Spread on buyer's credit has fallen below 100 basis points from 160 basis points in February 2012.

MUMBAI: Spreads on buyer's credit has fallen below 100 basis points from 160 basis points in February 2012.

Buyer's credit means the buyer or the importer arranges credit from foreign bankers to pay the overseas seller. The buyer gets his local bank to take quotes from overseas banks or branches on the cost of funds for the intended buyer, based on his credit quality. The spread is calculated over the LIBOR or London interbank offered rate.

According to a report published by Mecklai Financial, "Things started to deteriorate in September, when the rupee shot towards 48, then 49; spreads crossed 200 bp. By October/November, with the crisis in full flight, spreads crossed 250 bp and remained there till January, when the ECB's LTRO brought some liquidity into the system and spreads started to decline,"

But the decline did not impact the business volumes, since the import demand was more or less inelastic, though it negated the arbitrage opportunity that importers earlier had, of the buyers' credit route over local funding.

"Since the rupee's collapse began around mid-April, prices have tightened again, but, in our view, remain surprisingly reasonable at below 120 basis points for transactions in excess of $ 1 million. Smaller transactions have moved up more sharply, and we would see 150 basis points as an attractive spread for deals under $ 500,000," Mecklai Financial report said.

The rupee has fallen by over 12% since February, to historic lows of 56.40 per dollar.