FORFAITING
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It is a mechanism of financing Exports
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By discounting Export Receivables
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Evidenced by Bill of Exchange
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Without recourse to the Exporter
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On a fixed rate basis
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Upto 100 % of Contract Value
Major Conditions
Contract in Major Currencies e.g. US $, Deutsche Mark,
Sterling Pound, Japanese Yen
Minimum Contract Value US$ 5,00,000
Duration of Receivable between one year and five years
Availability of Forfaiting Quote will depend upon
Forfaiting Agency’s perception of Risk Quality of
Export Receivables from that country
How does forfaiting work?
(A)
Indian Exporter negotiates with prospective buyer for
Quantity, Price, Currency of Payment, Delivery Period,
Credit Terms
(B)
Exporter obtains (through Exim Bank) indicative forfaiting
quote from forfaiting agency including discount, commitment
fees and documentation fees
(C)
Exporter finalises terms with the buyer in such a way that
discounted proceeds equal to price on cash payment terms
Exporter finalises terms with Forfaiting Agency (through Exim
Bank)
(D)
(E)
Exporter enters into commercial contract with buyer and also
executes contract with Forfaiting Agency (through Exim Bank)
Exim Bank issues a certificate to the exporter regarding
commitment fees and discounting charges
(G)
Exporter ships the goods to the buyer
(H)
Exporter sends invoice to the buyer along with Bill of Exchange
for buyer’s acceptance and co-acceptance avalisation by
buyer’s banker.
Avalised Bill of Exchange comes back to Exporter
(I)
(J)
(K)
Exporter endorses avalised Bill of Exchange to Forfaiting agency
with words “ without recourse ”
Forfaiting Agency pays discounted value to the Exporter
On maturity of Bill of exchange, Forfaiting Agency collects
payments from Aval
What is the role of Exim Bank?
•
Exim Bank acts as a facilitator between Exporter
and overseas Forfaiting Agency
•
At the request of an Exporter, Exim Bank obtains indicative
and firm Forfaiting quotes discount rate, commitment charges
and documentation fees
•
Exim Bank receives avalised Bill of Exchange and sends to
forfaitor for discounting.
•
Also arranges for discounted proceeds to be remitted to Exporter
•
Exim bank also issues appropriate certificates to enable Exporter
to remit commitment charges and other fees.
What is a commitment fee?
Fee payable by Exporter to Forfaitor for latter’s commitment
to forfaiting transaction at a firm discount rate within specified time.
It is essentially an opportunity cost for Forfaitor.
What is a discounting fee?
Interest payable by Exporter for the total credit period and
is deducted by forfaitor from amount payable to Exporter against
avalised Bill of Exchange.
Are forfaiting services available in India?
1. HSBC
2. ABN AMRO
3. Nat West Bank
4. MEGHRAJ Financial Services representing London Forfaiting
BENEFITS TO EXPORTER FROM FORFAITING
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Converts deferred payment into cash transaction,
improves liquidity and cash flow
Frees Exporter from cross-border political or commercial risk
Finance upto 100 % of Value
Being without recourse to drawer, it does not impact
exporter’s borrowing limits. It is an additional source of finance.
Provides fixed rate finance, hedges against exchange and
interest risk
Frees exporter from credit administration and collection problems.
Exporter saves on insurance cost since forfaiting obviates
need for export credit insurance
Exporter can consider exporting to countries which are risky
FORFAITING IS
A FINANCING TOOL
AS WELL AS
A RISK MANAGEMENT TOOL