BANGALORE, May 21: Exim Bank willshortly initiate steps to promote forfaiting as an alternative financing mechanism for exporters and act as a facilitator between the Indian exporter and the overseas agency.

This was disclosed by D G Prasad, resident representative of the Exim Bank here today at a seminar on how forfaiting can assist Indian exporters to mitigate risk and provide better financing solutions. The seminar was organised jointly by Euromoney Publications, West Merchant Bank of London and the Exim Bank.

According to Prasad, forfaiting offers an array of advantages to the exporter. It eliminates risks like political, transfer and commercial risk.

It also protects the exporter from risk of interest rate increases and exchange rate fluctuations. The forfaiting transaction is priced after taking into account four elements. The first is the discount rate where discount is usually quoted as a margin over the London interbank offered rate.

The margin in such cases will depend on the country/bank risk and the credit period. The second pricing factor is the grace period after the maturity for the purpose of covering delays.

Pricing will also be based on the commitment fee which is applicable from the date the forfaiter is committed to undertake financing until date of discounting.

Apart from these, Exim Bank will levy a handling fee, which is currently 0.25 per cent of transaction value subject to a minimum of Rs 10,000.

Forfaiting as a financing option, has been approved by the Reserve Bank of India in 1992. It is the non-recourse discounting of export receivables.

``An exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker,'' said Margrith Lutschg-Emmenegger, director, West Merchant Bank.

In a forfaiting transaction, the exporter surrenders, without recourse to him, the rights to claim payment on goods delivered to an importer, in return for immediate cash payment from a forfaiter. The additional advantages are upto 100 per cent financing, no restriction of country sourcing, quick response and simple documentation, non-recourse financing and improved cash flow. Besides, no ECGC cover is required for a forfaiting transaction.

``Though the concept is still at a nascent stage in India, exporters should look to this tool for better returns,'' Michael Dunne of West Merchant Bank said.

Explaining the characteristics of a forfaiting transaction, Veena Mankar, managing partner, Indo-Aval & Consultancy Services, Mumbai said that in such transactions credit is extended by the exporter from 180 days to 7 years. The minimum amount should be US $ 100,000 but ideally should be $ 250,000.

The payment should be receivable in any major freely convertible currency like USD, Pound Sterling, Deutsche Mark and Swiss Francs. The exporter should also furnish a letter of credit or a guarantee by a bank, usually in the importers country.

The contract entered into should be for either goods or services, Mankar said.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.