling with your AD bank.

The full cost stack usually includes:

• Interest: benchmark (for example SOFR) plus a spread.
• Arrangement / SBLC issuance fee: a percentage of the facility, charged by your Indian bank.
• Forward cover cost: to hedge the foreign-currency repayment, protecting against a weaker rupee. See fx hedging and the spot rate vs forward rate guide for how this is priced.
• Withholding tax, where applicable on interest paid abroad.

Illustrative example (figures for illustration only): An importer funds a $500,000 purchase for one year. A rupee working-capital loan might cost around 10% a year.

A buyer's credit priced at SOFR plus a spread might come to roughly 6% a year, plus an SBLC fee of about 0.75% of the amount.

On paper the foreign-currency route is cheaper, but if the rupee weakens over the year, the repayment costs more rupees, which is why the forward-cover cost belongs in the comparison. Always run your own numbers with your bank before deciding.

Buyer's credit is a form of trade credit and sits inside the RBI's rules for it. Key parameters, as of the current framework, are:

• Amount: up to USD 50 million (or equivalent) per import transaction for most goods, and up to USD 150 million for sectors such as oil and gas, airlines and shipping.
• Maturity: up to one year (or the operating cycle) for non-capital goods, and up to three years for capital goods, from the shipment date.
• Reporting: trade credits are reported to the RBI, historically through Form ECB filings routed via your AD bank.
• End use: the funds must pay for the underlying import, not be diverted.

These figures are set by the RBI and revised from time to time, so treat them as current-framework values as of August 2026 and verify before you transact.

The process runs mostly through your Indian bank, which acts as the bridge to the overseas lender.

• Confirm eligibility and the import. You need a genuine import transaction with valid documents (proforma or commercial invoice, bill of lading or airway bill) and headroom within your bank limits.
• Get a quote. Your bank, or a broker working with it, sources an indicative rate (benchmark plus spread) and tenure from an overseas lender.
• Arrange the guarantee. Your bank issues the SBLC or Bank Guarantee in the lender's favour, transmitted over SWIFT.
• Disbursement. The overseas lender pays the supplier on the due date through the nostro account, and the supplier is settled in full.
• Reporting. The trade credit is reported to the RBI through your AD bank.
• Repayment at maturity. You repay the lender in foreign currency, plus interest, ideally covered by a forward contract booked earlier.

Keeping the invoice, shipping and payment documents aligned throughout is what keeps the facility compliant and the repayment clean.

Advantages

• Cheaper funding than a domestic rupee loan, because it is priced off international rates.
• The supplier is paid on time, which protects the relationship and can earn you better pricing.
• Working-capital relief, since you pay the lender at maturity rather than the supplier upfront.

Risks

• Foreign-exchange risk on the repayment, unless hedged.
• Rollover and benchmark risk if rates move against you.
• Bank charges (SBLC fee, arrangement fee) that erode the interest saving on small tickets.

When it fits: larger, recurring imports where the interest saving comfortably exceeds the SBLC and hedging costs, and where you can manage the currency exposure. For smaller one-off imports, the fees can outweigh the benefit.

Buyer's credit handles the financing of an import. It does not remove the separate job of actually moving money across the border, both the lender paying the supplier and, on other imports, you paying suppliers directly.

Those payments carry their own FX markup and compliance requirements under FEMA, including the correct purpose code for outward remittance and accurate documentation.

For importers paying suppliers directly rather than through a credit facility, a cross-border payments platform reduces the FX and admin drag.

Compared with paying through a bank, where the FX markup is wide and hidden, this keeps more of each payment with you, whereas the financing itself still comes from your bank.

Xflow holds a final Payment Aggregator - Cross Border (PA-CB) authorisation from the RBI for both exports and imports, as of February 2026, so import payments settle with transparent, mid-market-based FX and the compliance handled as part of the flow.

For the wider mechanics, see cross-border payments in india. Note that Xflow provides the payment and compliance layer, not the credit facility itself, which your bank arranges.

Trade terms such as incoterms also shape who pays for what along the shipment, so read them alongside your financing choice.