8/10/2019 87297911 Forfeiting

1/18

FORFEITING

Forfait is derived from French word A Forfeitwhich means surrender of fights.

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

It is different from International Factoring in asmuch as it deals with receivables relating todeferred payment exports, while Factoring dealswith short term receivables.

8/10/2019 87297911 Forfeiting

2/18

FORFEITING (contd)Exporter under Forfeiting surrenders his right for claiming paymentfor services rendered or goods supplied to Importer in favor ofForfeiter.

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.

8/10/2019 87297911 Forfeiting

3/18

It is a highly flexible technique that allows anExporter to grant attractive credit terms to foreign

Buyers, without tying up cash flow or assumingthe risks of possible late payment or default.

Simultaneously, the Exporter is fully protectedagainst interest and/or currency rates movingunfavourably during the credit period Forfaiting isa highly effective sales tool, which simultaneously

improves cash-flow and eliminates risk.

8/10/2019 87297911 Forfeiting

4/18

Six Parties in Forfaiting

Exporter (India)Importer (Abroad)

Exporters Bank (India)Importers/ Bank (Abroad)EXIM Bank (India )Forfaiter (Abroad

8/10/2019 87297911 Forfeiting

5/18

Three Additional MajorAdvantages of Forfaiting

Volume: Forfaiting can work on a one-shot deal, without requiring an ongoing

volume of business.Speed: Commitments can be issuedwithin hours or days depending on

details and country.Simplicity: Documentation is usuallysimple, concise, and straightforwar

8/10/2019 87297911 Forfeiting

6/18

ESSENTIAL REQUISITES OFFORFEITING TRANSACTIONS

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

Exporter to raise Bill of Exchange covering deferred receivablesfrom 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 NationalCompany.

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

8/10/2019 87297911 Forfeiting

7/18

CHARACTERISTICS OFFORFEITING

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

Absolves Exporter from Cross-border political or conversion risk associatedwith 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 onExporters borrowing limits. It does not reflect as debt in ExportersBalance Sheet.

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

8/10/2019 87297911 Forfeiting

8/18

CHARACTERISTICS OFFORFEITING (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 tradetransactions. Hence, no need to commit all of his business orsignificant part of business.

Forfeit transactions are confidential.

8/10/2019 87297911 Forfeiting

9/18

COSTS INVOLVED INFORFEITING

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

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

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

Documentation Fee:- where elaborate legal formalities are

involved.

Service Charges:- payable to Exim Bank.

8/10/2019 87297911 Forfeiting

10/18

FACTORING vs. FORFEITING

POINTS OFDIFFERENCE

FACTORING FORFEITING

Extent of Finance Usually 75 80% of thevalue of the invoice

100% of Invoice value

CreditWorthiness

Factor does the creditrating in case of non-recourse factoringtransaction

The Forfeiting Bankrelies on thecreditability of theAvailing Bank.

Services provided Day-to-day administration

of sales and other alliedservices

No services are

provided

Recourse With or without recourse Always withoutrecourse

Sales By Turnover By Bills

8/10/2019 87297911 Forfeiting

11/18

WHY FORFEITING HAS NOTDEVELOPED

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 alonedoes.

Long term advances are not favoured by Banks as hedging becomesdifficult.

Lack of awareness.

8/10/2019 87297911 Forfeiting

12/18

STAGES INVOLVED IN FORFEITING:-

Exporter approaches the Facilitator (Bank) for obtaining IndicativeForfeiting Quote.

Facilitator obtains quote from Forfeiting Agencies abroad andcommunicates to Exporter.

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

If terms are acceptable, Exporter approaches the Bank (Facilitator) forobtaining 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.

8/10/2019 87297911 Forfeiting

13/18

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 Forfeiteragency.

Bank sends document to Importer's Bank and confirms assignment and copiesof 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 ImportersBank and receives payment.

8/10/2019 87297911 Forfeiting

14/18

Benefits to ExportersConverts a Deferred Payment export into a cashtransaction, improves liquidity

Frees Exporter from cross-border political or commercialrisks associated

Finances upto 100 percent of export value

It is a Without Recourse finance

Hedges against Interest and Exchange Risks

B fi Eli i i f h f ll i Ri k

8/10/2019 87297911 Forfeiting

15/18

Benefits Elimination of the following Risks

associated with cross border transactions:

Commercial Risk - The risk of non-payment by anon-sovereign or private sector buyer or borrower inhis home currency arising from insolvency.

Political Risk - The risk of the borrower country

government actions, which prevent or delay therepayment of export credits.

Benefits Transfer Risk - The risk of an inability to

convert local currency into the currency in which debtis denominated.

Interest Risk - The risk of interest rate fluctuationsduring the credit period of the transaction.

Exchange Risk - The risk of exchange rate fluctuations

8/10/2019 87297911 Forfeiting

16/18

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 cashin advance.

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

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

8/10/2019 87297911 Forfeiting

17/18

Drawbacks of forfeiting

Non-availability for short Periods

Non-availability for financially weakcountries

Dominance of western currencies

Difficulty in procuring international banks

guarantee

8/10/2019 87297911 Forfeiting

18/18

THANK YOU