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P. 1
For Fa It Ing

For Fa It Ing

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Published by Hitesh Kalyani

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Published by: Hitesh Kalyani on Dec 02, 2011
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12/02/2011

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INTRODUCTIONForfaiting is a means of finanace (credit)an exporter of goods avails from an intermediary called the forfaiter against the export receivables but without obligations to repay credit.Forfating is used forinternationaltrade transactions.In fact,it is the discounting of trade receivables such as drafts drawn under letters of credit,bills of exchange,promissory notes,or other freely negotiable instrument on a no recourse basis.(ie without recourse to the exporter in case the importer failes to pay on the due date .)it is highly flexible technique that allows an exporter to grabt attractive credit terms to foreign buyers,without sacrificing his cash flow and without the risks of possible late payment or default of importer.Simultaneously, theexporter is fully protected against interest and /or currency rates moving unfavourably during the credit period as the entire risk passed on to the forfaiter. Forfaiting is thus a highly effective sales tool.,which simoultaneously improves cash flow and eliminates risk for the exporter.CHARACTERSTICS OF FORFAITINGIt converts deferred payment exports into a cash transaction, improving liquidity and cash flow.It absolves exporter from cross-border political or commercial risk associated with export receivable.It finances upto 100% of the export value as compared to 80-85% financing available under conventional export credit.It acts as an additional source of funding and hence does not have any impact onthe exporter
s borrowing limits. It does not reflect as debt in exporter
s balancesheet.It provides fixed rate finance and hence automatically hedges against interest and exchange rate fluctuation arising from deferred export credit.Exporter is freed from credit administration.It enables exporter to extend credit to the importer for more than 6 months (sayupto 1-2 years) which under normal condition is not possible and thus can act as a marketing edge.It saves on insurance costs as the need for export credit insurance viz. ECGC iseliminated.MECHANISM OF FORFAITINGThe exporter identifies his importer and signs with him a contract for sale of his goods at a price negotiated between them,giving the importer adequate creditperiod to pay forthe imports.The exporter will also inform the importer that the expoerter will discount the sales with the forfaiter and assign the receivables to the forfatier.The importer arranges with his banker for issue of letter of credit in favour ofexporter.the exporter enters into a forfaiting contract with the forfaiter.thenthe actual export takes place.the debitinstruments are drawn by the exporter (seller,accepted by the importer buyer )and will be backed by the unconditional standby letter of credit(guarantee) of theimporters bank.The forfaiter sends these documents to the importers bank,which in turn notifiesreceipt to the forfaiter.The forfaiter makes the payment to exporter ( 100% of the value of exports),after deducting his discount and other incidental charges as per the contract .In exchange for the payment the forfaiter then takes over responsibility for claimin
 
g the debit from the importer the forfaiter either hold s the notes till full maturity as an investment or,sell themto another investor on a non-recourse basis .the holder of the notes then presents each receivables to the bank at which they are payable as fall due.The letter of the credit does not have to be transferable or confirmed by the advising bank in the exporters country;but it must be subject to the uniform customs and practice for documentary credits(UCPDC) of the International Chamber of Commerce,Paris(UCP 500).Promissory notes or bills of exchange drafts are actuallythe most commonly forfaited debtinstruments .Under a forfaiting agreement,a promissory note or bills of exchange/draft is issued for each installment of the suppliers credit ,thus documentingthe exitence of a claim of the exporter on the importer i.e. totally abstract,i.e.it is unconditional,Irrevocable and divorced from the underlying trade tansactions.Forfaiting in India -Regulatory AspectsForfaiting as an export financing option in India has been approved by the Reserve Bank of India vide its circular A.D. (G.P. Series) No. 3 dated February 13, 1992. The Forfaiting facility is to be provided by an international forfaiting agency through an Authorised Dealer (see RBI Circular No. 42 A. D. (M.A.) series dated October 27, 1997).Forfaiting proceeds, on a without recourse basis, are to be received in India assoon as possible after shipment but definitely within the 180 day period specified by RBI for all exports. A Forfaiting transaction is to be routed through anAuthorised Dealer, who apart from handling documentation will also provide Customs Certification for GR Form purposes.PROBLEMS OF FORFAITING IN INDIAThere are various reasons for forfaiting which is responsible for forfaiting concept not to be picked in India they are as follows:Depreciating Rupee :- A major drawback for Forfaiting not picking up in India isthat Rupee is depreciating continuously as a result of which the exporters getthe benefit bynot converting the receivables into Rupee they get better gains. Every six months make that 30/ 35% of exports receivable are due.E.C.G.C. cover not provided :- As a E. C. G. C. cover is not needed in the following transaction the exporters are not keen to rely on the forfaiter or the importers bank guarantee.E. C. G. C. does not want to take up because not agency has been set up to provide creditworthiness of the buyers over-seas and as a result, It becomes very difficult for E. C. G. C. to judge. In case of some countries like Vietnam, Iran the conduct of trade becomes very expensive,therefore to make the option more attractive and safe for the exporter, the arrangment of forfaiting needs a review. E. C. G. C. must be able to provide some cover to the exporters for intervening uncovered period risks.Recovery of Debts by forfaiter: Though the transaction is backed by a Bill Of Exchange or promissory note but the recovery of debt should be backed by some actlike negotiable instrument act.Quantum of Export :- The minimum size of a forfaiting contract should be $ 100 0
 
00 million and that is not possible in a country like India. There are many small exporters withdeals worth 50000 $ U.S.Dollar but cannot go for forfaiting. The transactions ofthe minimum amount is a compulsion.Guide Lines by RBI :- No guidelines has been provided by RBI till date, except for circular no.3 which mentions that Exim is permitted to undertake forfaiting.All the documentationshould be done through Exim bank, no guideline or steps have been taken by RBI to improve the export credit limit above 180 days. There is a lack of full fledgelegal frame work on the part of RBI.Lack of Awareness among Exporters/Bankers :- There is a lack of awareness amongexporters and Bankers about forfaiting, very few are aware and they are not keento take up the business due to some reasons or the others.Lack of Expertise and Knowledge :- There is not much expertise in this area because nobody is aware of forfaiting. EXIM has taken a few steps by educating someof the bankers and by giving lectures to the bankers trainning staff camp. But the major disadvantage is that the person who is aware of this term thoroughly gets transferred to another job very soon. The required quality staff is not thereto operate such sophisticated servicies.Trustworthiness on the part of banker overseas :- There should be proper information available about the trustworthiness on the part of banker overseas becausethe importers banker may accept the bills but it should be acceptable by the forfaiting agency. The agency has to receive money and would not to go in few certain bankers guarantee whom they don
t consider worthit because sometimes, even letter of credit is not cleared & even the foreign banks default.Role of RBI :- No Guideline has been provided by RBI because exporter in India require RBI permission and if RBI issues any guidelines the exporter feels that the market is regulated and they do not want to enterCost of Funds is High :- Export to countries like Iran, Africa is not possible due to the high amount of risk prevailing in this countries. As a result the premium for discounting maygo upto a max of 20% as compared to other countries & which is very expensive for a normal forfaiting transaction.Availability of agency offering such services :- There are very few agencies which offer this option. In India. EXIM Bank has got the monopoly to undertake thistransactions.Awareness among the Bank :- The international branches of the Indian banks are actively involved in this business but these Bank in India are not ready to takeup due to lack of awareness & many such other reasons.Cost of Finance to be borne by importer :- The cost is included in the contractamount and the importer should be ready to pay the cost. The cost should be borne equally by the exporter & the importer.Cost of Finance Not Known :- In forfaiting the major problem is that the cost offinance is not known like in the case of Pre-Shipment Credit Finance,Post-Shipment Credit Financesch, which is 13% & 19% respectively. In forfaiting the cost varies according to the political certainity & the Bank Co-accepting the bills of

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