Forfaiting: An Export Finance Option

It’s derived from the French word Forfeit. Forfeit means to surrender the rights.

  • It’s a Non-recourse discounting of export receivables.
  • The Exim bank has introduced this instrument in our country for Indian Exporters.
  • Forfaiters offer credit period from 180 days to up to 7 years.
  • Forfaiters deduct interest in advance for the whole period of the credit & disburses the net proceeds to the exporter.
  • Forfaiting can be an alternative to export credit or insurance cover, especially for those transactions in which the export credit agency is not open to a particular country and/or bank.
  • Here, the exporter surrenders without recourse to him, his rights to claim for payment of goods delivered to the foreign buyer, in return for an immediate cash payment from a forfaiter.
  • An exporter can convert credit sale into a cash sale, with no recourse to himself or to his banker.

What exports are eligible for Forfaiting?

  • All export of capital goods & other goods made on medium to long-term credit is eligible to be financed through forfaiting.

How does forfaiting works?

  • Receivables under a deferred payment contract for export of goods, evidence of bills of exchange or promissory notes can be forfeited.
  • The bill of exchange or promissory notes, backed by co-acceptance from a foreign buyer bank, are endorsed by the exporter, without recourse, in favor of the forfaiting agency in exchange for discounted cash proceeds.
  • The bankers co-acceptance is known as Availisation
  • The co-operating bank must be acceptable to the forfaiter.
  • BOE or the promissory note as the case may be should be in the prescribe format.

Role of Exim Bank:

  • The Exim bank would act as a facilitator between the Indian exporter & the overseas forfaiting agency.

How Exim bank would facilitate the forfaiting transaction?

  • On a request from the exporter, the Exim bank will obtain indicative & firm forfaiting quotes discount rates, commitment & other fees from an overseas agent.
  • The Exim bank will receive avalised bills of exchange or promissory notes as the case may be and send them to the forfaiter for discounting and shall arrange for the discounted proceeds to be remitted to the Indian exporter.

Advantages of Forfaiting

  • It converts the deferred payment export into a cash transaction, improving liquidity & cash flow.
  • Free the exporter from cross-border political or commercial risk associated with the export receivables
  • Financing up to 100% of the export value is possible as compared to 80-85% financing available from conventional export credit arrangements.
  • Provides fixed rate finance, hedge against interest & exchange risks arising out of deferred payment exports.
  • The Exporter is free from credit administration & collection problem.
  • Forfaiting is a transaction specific & therefore a long-term banking relationship with the forfaiting agency is not necessary.
  • The exporter saves on the credit insurance cover as the forfaiting does not require it.
  • The simplicity of documents enables rapid conclusion of the forfaiting agreement.

Parties Involved In Forfaiting

  1. Exporter
  2. Overseas Buyer
  3. Exporter’s Bank
  4. Overseas Buyer’s Bank / Avalising Bank
  5. Exim Bank
  6. Forfaiter

Note: Availisation is a payment undertaking given by a bank in respect of a bill of exchange drawn on and accepted by a buyer. Discounting of bills of exchange is a method of financing trade wherein a seller sells an accepted obligation on a trade transaction to a bank/financier at a discount.

 

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