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Forfaiting

The Government of India has recently permitted a new form of post shipment
financing called Forfaiting as part of its efforts to promote
exports from the country.
Definition :
Forfaiting is the sale by an exporter of export trade receivables, usually bank
guaranteed, without recourse to the exporter. Such
receivables include Letters of Credit (with or without Bills of Exchange)
Promissory Notes with Aval (guarantee), Bill of Exchange with
Aval, Bank Guarantees Payable to an Exporter in one country from an Importer
in another country.
Forfaiting as a financing concept has been in use across the world since the
1960s. The word forfait means to forgo one's right to
something. In the context of export finance, the exporter forgoes his right to
receive payment from the importer at later date and
surrenders the right to collect payment to a third party or agency (known as
forfaiter). Instead the exporter receives an immediate
reimbursement of his payment less certain discounts from the forfaiter.
Normally, these payments are due at a later date, forcing the
exporter to bear the cost for the intervening period, as well as being exposed to
the risks of exchange rate fluctuations, political situations
etc. These are risks which expose a small or medium exporter to significant
erosion of profits. With forfaiting finance, the exporter passes
on his debts as well as attendant risks to the forfaiting agency. This form of
financing is referred to as without recourse financing (in case
the debt cannot be recovered there is no risk for the exporter). Forfaiting is a
medium term financing option typically for the three to
seven year time frame.
Forfaiting comes with the following terms and conditions
there is a discounting of the amount to be received from the importer
discounting is on a fixed rate
debt is in the form of bills of exchange or promissory notes guaranteed by a
bank
such financing is without recourse to the seller
100% of the amount receivable can be financed in this manner
Forfaiting The Modus Operandi
The parties/agencies involved in a forfaiting transaction include the exporter,
the importer, a forfaiting agency, a bank that stands
guarantee (aval) for the bills of exchange or promissory notes (this is normally
the importers bank) and the Exim bank in India acts as the
facilitating agency between the Indian exporter and the forfaiting agency
Typically the exporter negotiates terms like price, payment
currency, credit period and the like with their overseas buyer. The exporter then
approaches the Exim Bank with these terms. The Exim
Bank obtains a tentative forfaiting quotation from a forfaiting agency. Armed
with this quote the exporter can now finalise the contract
with the buyer. The exporter should ensure that most of the forfaiting charges
are passed on to the buyer. Once the terms have been
settled with the buyer, a final forfeiting quote is obtained by the Exim Bank. If
this quote is acceptable, the exporter signs the contract with
the buyer as well as a separate one with the forfaiting agency. Once shipment of
goods has taken place the exporter obtains availed
(guaranteed) bills of exchange from the importer (through a bank) or availed
promissory notes. These bills of exchange or promissory
notes are endorsed by the exporter and are routed to the forfaiting agency
through the Exim Bank. The forfaiting agency will then remit
the payment due to the exporter to an account of the exporter's bank in the
country where the forfaiting agency is based. This bank then
transfers the amount to the exporter in India, and the exporter will be provided
with a Certificate of Foreign Inward Remittance as proof.
When the promissory notes/bills of exchange reach maturity, the forfeiting
agency collects the payment from the aval (the bank or agency