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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.
Exporter (India) Importer (Abroad) Exporters Bank (India) Importers/ Bank (Abroad) EXIM Bank (India ) Forfaiter (Abroad
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.
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.
Extent of Finance Usually 75 80% of the value of the invoice Credit Worthiness Factor does the credit rating in case of nonrecourse factoring transaction
Services provided Day-to-day administration of sales and other allied services Recourse Sales With or without recourse By Turnover
STAGES INVOLVED IN FORFEITING: Exporter approaches the Facilitator (Bank) for obtaining Indicative
Forfeiting Quote.
Exporter has to confirm the Firm Quote. Exporter has to enter into commercial contract.
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
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
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