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FORFAITING


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Forfaiting

The forfaiting owes its origin to a Frenchterm forfait which means to forfeit (or

surrender) ones rights on something to someone else.

Under this mode of export finance, theexporter forfaits his rights to the futurereceivables and the forfaiter loses recourse tothe exporter in the event of non-payment bythe importer.


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Methodology It is a trade finance extended by a forfaiter to

an exporter/seller for an export/sale

transaction involving deferred payment termsover a long period at a firm rate of discount.

Forfaiting is generally extended for export of

capital goods, commodities and serviceswhere the importer insists on supplies on

credit terms.


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Methodology

The exporter has recourse to forfaiting usuallyin cases where the credit is extended for longdurations but there is no prohibition for

extending the facility where the credits arematuring in periods less than one year.

Credits for commodities or consumer goods is

generally for shorter duration within one year.Forfaiting services are extended in such casesas well.


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Mechanism

There are five parties in a transaction of

forfaiting. These are :

1. Exporter

2. Exporters bank

3. Importer

4. Importers bank and

5. Forfaiter


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Mechanism

The exporter and importer negotiate the proposedexport sale contract. These are the preliminarydiscussions.

Based on these discussions the exporter approachesthe forfaiter to ascertain the terms for forfeiting.

The forfaiter collects from exporter all the relevantdetails of the proposed transaction, viz., details

about the importer, supply and credit terms,documentation, etc., in order to ascertain thecountry risk and credit risk involved in thetransaction..


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Documentation and cost

Forfaiting transaction is usually covered either by apromissory note or bill of exchange. In either case ithas to be guaranteed by a bank or, bill of exchangemay be avalled by the importer bank.

The Aval is an endorsement made on bill ofexchange or promissory note by the guaranteeingbank by writing per aval on these documentsunder proper authentication.

The forfeiting cost for a transaction will be in theform of commitment fee, discount fee anddocumentationfee.


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Mechanism- a case Export-Import Bank of India, (EXIM Bank) has

started with a scheme to the Indian exporters byworking out an intermediary between the exporterand the forfaiter.

The scheme takes place in the following stages:

1. Negotiations being between exporter and importerwith regard to contract price, period of credit, rateof interest, etc.

2. Exporter approaches EXIM Bank with all therelevant details for an indicative discount quote.

3. EXIM Bank approaches an overseas forfaiter,obtain the quote and gets back to exporter with the

offer.


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Mechanism- a case

4.Exporter and importer finalise the term of contract.All costs levied by a forfaiter are to be transferred tothe overseas buyer. As such discount and othercharges are loaded in the basic contract value.

5. Exporter approaches EXIM Bank and it in turn theforfaiter for the firm quote. The exporter confirm theacceptance of the arrangement.

6. Export takes placeshipping documents along withbill of exchange, promissory note have to be in theprescribed format.


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Mechanism- a case

7.Importers bank delivers shipping documents to

importer against acceptance of bill of exchange or on

receipt of promissory note from the importer as the

case may be and send these to exporters bank withits guarantee.

8. Exporters bank gets bill of exchange/promissory

note endorsed with the words Without Recourse

from the exporter and present the document(s) to

EXIM Bank who in turn send it to the forfaiter.


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Mechanism- a case

9. Forfaiter discounts the documents at the pre-determined rate and passes on funds to EXIM Bankfor onward disbursement to exporters bank nostroaccount ofexporters bank.

10.Exporters bank credits the amount to the exporter.11.Forfaiter presents the documents on due date to the

importers bank and receives the dues.

12.Exporters bank recovers the amount from the

importer i.e assumes complete responsibility forcollection without recourse to exporter.


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DIFFERENCE BETWEEN

FACTORING AND FORFAITING

1.Suitable for ongoingopen account sales, notbacked by LC oraccepted bills orexchange.

2. Usually providesfinancing for short-termcredit period of upto180 days.

1. Oriented towards singletransactions backed byLC or bank guarantee.

2. Financing is usually formedium to long-termcredit periods from 180days upto 7 yearsthough shorterm creditof 30180 days is alsoavailable for largetransactions.


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DIFFERENCE BETWEEN


3.Requires a continuousarrangements betweenfactor and client,whereby all sales arerouted through thefactor.

4. Factor assumesresponsibility forcollection, helps clientto reduce his ownoverheads.

3. Seller need not route orcommit other businessto the forfaiter. Dealsare concludedtransaction-wise.

4. Forfaitersresponsibility extends tocollection of forfeiteddebt only. Existingfinancing lines remainsunaffected.


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DIFFERENCE BETWEEN


5. Separate charges areapplied for

financing

collection administration

credit protection and

provision

of information.

5. Single discount chargesis applied which dependon

guaranteeing bankand country risk,

credit

period involved

currency of debt. Additional charges

is commitment fee.


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DIFFERENCE BETWEEN


6. Service is available for

domestic and export

receivables.

7. Financing can be withor without recourse; the

credit protection

collection and

administration servicesmay also be provided

without financing.

6. Usually available forexport receivables onlydenominated in anyfreely convertiblecurrency.

7. It is always withoutrecourse andessentially a financingproduct.


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DIFFERENCE BETWEEN


8. Usually no restrictionon minimum size oftransactions that can becovered by factoring .

9. Factor can assist withcompleting importformalities in thebuyers country andprovide ongoingcontract with buyers.

8. Transactions should be

of a minimum value of

USD 250,000.

9. Forfaiting will acceptonly clean

documentation in

conformity with all

regulations in theexporting/importing

countries

Documents

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