Financial Express: High minimum service limit makes forfaiting an untapped option

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High minimum service limit makes forfaiting an untapped option

Amiti Sen

Delay in getting payments can sometimes prove to be the bane of export business. Forfaiting is one method by which an exporter can get immediate cash payment for exports at an agreed discount rate. The added advantage of forfaiting is that all risks and responsibilities for collecting the debt is passed on to the forfaiter.

Though the Reserve Bank of India (RBI) had approved forfaiting as an export financing option in India in 1992, not many exporters have adopted this option. The main reason is that the minimum amount of transaction prescribed by the foreign banks offering this service is too high for an average exporter in India. London-based West Merchant Bank, which is the front-runner in providing forfaiting service in India, has fixed the minimum amount of transaction at $1,00,000. Though the amount has been brought down from the previous amount of $2,50,000, it is still beyond most of the Indian exporters.

At a seminar on forfaiting organised by the Federation on Indian Exporters Organisation, the Delay in getting payments can sometimes prove to be the bane of export business. Forfaiting is one method by which an exporter can get immediate cash payment for exports at an agreed discount rate. The added advantage of forfaiting is that all risks and responsibilities for collecting the debt is passed on to the forfaiter.

At a seminar on forfaiting organised by the Federation on Indian Exporters Organisation, thecountry representative of West Merchant Bank, Veena Mankar, said that talks were on to bring down the limit further"We realise that the financing scheme will become popular only after we scale down the limit."

There are several advantages which forfaiting has over other forms of financing. Credit can be extended by an exporter from 180 days to seven years. In India, as the RBI allows credit period only up to 180 days, forfaiting can be useful for transactions where the credit period is beyond 180 days. Says Mankar, "In today's competitive world, unless an exporter offers long credit periods to a foreign buyer it is very difficult for him to enter a new market. So, forfaiting can also help the exporter to expand his market base."

V S Bharucha, economic adviser, Ministry of Commerce, feels that it is important for Indian exporters to look for new markets so forfaiting as an option should be explored. "Fifty per cent of exports from India go to 10 countries and around 70 per cent go to 15 countries. Thesemarkets are becoming saturated. It is high time that exporters look for new vistas."Since forfaiting involves financing on a non-recourse basis, it reduces the risk for deferred payment. Points out Geoff Sharp, assistant director, West Merchant Bank, "As the financing is done off the balance sheet, other banking facilities remain unaffected. Moreover, a fixed discount rate also protects the exporter from the risk of interest rate increases and exchange rate fluctuations."

The speed at which credits are sanctioned by the forfaiting banks is very fast. Says Mankar, "We take anything between one to 30 days for sanctioning. Applications are generally cleared within a week. Delay is only due to failure on the part of the applicants to fill in the applications properly."The procedure for forfaiting is simple. The receivables should be evidenced by debt instruments including promissory notes, bills of exchange, deferred payment letter of credit or a letter of guarantee. The forfaiter purchases the debt instrumentonly after the documents have been accepted by the opening bank.

In India, the facilitating services can be provided by either Exim Bank or any authorised dealer.

To establish its ownership of the debts and the authenticity of the trade transaction, the forfaiter also normally asks for assignment by the way of endorsement of the bill of exchange in its favour or a separate letter of assignment; confirmed or true copies of the invoice; bill of lading and letter of credit with all amendments and confirmations of authenticity, and authority of all signatures appearing on the documents.

The pricing of a forfaiting transaction generally depends on a few considerations. The discount rate depends on the prevailing bank offer rate, country/bank risk and the credit period. A high country risk and longer period will attract higher margins. Different forfaiting banks have different perceptions of risk for different countries depending on their spread in the countries. So, exporters should chose a forfaitercarefully keeping in mind the country they want to transact with.

Discount is calculated for the actual number of days to maturity of the instruments plus grace days which are added for covering the number of days delay normally experienced in the transfer of payment applicable to the country of risk. Commitment fee applying from the date the forfaiter is committed to undertake the financing until the date of discounting is also charged. RBI has stipulated that authorised dealers may also charge a handling fee.

As per guidelines issued by the RBI, the exporter should pass on the forfaiter cost to his buyer for which he should contact the forfaiter at an early stage of negotiations.

Once the exporter is ready to commit to his buyer he gets a firm bid from the forfaiter through an authorised dealer. Once accepted by an authorised signatory of the exporter, it becomes a binding contract between forfaiter and exporter.

When the exporter is ready to ship, he obtains a certificate from the dealer statingthe forfaiting discount. The shipping documents and bills of exchange are forwarded to the buyer. The accepted bills are returned by the buyer to the exporters' bank and the authorised dealer forwards them with other documents to the forfaiter.

The forfaiter, after verifying documents, remits the discounted proceeds for the account of the exporter to the authorised dealer.

Net Express

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This story was printed from Net Express located at http://www.expressindia.com. Net Express provides a portal to India, with news from The Indian Express and The Financial Express along with sites on travel and tourism, the entertainment industry, the power sector, the environment and much more.

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