FORFEITING

“Forfait” is derived from French word ‘A Forfeit’ which means surrender of fights.

Forfeiting is a mechanism by which the right for export receivables of an exporter (Client) is purchased by a Financial Intermediary (Forfeiter) without recourse to him.

It is different from International Factoring in as much as it deals with receivables relating to deferred payment exports, while Factoring deals with short term receivables.

FORFEITING (contd…)

Exporter under Forfeiting surrenders his right for claiming payment for services rendered or goods supplied to Importer in favor of Forfeiter.

Bank (Forfeiter) assumes default risk possessed by the Importer.

Credit Sale gets converted as Cash Sale.

Forfeiting is arrangement without recourse to the Exporter (seller)

Operated on fixed rate basis (discount)

Finance available up to 100% of value (unlike in Factoring)

Introduced in the country in 1992.

It is a highly flexible technique that allows an Exporter to grant attractive credit terms to foreign Buyers, without tying up cash flow or assuming the risks of possible late payment or default.

Simultaneously, the Exporter is fully protected against interest and/or currency rates moving unfavourably during the credit period Forfaiting is a highly effective sales tool, which simultaneously improves cash-flow and eliminates risk.

Six Parties in Forfaiting

Exporter (India)Importer (Abroad)Exporter’s Bank (India)Importer’s/ Bank (Abroad)EXIM Bank (India )Forfaiter (Abroad

Three Additional Major Advantages of Forfaiting

Volume: Forfaiting can work on a one-shot deal, without requiring an ongoing volume of business. Speed: Commitments can be issued within hours or days depending on details and country. Simplicity: Documentation is usually simple, concise, and straightforwar

ESSENTIAL REQUISITES OF FORFEITING TRANSACTIONS

Exporter to extend credit to Customers for periods above 6 months.

Exporter to raise Bill of Exchange covering deferred receivables from 6 months to 5 years.

Repayment of debts will have to be guaranteed by another Bank, unless the Exporter is a Government Agency or a Multi National Company.

Co-acceptance acts as the yard stick for the Forfeiter to credit quality and marketability of instruments accepted.

CHARACTERISTICS OF FORFEITING

Converts Deferred Payment Exports into cash transactions, providing liquidity and cash flow to Exporter.

Absolves Exporter from Cross-border political or conversion risk associated with Export Receivables.

Finance available upto 100% (as against 75-80% under conventional credit) without recourse.

Acts as additional source of funding and hence does not have impact on Exporter’s borrowing limits. It does not reflect as debt in Exporter’s Balance Sheet.

Provides Fixed Rate Finance and hence risk of interest rate fluctuation does not arise.

CHARACTERISTICS OF FORFEITING (contd….)

Provides long term credit unlike other forms of bank credit.

Saves on cost as ECGC Cover is eliminated.

Simple Documentation as finance is available against bills.

Forfeit financer is responsible for each of the Exporter’s trade transactions. Hence, no need to commit all of his business or significant part of business.

Forfeit transactions are confidential.

COSTS INVOLVED IN FORFEITING

Commitment Fee:- Payable to Forfeiter by Exporter in consideration of forfeiting services.

Commission:- Ranges from 0.5% to 1.5% per annum.

Discount Fee:- Discount rate based on LIBOR (London inter bank offered rate) for the period concerned.

Documentation Fee:- where elaborate legal formalities are involved.

Service Charges:- payable to Exim Bank.

FACTORING vs. FORFEITING

POINTS OF DIFFERENCE

FACTORING FORFEITING

Extent of Finance

Usually 75 – 80% of the value of the invoice

100% of Invoice value

Credit Worthiness

Factor does the credit rating in case of non-recourse factoring transaction

The Forfeiting Bank relies on the creditability of the Availing Bank.

Services provided

Day-to-day administration of sales and other allied services

No services are provided

Recourse With or without recourse Always without recourse

Sales By Turnover By Bills

WHY FORFEITING HAS NOT DEVELOPED

Relatively new concept in India.Depreciating RupeeNo ECGC CoverHigh cost of fundsHigh minimum cost of transactions (USD 250,000/-)RBI Guidelines are vague.Very few institutions offer the services in India. Exim Bank alone does.Long term advances are not favoured by Banks as hedging becomes difficult.Lack of awareness.

STAGES INVOLVED IN FORFEITING:-

Exporter approaches the Facilitator (Bank) for obtaining Indicative Forfeiting Quote.

Facilitator obtains quote from Forfeiting Agencies abroad and communicates to Exporter.

Exporter approaches importer for finalizing contract duly loading the discount and other charges in the price.

If terms are acceptable, Exporter approaches the Bank (Facilitator) for obtaining quote from Forfeiting Agencies.

Exporter has to confirm the Firm Quote.

Exporter has to enter into commercial contract.

Execution of Forfeiting Agreement with Forfeiting Agency.

Export Contract to provide for Importer to furnish availed BoE/PN.

STAGES INVOLVED IN FORFAITING:- (contd…..)

Forfeiter commits to forfeit the BoE/PN, only against Importer Bank’s Co-acceptance. Otherwise, LC would be required to be established.

Export Documents are submitted to Bank duly assigned in favor of Forfeiter agency.

Bank sends document to Importer's Bank and confirms assignment and copies of documents to Forfeiter agency.

Importer’s Bank confirms their acceptance of BoE/PN to Forfeiter agency.

Forfeiter agency remits the amount after deducting charges.

On maturity of BoE/PN, Forfeiter presents the instrument to the Importer’s Bank and receives payment.

Benefits to ExportersConverts a Deferred Payment export into a cash transaction, improves liquidity

Frees Exporter from cross-border political or commercial risks associated

Finances upto 100 percent of export value

It is a “ Without Recourse ” finance

Hedges against Interest and Exchange Risks

 Benefits Elimination of the following Risks

associated with cross border transactions:   Commercial Risk - The risk of non-payment by a non-sovereign or private sector buyer or borrower in his home currency arising from insolvency.Political Risk - The risk of the borrower country government actions, which prevent or delay the repayment of export credits.Benefits Transfer Risk - The risk of an inability to convert local currency into the currency in which debt is denominated.Interest Risk - The risk of interest rate fluctuations during the credit period of the transaction.Exchange Risk - The risk of exchange rate fluctuations

Benefits to the importer

The Importer can match repayments to projected revenues, allowing for grace periods.

The Importer can obtain 100% financing, and avoid paying out cash in advance.

The Importer can pay interest on a fixed rate basis for the life of the credit, which will make budgeting simpler and safer.

The Importer can access medium to long term financing which may be prohibitively expensive or completely unavailable locally.

Drawbacks of forfeitingNon-availability for short Periods

Non-availability for financially weak countries

Dominance of western currencies

Difficulty in procuring international bank’s guarantee

THANK YOU