Financial

Services
EXPORT IMPORT FINANCE –
BILLS, LCs and FORFAITING
 Bodies monitoring
Fn Exch
■ Exchange Control – R B I
■ Trade Control – Min. of Com GOI
■ Min of Foreign Trade –
Enforcement Directorate, N Delhi
■ F E D A I – Mumbai
■ 13 Export Promotion Councils – all
State Head Quarters in India
■ Export Promotion Board, GOI
■ FIEO New Delhi

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 1. Facilities to
Exporters
■ A. FUND BASED
◆ Pre-shipment Credit (Packing Credit facility)
◆ Post-Shipment Credit
✦ Negotiation / Purchase / Discount of Export bills
✦ Post-shipment loans / Advances against B Cs

✦ Advances against claims of duty drawback

■ B. NON-FUND BASED
◆ Advising / Confirmation of export LCs
◆ Export Guarantees
◆ Forward Exchange Contracts
◆ Back to Back Letter of Credit issue

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 Financing
Exporters
■ a) Pre-Shipment Finance
◆ Packing Credit
◆ Advance against receivables/ Export
incentives from Government of India
■ b) Post-Shipment Finance
◆ Negotiation of Export Bills
◆ Advances against Bills under collection
◆ Others ...

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 a. Pre-Shipment
Finance
■ A Working Capital facility
■ Purchase of raw material etc
■ Covers all costs prior to shipment
■ Two essential features
◆ an Export Order and/or Confirmed
Irrevocable Letter of Credit
◆ To Liquidate the advance out of
proceeds of export bills negotiated
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 b. Post Shipment
Finance
■ Negotiation or Discounting of Exp Bills
■ Scrutinize the Export Documents
◆ Permissible Currencies ?
◆ Permissible method of Payment ?
◆ All L/C terms have been complied with ?
◆ Customs certified GR / PP form obtained ?
◆ Validity of documents per EC Regulations ?

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 Letter of
Credit

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 Letter of
Credit
A letter (firm, absolute and autonomous
undertaking) issued by the importer’s
bank in favour of the exporter
undertaking that the bills drawn by the
exporter up to a particular amount will
be duly honored by the opening bank,
provided the terms and conditions of
the credit are strictly complied with by
the exporter.
 In simple, L C is a
■ Written assurance of an issuing bank …
■ Given to the seller / exporter / beneficiary
■ On instructions from the importer (applicant)
■ To effect payment ….
■ Up to a stated sum of money
■ Provided the seller presents all specified
documents evidencing shipment of goods or
performance of services agreed upon
■ Within the prescribed period of time.
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 U C P D C - 500
■ Uniform Customs and Practices
for Documentary Credits, 1993
■ Revision – Publication No. 500
■ In force from January 01, 1994
■ 49 Articles covering all aspects
■ International Chamber of
Commerce (ICC), Paris
■ Sets in all terms and conditions
■ Scope for arbitration by ICC
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 S W I F T,
Brussels
■ Society for Worldwide Inter-bank
Financial Telecommunications
■ Created under Belgian law
■ In operation since May 1977
■ Comprises computer network
system for all member banks
■ Speed, Security and Efficiency

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 Parties to
■ an L C
Buyer / Importer ■ Seller / Exporter /
/ Opener / Beneficiary
Applicant ■ Advising /

Confirming /
■ Buyer’s Bank/ Notifying Bk
Issuing Bank/
Opening Bank/ ■ Paying /Negotiating
Establishing Bank
Bank ■ Exporter’s Bank

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 Types of Letters
of Credit
1. Irrevocable Letter of Credit
2. Revocable Letter of Credit
3. Confirmed Credit
4. Deferred Payment Credit
5. Acceptance Credit
6. Revolving Letter of Credit
7. Transferable Credit
8. Back to Back Credit and
9. Red Clause Credit
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 Contents in a Letter of
Credit
■ Terms - Date, Price, Ports, Qly, Qty,…
■ Draft / Bill of Exchange (in Duplicate/Triplicate)
■ Commercial Invoice - FOB, CIF, C & F, etc
■ Bill of Lading - Complete set ( No.of Copies)
■ Certificate of Origin
■ Marine Insurance Policy - 110 % CIF Value
■ Consular Invoice
■ Fumigation Certificate
■ Weight Certificate

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 Documents under
LC
■ 1. Bill of Exchange or Draft
◆ Date : Demand or Usance
◆ LC Amount
◆ Value - FOB or CIF
◆ Drawee arrangements
◆ in sets of 2 or 3

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 2.Invoice &
Packing List
■ Description of Goods
■ Quantity,
■ Rate
■ Amount
■ Ports of shipment and
destination
■ Freight prepaid or payable at
destination

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 3.
Insurance
■ Mode of shipment
■ Port of Shipment and
Destination
■ Transshipment permitted ?
■ Cover Note, Certificate allowed ?
■ Type of Risks covered
■ Amount - FOB or CIF + 10 %

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 4. Bill of
Lading
■ A receipt from Shippers or their Agents
■ A Document of Title to Goods (UCPDC)
■ Received for Shipment or On Board ?
■ In sets of 2 or 3 ?
■ Negotiable and non-Negotiable copies
■ Types of B/L - Clean, Chartered Party, On
Board, etc..

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Some
Discrepancies in
Export Documents
1.L C already expired
2.Late Shipment of Goods
3.Late presentation of Documents
4.Bill amount in excess of L C amount
5.Shipments made to different Port
6.Partial Shipment/ Transshipment done
7.B L or AWB not signed properly or not
stamped properly or not authenticated...

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 Discrepancies
….
8. Insufficient or incomplete set of BL
9. Defective BL - eg Received for Shipment
10. “On Board” - not authenticated in BL
11.Variations in Packages/Weights/specifics
12.Inconsistency among the different docs.
13.Inadequate or defective Insurance cover
14.Defective Bills of Exchange
15.Non-submission of any other documents

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 Advances
against
Incentives
from Govt..
■ Duty Drawback : Export
Incentives in the form of
refund of Excise / Customs
Duty
■ Advances for these @ lower
rates of interest

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 Some factors to
consider

■ Flexible attitude to margins,security

■ Exporters capacity to execute Order
■ Quantum of Finance -commensurate ?
■ Standing of the LC Opening Bank ?
■ Status Report on overseas Buyer ?
■ Country Risk in the importer’s country ?
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 Some factors
...
■Exporters to comply with Ex Control
Registration - IE Code No. from DGFT ?
■ Possession of Exp L I C or Quota/EPC ?
■ Availability of ECGC Cover/Guarantee ?
■ Spread of Risk-large number of buyers?
■ Risk - covered by Forward Contract ?
■ Any restrictions in importer’s country ?

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 RBI relaxations to
exports
■ AD s to extend PSC for >180 days up to
<270 days without prior clearance
■ “Running Account Facility” can be given
■ Given at concessional rate of interest,
each packing credit to be kept separate
■ Amount of advance can be FOB Value or
Domestic Market Value - lower of the two
■ Clean Packing Advances can be given
selectively - Hypothecation / Pledge

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 2. Financing
Importers
■ Term Loan for machinery
◆ Under LC or DPG

■ Working Capital for day-to-day needs

◆ Under LC or Purchase Contract
◆ Raw Material - imported or indigenous
◆ Others - spares or components etc

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 Retirement of
Import Bills
■ Strictly under terms of LC
◆ Scrutiny of all documents viz., BE, BL,
Invoice, Packing List, Insurance, Certificate of
Origin, Consular Invoice, etc
■ Release Payment by debit to TL / CC
■ Formalities connected to goods
release
◆ C & F Agents
◆ Customs formalities
■ Charge on Assets as usual
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 Factoring
■ A continuing arrangement between Factor
and a “client” (seller of goods/services”)
■ It is purchasing the client’s a/cs receivables
- with or without recourse,
■ Maintenance of Sales Ledger
■ Collection of Receivables from Customer
■ Follow up and
■ Sending of Statements, Adv Services etc

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 Forfaiting or
Forfeiting ?
■ Yet another form of long-term factoring;

■ Right to future payment of cash forfeited

through receiving discounted cash flows;

■ Expected to be in 21st Century banking…

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 What is
Forfaiting ?
■ “Forfait” is derived from French word “a forfait”
which means forfeiting or surrender of rights
■ It is a mechanism of financing exports
◆ by discounting export receivables
◆ evidenced by Bills of Exchange or PN
◆ without recourse to the seller (viz exporter)
◆ carrying medium to long term maturities
◆ on a fixed rate basis (discount)
◆ upto 100 per cent of the contract value

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 Six Parties in
Forfaiting
❚ Exporter (India)
❚ Importer (Abroad)
❚ Exporter’s Bank (India)
❚ Importer’s/Avalising Bank (Abroad)
❚ EXIM Bank (India )
❚ Forfaiter (Abroad)

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 Forfaiting : 8
Steps
1. Coml contract : Exporter & Foreign Buyer
2. Commitment to Forfait B Exch / Pro Notes
3. Delivery of Goods by Exporter to Buyer
4. Delivery of B Ex / PN to Bank to EXIM Bk
5. Endorsement of BE / PN without recourse
6. Cash Payment/ thro’ a Nostro Account
7. Presentation of BE / PN to Buyer on maty
8. Payment of Debt Instrument on maturity

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 FACTORING Vs FORFAITING
S.NO FORFAITING FACTORING
1. 100% FINANCE RESTRICTED TO 80%

2. PURE FINANCING PACKAGE OF SERVICES

ARRANGEMENT

3. APPLICABLE FOR SHORT TERM FINANCING

DEFERRED ARRANGEMENT
TRANSACTIONS

FACTORING – CLOSER FOLLOW UP OF RECEIVABLES

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 FACTORING Vs FORFAITING
S.NO FORFAITING FACTORING
4. ONLY INTERNATIONAL FOR BOTH DOMESTIC AND
TRADE INTERNATIONAL
TRANSACTIONS

5. BASED ON FINANCIAL BASED ON EXPORTER’S AND

STANDING OF THE IMPORTER’S STANDING
“AVALLING BANK”

6. ALWAYS WITHOUT MAY BE WITH OR WITHOUT

RECOURSE RECOURSE

FACTORING – FOLLOWS UP EACH INVOICE

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 Forfaiting vs. Export
Factoring
■ Forfaiting discounts 100% value of Bill
■ Avalising Bank provides unconditional and
irrevocable guarantee for Forfaiting
■ Forfaiting is a pure financing arrangement
■ Forfaiting covers Notes and Bills for Long Term &
Deferred Payments : 3-7 years
■ Forfaiter charges for and covers Exchange Rate
fluctuations risk

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 Forfaiting
means...
■ Forfaiting is the discounting of trade receivables,
without recourse to the Exporter
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.

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 London
Forfaiting ....
■ Applications and tenors
■ Typical applications and tenors
■ Commodities (oil, coal, rice, grain, etc.) Financed from 90
days to 18 months
■ Services (engineering, design, maintenance, etc.)
Financed from 180 days to 3 years.
■ Technology (software, computers, communications, etc.)
Financed from 180 days to 5 years.
■ Capital equipment (machine tools, generators, tractors,
etc.) Financed from 2 to 7 years
■ Turn Key Plants (power generation, asphalt production,
etc.) Financed from 3 years to 7 years -
Construction/Project (hospitals, airports, factories, etc)
Financed from 3 years to 7 years.

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 What is discountable?

■ Generally, to discount a receivable without

recourse, there should be a document evidencing
the debt owed by the Buyer to the Exporter. This
debt can be evidenced by a wide range of
documentation such as:
■ · Promissory Notes
■ · Bills of Exchange
■ · Letters of Credit / Standby Letters of Credit
■ · Payment guarantees
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 What is
discountable?.....
■ Open Book Receivables, subject to certain
conditions

In most instances, the debt will need to bear the

unconditional, irrevocable and freely transferable
guarantee or the Aval of an acceptable bank in
the Buyer's country.
■ In some cases however, London Forfaiting can
consider top tier corporate or government debt
without additional bank security.
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 Role of Ex-Im Bank of
India
■ EXIM Bank (estd 1982) is authorised by RBI

■ A facilitator between Indian Exporters and the

overseas Forfaiting Agency

■ EXIM Bank obtains quotes from Forfaiter

■ EXIM Bank issues necessary Certificates

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 EXIM Bank and
Forfaiting
■ Arranged the first Transaction in 1993-94
■ Credit Periods range from 90 days to 7 yrs
■ Goods covered - textiles, plant & m/c etc

■ Countries - Brazil, Germany, Ghana,

Guyana, Indonesia, Iran, Paraguay, Saudi
Arabia, South Africa and Turkey

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 Charges in
Forfaiting
■ Commitment Fee (to Forfaiter)

■ Discounting Fee (to Forfaiter)

■ Documentation Fee (EXIM Bank)

■ Intermediary Service Fee, if any.

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 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

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 -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.
■ The Importer may be able to take advantage of export
subsidy schemes which are often available from the
Exporter's government.

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 Other Important
Features
■ Normally receivables of 1-7 years covered

■ Export Contract should be in any major currency US Dollars,

Pound Sterling, Japanese Yen, Euro etc

■ Minimum value is of US $ 500,000

■ Forfaiting Quotes depend on the country risk perceived by

the Agency

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 Some major/active
Forfaiters
■ Banque Indosuez Aval
■ Amsterdam Rotterdam Bank
■ Chase Investment Bank PIc
■ Barclays Bank PIc
■ Citicorp Investment Bank PIc
■ Midland Bank Aval, Hungarian International Bank
■ Banque Indosuez Sogem Aval
■ Standard Bank, London Forfaiting Asia,
■ Morgan Greenfell Trade France, ING Cap
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 List of some
Forfaiters
■ Standard Bank, London
■ Hong Kong Bank
■ Indo Aval
■ ABN AMRO Bank
■ Meghraj Financial Services
■ Triumph International Finance India Ltd.,
■ Natwest Bank and
■ West LB + EXIM Bk + IFC : GTF, India

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 Global Trade Finance
Pvt Ltd
■ Co-founded by West Lb Bank (Germany)- 40%,
International Finance Corp – 25% and EXIM
Bank of India – 35% share-holding
■ EXIM MD is Chairman of GTF
■ To carry out Factoring and Forfaiting in India
■ Capital Base of Rs. 45 crore – from 2001
■ In 2002-03, factoring t/o of Rs. 500 crore
■ Total Income Rs. 13.8 cr and Profit – Rs 1.3 cr

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 Suggested
websites
■ www.forfaiting.com
■ www.forfaiting.co.uk
■ www.meridianfinance.com
■ www.mezraforfaiting.com
■ www.londonforfaiting.com
■ www.eximbankindia.com
■ www.ecgcindia.com
■ www.afia-forfaiting.org
■ www.indianexportregister.com

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 Books on
Forfaiting
■ Ref : Mezra / London Forfaiting
■ Guide to Forfaiting by Lutschg : 2 Parts
■ Forfaiting for Exporters by Andy Ripley :
Amazon.com
■ Forfaiting (1986) by Ian Guild
■ EXIM Bank of India Booklet
■ Indian Institute of Bankers, Mumbai Booklet
■ NIBM, Vinimaya
■ ICFAI – Chartered Financial Analyst

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 Thanks
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