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)
Exporters Bank (India)
Importers/ 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
Exporters borrowing limits. It does not reflect as debt in Exporters
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 Exporters 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 Rupee
No ECGC Cover
High cost of funds
High 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 Banks 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.

Importers 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 Importers
Bank and receives payment.




Benefits to Exporters
Converts 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 forfeiting
Non-availability for short Periods

Non-availability for financially weak
countries

Dominance of western currencies

Difficulty in procuring international banks
guarantee

THANK YOU