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1.1 INTRODUCTION
With the initiation of globalization and liberalization, competition among
firms has increased both domestically and internationally. Mergers and acquisitions are
common occurrence worldwide and the Indian companies have no security against these
aggressive takeovers. A companys approach has to persistently keep velocity with these
changes because of fast changing ecological and technological scenario. Global financial
market is facing forceful conditions as there is a decline in the economic activity in
general. With this existing situation, management of cash and receivables is of paramount
significance to giant size and also medium sized companies. The success of any business
lies on the liquidity position by means of converting credit sales into cash within a short
period of time. In the past days, short-term funds can be raised through cash credit, bills
discounting and consumer credit through financial intermediaries. Of late, new financial
services such as factoring and forfeiting have come into reality to assist the financing of
credit sales and in this manner, help the business unit to tide over the liquidity crisis.
The forfeiting evolved in the 1960s and owes its origin to a French term a
forfeit which means to forfeit (or surrender) ones rights on something to someone else.
This concept was originally developed to help finance German exports to the Eastern
bloc countries. The buyers of the Eastern bloc countries required credit and their need
could not be fulfilled through the then existing modes of finance. This gave birth to a new
concept- Forfeiting.
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The study is based on the secondary data. Secondary data includes
information from journals, newspapers, articles, e-books & information collected from
the websites.
1.4CHAPTER SCHEME
This project is divided into 8 chapters, namely:
Chapter 1 (Introduction & Research Design):
The factual background of the study is discussed in this chapter. It will first
start on introducing the reader to the concept of forfeiting. Later it will describe about the
objective of study, research methodology and chapter scheme.
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This chapter will cover the general aspects of forfeiting. This chapter will
include repayment/account, currency, discounting, types of instrument and forms of bank
security.
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EXPORT FINANCE
2.1 INTRODUCTION
Export:
Export in simple words means selling goods abroad. International market
being a very wide market, huge quantity of goods can be sold in the form of exports.
Exports are a vehicle of growth and development. They help not only in
procuring the latest machinery, equipment and technology but also the goods and
services, which are not available indigenously. Exports leads to national self-reliance and
reduces dependence on external assistance which howsoever liberal, may not be available
without strings.
Though Indias export compared to other countries is very small, but one of
the most important aspects of our export is the strong linkages it is forging with the world
economy which is a great boon for a developing nation like India.
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Export Finance:
Credit and finance is the life and blood of any business whether domestic or
international. It is more important in the case of export transactions due to the prevalence
of novel non-price competitive techniques encountered by exporters in various nations to
enlarge their share of world markets.
Production and manufacturing for substantial supplies for exports take time,
in case finance is not available to exporter for production. They will not be in a position
to book large export order if they dont have sufficient financial funds. Even merchandise
exporters require finance for obtaining products from their suppliers.
The exporter may require short term, medium term or long term finance
depending upon the types of goods to be exported and the terms of statement offered to
overseas buyer.
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regular and recurring needs of a business firm refer to purchase of raw material, payment
of wages and salaries, expenses like payment of rent, advertising etc.
The exporter may also require term finance. The term finance or term
loans, which is required for medium and long term financial needs such as purchase of
fixed assets and long term working capital.
An exporter may avail financial assistance from any bank, which considers
the ensuing factors:
2.4 APPRAISAL
Appraisal means an approval of an export credit proposal of an exporter.
While appraising an export credit proposal as a commercial banker, obligation to the
following institutions or regulations needs to be adhered to.
Appraise should have the Exim code number allotted by the Director General of
Foreign Trade.
Partys name should not appear under the caution list of the RBI.
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Obligations to the Trade Control Authority under the EXIM policy are:
Goods must be freely exportable i.e. not falling under the negative list. If it falls
under the negative list, then a valid license should be there which allows the goods to be
exported.
Country with whom the Appraise wants to trade should not be under trade
barrier. Obligations to ECGC are:
Verification that Appraise is not under the Specific Approval list (SAL).
Pre-shipment finance.
Post-shipment finance.
PRE-SHIPMENT FINANCE
MEANING:
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Pre-shipment is also referred as packing credit. It is working capital
finance provided by commercial banks to the exporter prior to shipment of goods. The
finance required to meet various expenses before shipment of goods is called pre-
shipment finance or packing credit.
DEFINITION:
Financial assistance extended to the exporter from the date of receipt of the
export order till the date of shipment is known as pre-shipment credit. Such finance is
extended to an exporter for the purpose of procuring raw materials, processing, packing,
transporting, warehousing of goods meant for exports.
In this type of credit, the bank normally grants packing credit advantage
initially on unsecured basis. Subsequently, the bank may ask for security.
Packing credit is given to process the goods for export. The advance is given
against security and the security remains in the possession of the exporter. The exporter is
required to execute the hypothecation deed in favor of the bank.
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The bank provides packing credit against security. The security remains in
the possession of the bank. On collection of export proceeds, the bank makes necessary
entries in the packing credit account of the exporter.
The Red L/C received from the importer authorizes the local bank to grant
advances to exporter to meet working capital requirements relating to processing of
goods for exports. The issuing bank stands as a guarantor for packing credit.
The merchant exporter who is in possession of the original L/C may request
his bankers to issue Back-To-Back L/C against the security of original L/C in favour of
the sub-supplier. The sub-supplier thus gets the Back-To-Bank L/C on the basis of which
he can obtain packing credit.
DBK means refund of customs duties paid on the import of raw materials,
components, parts and packing materials used in the export production. It also includes a
refund of central excise duties paid on indigenous materials. Banks offer pre-shipment as
well as post shipment advance against claims for DBK.
Exim-Banks scheme for grant for Foreign Currency Pre-Shipment Credit (FCPC)
to exporters.
Packing credit for Deemed exports.
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SOME SCHEMES IN PRE-SHIPMENT STAGE OF FINANCE
1. PACKING CREDIT
There are certain factors, which should be considered while sanctioning the
packing credit advances viz.
i) Banks may relax norms for debt-equity ratio, margins etc but no compromise
in respect of viability of the proposal and integrity of the borrower.
ii) Satisfaction about the capacity of the execution of the orders within the
stipulated time and the management of the export business.
iii) Quantum of finance.
iv) Standing of credit opening bank if the exports are covered under letters of
credit.
v) Regulations, political and financial conditions of the buyers country.
iii. Quantity.
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iv. Value.
Eligibility: PCFC is extended only on the basis of confirmed /firms export orders or
confirmed L/Cs. The Running account facility will not be available under the scheme.
However, the facility of the liquidation of packing credit under the first in first out
method will be allowed.
Order or L/C: Banks should not insist on submission of export order or L/C for every
disbursement of pre-shipment credit, from exporters with consistently good track record.
Instead, a system of periodical submission of a statement of L/Cs or export orders in
hand, should be introduced.
Sharing of FCPC: Banks may extend FCPC to the manufacturer also on the basis of the
disclaimer from the export order.
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POST-SHIPMENT FINANCE
MEANING:
DEFENITION:
Credit facility extended to an exporter from the date of shipment of goods till
the realization of the export proceeds is called Post-shipment Credit.
1. Export bills negotiated under L/C: The exporter can claim post-shipment finance by
drawing bills or drafts under L/C. The bank insists on necessary documents as stated in
the L/C. if all documents are in order, the bank negotiates the bill and advance is granted
to the exporter.
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2. Purchase of export bills drawn under confirmed contracts: The banks may sanction
advance against purchase or discount of export bills drawn under confirmed contracts. If
the L/C is not available as security, the bank is totally dependent upon the credit
worthiness of the exporter.
3. Advance against bills under collection: In this case, the advance is granted against
bills drawn under confirmed export order L/C and which are sent for collection. They are
not purchased or discounted by the bank. However, this form is not as popular as
compared to advance purchase or discounting of bills.
4. Advance against claims of Duty Drawback (DBK): DBK means refund of customs
duties paid on the import of raw materials, components, parts and packing materials used
in the export production. It also includes a refund of central excise duties paid on
indigenous materials. Banks offer pre-shipment as well as post-shipment advance against
claims for DBK.
5. Advance against goods sent on Consignment basis: The bank may grant post-
shipment finance against goods sent on consignment basis.
6. Advance against Undrawn Balance of Bills: There are cases where bills are not
drawn to the full invoice value of gods. Certain amount is undrawn balance which is due
for payment after adjustments due to difference in rates, weight, quality etc. banks offer
advance against such undrawn balances subject to a maximum of 5% of the value of
export and an undertaking is obtained to surrender balance proceeds to the bank.
7. Advance Deemed Exports: against Specified sales or supplies in India are considered
as exports and termed as deemed exports. It includes sales to foreign tourists during
their stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit
is offered for a maximum of 30 days.
8. Advance against Retention Money: In respect of certain export capital goods and
project exports, the importer retains a part of cost goods/ services towards guarantee of
performance or completion of project. Banks advance against retention money, which is
payable within one year from date of shipment.
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9. Advance against Deferred payments: In case of capital goods exports, the exporter
receives the amount from the importer in installments spread over a period of time. The
commercial bank together with EXIM bank do offer advances at concessional rate of
interest for 180 days.
1. DEFERRED CREDIT
Meaning:
Consumer goods are normally sold on short term credit, normally for a
period upto 180 days. However, there are cases, especially, in the case of export of capital
goods and technological services; the credit period may extend beyond 180 days. Such
exports were longer credit terms (beyond 180 days) is allowed by the exporter is called as
deferred credit or deferred payment terms.
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Amount of credit support:
Any loan upto Rs.10crore for financing export of capital goods on deferred
payment terms is sanctioned by the commercial bank which can refinance itself from
Exim bank. In case of contracts above Rs.10 Lakhs but not more than Rs50crore, the
EXIM Bank has the authority to decide whether export finance could be provided.
Contracts above Rs.50crore need the clearance from the working group on Export
Finance.
The exporter has the option of availing of export credit at the post-shipment
stage either in rupee or in foreign currency under the rediscounting of export bills abroad
(EBRD) scheme at LIBOR linked interest rates.
Prior permission of RBI will not be required for arranging the rediscounting
facility abroad so long as the spread for rediscounting facility abroad does not exceed one
percent over the six months LIBOR in the case of rediscounting with recourse basis &
1.5% in the case of without recourse facility. Spread, should be exclusive of any
withholding tax. In all other cases, the RBIs permission will be needed.
(FREPEC)
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This program seeks to Finance Rupee Expenditure for Project Export
Contracts, incurred by Indian companies.
Indian project exporters who are to execute project export contracts overseas
secure on cash payment terms or those funded by multilateral agencies will be eligible.
The purpose of the new lending program is to give boost to project export efforts of
companies with good track record and sound financials.
Up to 100% of the peak deficit as reflected in the Rupee cash flow statement
prepared for the project. Exim Bank will not normally take up cases involving credit
requirement below Rs. 50 lakhs. Although, no maximum amount of credit is being
proposed, while approving overall credit limit, credit-worthiness of the exporter-borrower
would be taken into account. Where feasible, credit may be extended in participation with
sponsoring commercial banks.
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Repayment of credit would normally be out of project receipts. Period of
repayment would depend upon the project cash flow statements, but will not exceed 4
(four) years from the effective date of project export contract. The liability of the
borrower to repay the credit and pay interest and other monies will be absolute and will
not be dependent upon actual realization of project bills.
INTRODUCTION:
This is one of the most popular and more secured of method of payment in
recent times as compared to other methods of payment. A L/C refers to the documents
representing the goods and not the goods themselves. Banks are not in the business of
examining the goods on behalf of the customers. Typical documents, which are required
includes commercial invoice, transport document such as Bill of lading or Airway bill, an
insurance documents etc. L/C deals in documents and not goods.
DEFINITION:
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Beneficiary: The party to whom the L/C is addressed. The Seller or supplier of goods.
Advising bank: Issuing banks branch or correspondent bank in the exporters country to
which the L/C is sending for onward transmission to the beneficiary.
Confirming bank: The bank in beneficiarys country, which Guarantees the credit on the
request of the issuing Bank.
Negotiating bank: The bank to which the beneficiary presents his Documents for
payment under L/C.
A payment undertaking given by the bank (issuing bank) on behalf of the buyer
(applicant)
To pay a seller (beneficiary) a given amount of money on presentation of
specified documents representing the supply of goods within specific time limits
These documents conforming to terms and conditions set out in the letter of credit
Documents to be presented at a specified place.
To guarantee to the seller that if complete documents are presented, the bank will
pay the seller the amount due. This offers security to the seller the bank says in
effect "We will pay you if you present documents (XYZ)"
To examine the documents and only pay if these comply with the terms and
conditions set out in the letter of credit. This protects the buyer's interests - the
bank says "We will only pay your supplier on your behalf if they present
documents (XYZ) that you have asked for"
No blocking of funds.
Clearance of import regulations.
Free from liability.
Pre- shipment finance.
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Non-refusal by importer.
Reduction in bad-debts.
Lacks flexibility.
Complex method
Expensive for importer
Problem of revocable L/C
I. FORFEITING
The word `forfeit' is derived from the French word `a forfeit' which means
the surrender of rights.
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Simply put, Forfeiting is the non-recourse discounting of export receivables.
In a forfeiting transaction, the exporter surrenders, without recourse to him, his rights to
claim for payment on goods delivered to an importer, in return for immediate cash
payment from a forfeiter. As a result, an exporter in India can convert a credit sale into a
cash sale, with no recourse to the exporter or his banker.
CONCEPT OF FORFEITING
All exports of capital goods and other goods made on medium to long term
credit are eligible to be financed through forfeiting.
The role of Exim Bank will be that of a facilitator between the Indian
exporter and the overseas forfeiting agency.
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On a request from an exporter, for an export transaction which is eligible to
be forfeited, Exim Bank will obtain indicative and firm forfeiting quotes - discount rate,
commitment and other fees - from overseas agencies.
Exim Bank will receive availed bills of exchange or promissory notes, as the
case may be, and send them to the forfeiter for discounting and will arrange for the
discounted proceeds to be remitted to the Indian exporter.
Commitment fee
Discount fee
Documentation fee
Provides fixed rate finance; hedges against interest and exchange risks
arising from deferred export credit.
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Forfeiting is transaction specific. Consequently, a long term banking
relationship with the forfeiter is not necessary to arrange a forfeiting transaction.
Exporter saves on insurance costs as forfeiting obviates the need for export
credit insurance.
II. FACTORING
Factoring offers smaller companies the instant cash advantage that was once
available only to large companies with high sales volumes. With Factoring, there's no
need for credit or collection departments, and no need to spend your profits on
maintaining accounts receivables.
RBI has approved the above scheme evolved by SBI Factors and
Commercial Services Pvt. Ltd Mumbai for providing International Export Factoring
Services on with recourse basis. The salient features of the scheme are as follows:
An exporter should submit to SBI Factors & Commercial Services Pvt.Ltd i.e.
the Export Factor(EF) a list of Buyers(customers) indicating their names & street
addresses and his credit line needs .
The Import Factor (IF) located in the importers country selected by EF, will rate
the buyers list and the results will be reported to the exporter through EF. The exporter
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will apply for a credit limit in respect of overseas importer. IF will grant credit line based
on the assessment of credit-worthiness of the overseas importer.
The exporter will thereafter enter into an export factoring agreement with EF.
All export receivable will be assigned to the EF, who in turn will assign them to IF.
The exporter will ship merchandise to approved foreign buyers. Each invoice is
made payable to a specific factor in the buyers (importer) country. Copies of invoices &
shipping documents should be sent to IF through EF. EF will make prepayment to the
exporter against approved export receivables.
On receipt of payments from buyers on the due date of invoice, IF will remit
funds to EF who will convert foreign currency remittances into rupees and will transfer
proceeds to the exporter after deducting the amount of prepayments, if made.
Simultaneously, EF will report the transaction in the relative R returns enclosing
duplicate copy of the respective GR form duly certified. The payment received will be the
net payment after deduction of a service fee, which ranges from 0.5 % to 2% of the value
of the invoices.
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In terms of Regulation 9 of the Foreign Exchange Management Act 1999, the
amount representing the full export value of goods exported must be realized and
repatriated to India within 6 months of date of export.
Exports where more than 10% of the value is realized beyond the prescribed
period, i.e. 6 months from date of shipment, are treated as Deferred Payment Exports
1. What is an offer?
Exporters can seek Supplier's Credit in Rupees/ Foreign Currency from Exim
Bank in respect of export contracts on deferred payment terms irrespective of
value of export contracts.
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Period of Credit and Repayment: Period of credit is determined for each
proposal having regard to the value of contract, nature of goods covered, security,
competition. Repayment period for Supplier's Credit facility is fixed coinciding
with the repayment of post-shipment credit extended by Indian exporter to
overseas buyer. However, the Indian exporter will repay the credit to Exim Bank
as per agreed repayment schedule, irrespective of whether or not the overseas
buyer has paid the Indian exporter.
Overseas Buyers Credit: Credit is offered directly to overseas buyer for a
specific project/contract.
OVERVIEW OF FORFEITING
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3.2 HISTORICAL DEVELOPMENT OF FORFEITING
The origins of the forfeiting market lie in changes in the world economic
structure during the early sixties, when trade between Western and Eastern Europe was
re-established. The growing importance of trade with developing countries in Africa, Asia
and Latin America boosted the forfeiting market to an international level.
A. To the Exporter:
100% financing without resource to the seller of the obligation.
Transactions are concluded on a fixed or floating interest rate basis.
Forfeiting passes the payment risk and political/ country risk of the foreign buyers
country from the sellers to the Forfeiter.
Protection from the risk of interest rate increase & exchange rate fluctuations.
Forfeiting converts a credit-based transaction into a cash transaction.
Increase the ability to offer credit terms, without affecting cash flow & without
taking risk of the buyer.
The exporters balance sheet is improved, as it does not need to carry accounts
receivable, bank loans or contingent liabilities.
Documentation is usually concise and straight forward.
Forfeiting relieves the exporter from administration and collection problems.
B. To the Banks:
To work with the specialist in the field and who is not a competitor.
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To assist the customer with many more country risks without increasing the risk
for the bank.
To increase the market share & develop greater customer loyalty.
To fine tune their existing portfolio by selling to a forfeiter and increase room for
the new transactions.
Enables banks to handle more of customers business which the bank may have
had to refuse in the past for reasons of country risk or longer maturities.
Stop the customers from looking to other banks for help (business leakage).
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Simple & Flexible: From the point of view of exporter, this tool of finance is
simple & flexible, as he & forfeiter can decide the term according to the needs of
each other.
Avoid Export Credit Risk: The exporter is completely free for credit risk that
may arise out of possibility of interest rate fluctuations etc.
Avoid Export Credit Insurance: If exporter does not wish for forfeiting, he has
to go for export credit insurance. Which sometimes involve very rigid procedure
as well as costly. But in case of forfeiting he need not bear any such expenses.
ANALYZING FORFEITING
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debt will be used (promissory notes, bills of exchange, letters of credit), and the identity
of the guarantor of payment.
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abstract: that is, it is unconditional irrevocable, and divorced from the underlying trade
transaction.
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4.6 HOW SOON DOES AN EXPORTER GET HIS MONEY?
Many houses claim that exporters get 100 per cent finance in about two days
after presentation of the proper documents. Practices vary between houses.
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4.8 HOW DOES FORFEITING COMPARE WITH OFFICIALLY
SUPPORTED EXPORT CREDITS?
An interesting comparison may be made between Forfeiting and official
supported credits, (through the country's Eximbank).
It should be remembered, that Forfeiting is a complementary method of
finance to officially supported export credits. Nevertheless, Forfeiting does offer
exporters some real advantages over EXIM.
Forfeiting allows the exporter greater flexibility in structuring a deal,
particularly where goods are being supplied from a country where EXIM requirements on
local and foreign content cannot be met under existing regulations.
Further, if a buyer insists on 100 per cent financing (only 85 per cent finance
is available under EXIM rules), then Forfeiting could supply the remaining l5 per cent.
Typically, unless it is a very large or complex deal, a Forfeiter will be able to
indicate within a couple of days whether financing is available or not. It may take longer
for EXIM to come through with a commitment.
In addition, Forfeiting is 100 per cent without recourse. Once the Forfeiter
has bought the paper, the exporter can collect the cash and even forget the entire
transaction. Finance can also be obtained for countries that are off cover from official
export credit insurance (and there are no insurance premiums to pay).
a) Parties to Forfeiting:
There are five parties in a transaction of forfeiting. They are:
i. Exporter
ii. Importer
iii. Exporters bank
iv. Importers bank
v. The forfeiter
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b) Steps involved in Forfeiting:
2) Commercial contract:
The exporter and the importer sign the commercial contract.
3) Delivery of goods:
A forfeiting certificate is provided by the authorized dealer (AD) to be
attached to the Goods Received prior to the submission of the customers. The rest of the
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shipping documents are prepared as per the commercial contract. The goods are then
dispatched to the importer.
4) Gives guarantee:
The importers bank provides guarantee at the request of the importer.
6) Delivers documents:
The exporter then assigns the guarantee in favor of the forfeiter and forwards
other documents relating to forfeiting.
7) Makes payment:
On receipt of complete documentation, the forfeiter makes the payment to
the exporter on a without recourse basis.
9) Repays at maturity:
The importer makes the payment to his guaranteeing bank.
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GENERAL ASPECTS OF FORFEITING
5.2 CURRENCY
5.3 DISCOUNTING
The forfeiter will discount the drafts after the exporter has delivered the
goods to the importer and handed over the required documents to the forfeiter.
The discount (interest) will be deducted from the face value (nominal) of the
drafts and the resulting net proceeds will be paid out immediately. Please refer to parha
6.1 for more details about discount rate.
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drawn by the beneficiary on and accepted by the debtor. These drafts will generally be
guaranteed by a bank aval or a separate bank guarantee of the debtors bank. The first
reason for the predominance of these forms of debt instrument is a matter of familiarity.
Long experience in dealing with such paper has led to considerable ease of handling by
all parties and generally facilitates a quick and uncomplicated transaction.
By transferring the drafts, the exporter also transfers his claim to the
forfeiter. This is done by an endorsement on the back of the draft, the exporter being the
endorser and the forfeiter being the endorsee. A sample endorsement would read Please
pay to the order of forfeiter without recourse - signed exporter. This clause excludes the
endorsees right of recourse against the previous holder of the draft - the main
characteristic of forfeiting.
All drafts should bear this clause which ensures that payment may only be
effected in the currency agreed upon and not in any local currency. The clause will read
effective payment to be made in United States Dollars only, without deduction for and
free of any tax, impost, levy or duty present or future of any nature. A draft bearing this
clause is issued in international format.
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5.5 FORMS OF BANK SECURITY
An aval makes the avalizing bank primary obligor where a guarantee does
not. Besides, an aval is transferable by nature but a guarantee must state tat it is
unconditional and fully transferable.
The simplicity and clarity, together with its inherent abstractness and
transferability makes an aval the preferred form of security for forfeiting.
Claims covered by export credit agencies (ECA), e.g. EXIM Bank, ERG,
Hermes, may of course also be forfeited. The discount rate would be reduced accordingly.
Unlike an ECA the forfeiter will be able to purchase the total claim without restriction.
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TECHNICAL ASPECTS OF FORFEITING
6.1 COST
Discount Rate
The claims will be discounted at an all-in discount rate. The rate is usually quoted as
Grace Days
Grace days are added to each maturity when calculating interest. These will compensate
for delays in payment that are common in certain countries.
Commitment Fee
Exporters will often need a forfeiters firm commitment to purchase a claim long before
the delivery of goods. A commitment fee will then be charged from the day of
commitment until disbursement.
6.2 DOCUMENTATION
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In case the claim will be evidenced by a letter of credit, the following will apply:
The exporter is obliged to meet all terms and conditions agreed to in the
forfeiting agreement, i.e.:
Information Checklist
To be able to submit a firm offer the forfeiter needs the following information from the
exporter:
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Necessary approvals and licenses (import license, transfer documents etc.)
Domicile for payment of the debt
Name of importer and exporter
The forfeiter can often quote his indicative risk premium, even if not all the
details of the deal are known.
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FORFEITING & GLOBAL SCENARIO
The origins of the forfeiting market can be traced in the changes that world
economic structure witnessed during the early sixties, when trade between Western and
Eastern Europe was re-established. The growing importance of trade with developing
countries in Africa, Asia and Latin America; boosted forfeiting market to an international
level. By definition, these transactions are part of trade and project finance. The
discounting method used is linked to the forfeiting market, a subset of export/import trade
finance. Forfeiting is derived from the French term, a forfeit, which means to forfeit. In
a forfeit transaction the exporter or borrower, after pledging notes or bills, forfeits his
rights to future payments to the funder. This method was devised to finance exports of
capital goods from West German manufacturers to the growing markets of Eastern
Europe, which were opening up in the late fifties and early sixties. Short of hard currency
for such imports, the East Europeans declared that they could not operate within the
restraints of the traditionally acceptable three to six month credit periods, and sought
credit for five to ten years, with semi-annual payments. The inherent financial and
political risks of the Eastern European bloc countries were too vague and uncertain for
the West German exporters. They also required speedy cash settlements to invest in new
projects, for which they were seeking refinancing instruments. Moreover the West
German exporters bankers also considered Eastern Europe as too risky, and felt that
the requested credit periods were too long, especially at fixed rates of interest.
Consequently, a group of financers in Switzerland decided to do what the West German
banks could not, i.e., discount the promissory notes or bills of exchange without recourse
to the exporter, a financial commitment that became known as forfeiting. Simply stated,
if the importer or his bank failed to pay on the due dates, this would not be the
responsibility of the exporter, but the forfeiting house (Swiss Banks in those days), which
financed the transaction will carry all the risks. This resulted in the Swiss market being
developed and Zurich became the center for such transactions in the Sixties, thus
assisting the West Germans economic revival. Many countries across the world have
financed their government and infrastructure development projects through these
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transactions with the approval of course of the G-7 Nations. As the coverage of forfeiting
enlarged, it is even finding a place in state and federal financing in UK & US and the
Bureau of Private Enterprise is engaged in guaranteeing forfeit transactions. Because of
its popularity, new applications for forfeiting are constantly being developed such as
shorter and longer credit terms, application to services, sans aval, floating rates,
government guarantees, and so on. As far as the scenario in Asia is concerned Forfeiting
started from 1995 in Japan although its economy had been wavering after the massive
earthquake that struck Kobe. Japans much vaunted earthquake preparedness was
shattered but this has created opportunities for forfeiting. The practice of forfeiting is
relatively new to China, but it is catching up fast. In the early 1990s, some of the overseas
branches of Bank of China (BOC) started to offer forfeiting services to their customers
and later on, it was introduced to the Chinese mainland around 2000. In the past few
years, the forfeiting market in China has developed fast. In 2001, BOC became the first
bank in China to offer forfeiting to domestic clients and currently it claims the top
position with a primary market share of > 40%. BOC joined the International Forfeiting
Association (IFA) in 2003 and now holds the chairmanship of the IFA North and East
Asia Regional Committee (NEARC), which was constituted in June 2005. The ten
members of NEARC include the four state-owned commercial banks and some of the
major joint-stock banks in China. In India forfeiting facility presently is available through
EXIM Bank, SBI GLOBAL FACTORS and few other banks and there is a huge potential
for the development of forfeiting business in future. Some of the leading Banks and
Corporate houses offering forfeiting in foreign countries are- Association of Trade &
Forfeiting In The Americas, Inc. (ATFA) New York, London Forfeiting New York, Mezra
Forfeiting London and Bank of China to name a few.
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GROWTH OF FORFEITING IN INDIA
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CONCLUSION
Export Finance is a very important branch to study & understand the overall
gamut of the international finance market. Availability of favorable Export Finance
schemes directly impacts the local trade, encourage exports, enlarge markets abroad,
improves quality of domestic goods & overall helps the nation boost its encourage
earnings.
In forfeiting the money is with the exporter before he parts with his goods,
thus, eliminating the risk factor altogether. The exporter then has no further interest in the
transaction and it is up to him to decide whether the size of the discount he has had to
accept for this peace of mind is worthwhile.
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BIBLIOGRAPHY
1. www.oiirj.org
2. www.careergyaan.org
3. www.finanzag.csfb.com
4. John F Moran: FORFAITING A USER'S GUIDE WHAT IT IS, WHO USES IT
AND WHY?
5. Cauvery Research Journal, Volume 2, Issue 2, January 2009: FORFAITING AS
A SOURCE OF FINANCE FOR GLOBAL TRADE
6. Trade Finance Guide (Chapter s10; Page 21)
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