Forfeiting, Parties to Forfeiting, Costs of Forfeiting

Forfaiting in French means to give up one’s right. Thus, in forfaiting the exporter hands over the entire export bill with the forfaiter and obtains payments. The exporter has given up his right on the importer which is now taken by the forfaiter. By doing so, the exporter is benefited as he gets immediate finance for his exports. The risk of his exports is now borne by the forfaiter. In case if the importer fails to pay, recourse cannot be made on the exporter.

Forfaiting is the provision of medium-term financial support for the import and export of capital goods. The forfaiter can be thought of as a third party to transactions in the import and export industry. The forfaiter operates similarly to a central clearing counterparty in the OTC markets, where they take on risks from importers and exporters in return for a margin.

Forfaiting process or Parties involved in forfaiting

1. Before resorting to forfaiting, the exporter approaches the forfaiting company with the details of his export and the details of the importer and the importing country.
2. On approval by the forfaiter, along with the terms and conditions, a sale contract is entered into between the exporter and importer.
3. On execution of the export, the exporter submits the bill to the forfaiter and obtains payment. In this way, the three parties involved in the forfaiting process are the exporter, the importer and the forfaiter.
4. If the exports are done against Document Acceptance Bill, it has to be signed by the importer and since the importer’s bank has guaranteed through the L/C, it will be easy for the forfaiter to collect payment.
5. All the trade documents, connected with exports, are handed over by the exporter to his bank which in turn hands over the documents to the importer’s bank.
6. The proof of all these documents will be submitted by the exporter to the forfaiter who will make payment for the export.
7. The cost of forfaiting is included in the bill. The exporter may not lose much as the interest will be included in the invoice and recovered from the importer. However, the forfaiter is exposed to the risk of fluctuations in the exchange rate, interest rate and commercial risk, and to cover these risks, he charges suitably.

Advantages of forfaiting

1. It provides immediate funds to the exporter who is saved from the risk of the defaulting importer.
2. It is an earning to commercial banks who by taking the bills of highly valued currencies can gain on the appreciation of currencies.
3. The forfaiter can also discount these bills in the foreign market to meet more demands of the exporters.
4. There is very little risk for the forfaiter as both importer’s bank and exporter’s banks are involved.
5. Letter of Credit plays a major role for the forfaiter. Moreover, he enters into an agreement with the exporter on his terms and conditions and covers his risks by separate charges.
6. As forfaiting provides 100% finance to exporter against his exports, he can concentrate on his other exports.

Disadvantages or Drawbacks of Forfaiting

1. Forfaiting is not available for deferred payments especially while exporting capital goods for which payment will be made on a deferred basis by the importer.
2. There is discrimination between Western countries and the countries in the Southern Hemisphere which are mostly underdeveloped (countries in South Asia, Africa and Latin America).
3. There is no International Credit Agency which can guarantee for forfaiting companies which affects long-term forfaiting.
4. Only selected currencies are taken for forfaiting as they alone enjoy international liquidity.

Forfaiting in India

For a long time, Forfaiting was unknown to India. Export Credit Guarantee Corporation was guaranteeing commercial banks against their export finance. However, with the setting up of export-import banks, since 1994 forfaiting is available on liberalized basis.

The exim bank undertakes forfaiting for a minimum value of Rs. 5 lakhs. For this purpose, the exporter has to execute a special Pronote in favor of the exim bank. The exporter will first enter into an agreement with the importer as per the quotation given to him by the exim bank. The exim bank on its part, gets quotation from the forfaiting agency abroad. Thus, the entire forfaiting process is completed by exporter agreeing to the terms of the exim bank and signing the Pronote.

Forfaiting business in India will pick up only when there is trading of foreign bills in international currencies in India for which the value of domestic currency has to be strengthened. This would be possible only with increasing exports. At present, India’s share stands at 1.7 percent in the world exports. Perhaps, this will bring a push to the forfaiting market.

Information Does a Forfaiter Need

• The identity of the buyer
• Buyer’s nationality
• Nature of goods sold
• Detail of the value
• Currency of contract
• Date and duration of the contract
• Credit terms
• Payment schedule
• Interest rate
• Know what evidence of debt will be used, e.g., promissory notes, bills of exchange, letter of credit, etc.
• The identity of the guarantor of payment