Generally, a trade bill arises out of a genuine credit trade transaction. The seller draws a bill of exchange on the buyer for the invoice price of goods sold on credit. The debtor of goods accepts the same and binds himself liable to pay the amount on due date. In such cases the seller of goods have to wait till due date, for the sale price. It involves locking up of his working capital which is very much needed for smooth running of business or for carrying normal production process. It is the commercial banks enter into as a financier. The commercial banks provide immediate cash by discounting trade bills. They deduct a certain charge as discount charges from the amount of the bill and balance is credited to customer account. Bill of exchange financing is the most liquid one from the banker’s point of view since, in time of emergencies, they can take those bills those bills to RBI for rediscounting. Even if the bill is dishonored, there is a simple remedy. The bank has to simply note and protest the bill and debit the customers account. Bills are always drawn with recourse. Despite many efforts of RBI to promote and develop a good bill market, bill financing forms barely 5 % of the total credit extended by banks. The latest step of RBI is to promote the bill market is launching of the factoring service organizations.
Factors, who are usually subsidiaries of banks or private financial companies, generally rendering the following services: • Purchase the accounts receivable of the seller for immediate cash.
• Administer the sales ledger of the seller.
• Collects the account receivable.
• Assume the losses which may arise due to bad debts.
• Provide relevant advisory services to the seller.
For rendering these services, the factor charges a fee that is usually
expressed as a percentage of the total receivables factored. Factoring is thus alternative to in-house management receivables.
1. Seller invoices buyer in the usual way, only adding a notification that is assigned to and must be paid to factor. 2. Copies of invoices are submitted to factor with schedule of offer, accompanied by the receipted delivery challan or any valid proof of dispatch. 3. Factor will provide pre-payment up to 80% of the invoice value and balance 20% on realisation. 4. Follows up with customers for realisation for payment due. 5. Seller will be informed of factored invoices through monthly statement of account sent by factor.
Functions provided by Factor:
1. Purchase of account receivable: Factor purchases the book debts of its clients. The factor provides advances upto 80% immediately and balance on realisation. Thus, the factors act as a source of short-terms funds.
2. Risk control: The factor having developed a high level of expertise in credit appraisal reduces the risk of loss through bad debts. Moreover, he assumes the losses which may arise due to bad debts.
3. Sales Ledger Administration: For a service fee, the factor provides its client firm professional expertise in accounting and maintenance of sale ledger. The factor also sends periodic statements to client.
4. Collects the accounts receivable: The factor undertake to collect all receivables on behalf the client relieving him of problems and enabling to concentrate on other important functions of his business.
5. Advisory Services: The factor developed a high level expertise in credit appraisal/ dealings and having access to extensive credit information. Advisory services provided are: • Customer’s perception of the client’s product, changing market strategies and emerging trends. • Audit procedure followed for invoicing, delivery and dealing with sales returns. • Provide information of its client with respect to the credit worthiness of customer and credit period.
Types of Factoring:
1. Recourse Factoring: Under this arrangement, the factor provides receivable on the condition that any loss arising out of irrecoverable debts will borne by the client.
2. Non- recourse or Full Factoring: Client gets full credit protection .i.e. any loss arising out of irrecoverable debts will borne by the factor.
3. Advance Factoring: In case of advance factoring , where the factor makes prepayment of around 80% of the invoice value to the client and balance would be provided on realisation.
4. Maturity Factoring: The factor pays the client either on guaranteed payment date or on date of collection from the customer. The factor does not make any advance or prepayment.
5. Invoice Factoring: Under this type, the factor simply provides finance against invoice without undertaking any other functions. All works connected with the sales administration have to be done by the client himself.
6. Undisclosed Factoring: The factor does not follow up or collect the payment from the customer. The customer is not be aware of the factoring arrangement and pays the client directly. The factor receives payment of invoices through client.
7. Bank participating factor: Factor arranges a part of the advance through banker.
8. Disclosed Factoring: Factor provides finance after disclosing the fact of assignment of debts to the debtor concerned. Generally all factoring are disclosed factoring. This type of factoring is restored when the factor is not fully satisfied with the financial condition of the client.
9. Domestic Factoring: The factoring arrangement where all the three factor, seller and buyer are in same country, subject to the same laws.
10. International Factoring: The factoring arrangement, where the seller and buyer are into two different countries involving co-operation between two factoring companies, one in the seller’s country (export factor) and other in the buyer’s country (Import factor).
Advantage of Factoring:
1. Liquidity: Seller will have ready cash for his credit sale. Seller will have funds up to 80% of the factored invoices. Seller’s liquidity will improve and therefore, seller’s production will be accelerated.
2. Ledger Management: Factors basically provide sales ledger management and collection of receivable. Factor review the entire billing process. The factor has to credit the customer’s account whenever the payment is received, send monthly statement and to maintain liaison between client and customer to resolve all possible disputes. He has to inform the client about balances in the account, overdue period, financial standing of customer’s. Thus, the factor takes up the work of monthly sale analysis, overdue invoice analysis and credit analysis.
3. Rendering consultancy services: The factor provides management services to the client. He has to inform about the additional business opportunities available, changing business, credit period, financial profiles of the customer. Seller will be free to concentrate on production, marketing etc.
4. Credit risk service: Bad debts eat away the profits of a concern and in some cases lead to closure of business. But once factoring relation ship is established, the client need not bother about the risk of loss due to bad debt.
5. Collection service: Collection of debt becomes an important internal credit management and requires more and more time. Now collection is completely taken by factor.
6. Economy in service: Factors are able to render very economic service to the clients because their overhead cost is spread over a number of clients. Moreover service charges are also reasonable. Factoring is a cheap source of finance to the client because the interest charged only on the amount actually provided to the client and not on the total amount.
7. Off-Balance Sheet Financing: Factoring is an off-balance sheet means of financing. When the factor purchases the book debts of the client, these debts no longer exist on the current side of the balance sheet. It leads to reduction in debts and less collection problem. The client can utilise the money to pay off its creditors. This improves current ratio.
Cost of factoring: The cost of factoring comprises of two aspects namely finance charges and service fees.
Finance charges: Since the factor provides 80% of invoice as credit, he levies finance charges. This charge is normally the same interest levied by bank. Factor charges interest only on the amount actually provided to the client.
Service Charge: This charge represents service provided by the factor, such as collection of receivable, ledger management, consultancy services (these services are discussed above. The fees usually vary from 0.5% to 3%.The service fee is a percent charged on client’s turnover.
Factoring .vs. Discounting:
1. The factors may extend without any recourse to the client in the event of non-payment by customers. But, discounting is always made with recourse to client. 2. Account receivables under discount are subject to rediscounting whereas it is not possible under factoring. 3. Factoring involves purchase and collection of debts, management of sales ledger and advisory services. But, Discounting involves simply provision of finance alone 4. Bill discounting finance is a specific one in the sense that is based on individual bill arising out of an individual transaction only. On the other hand, factoring is based on whole turnover i.e. bulk finance is provided against unpaid invoices. 5. In case of bill discounting, drawee is always aware of banks charge on receivables. But, under disclosed factoring every is kept confidential. 6. Bill financing through discounting requires registration of charges with registrar of companies. In fact, factoring does not require registration.
Factoring in India:
In India, the idea of providing factoring services was first set up by the Vagul working group. It has recommended that banks and private NBFC companies should be encourage to provide factoring services with a view to helping the industrialists and traders to tide over financial crunch arising out of delays in the realization of their book debts. The RBI subsequently constituted a study group in January 1988 under the chairmanship of Mr .C.S. Kalyanasundaram, former Managing Director of SBI, to examine the feasibility of starting factoring services. On the recommendation of the committee, the Banking Regulation Act was amended in July 1990 with a view to enabling commercial banks to take up factoring services by forming separate subsidiaries.
In India State Bank of India was the first to start factoring services. Factoring services are provided by following companies in India:
Factoring companies in India
Canbank Factors Limited: http://www.canbankfactors.com
SBI Factors and Commercial Services Pvt. Ltd: http://www.sbifactors.com The Hongkong and Shanghai Banking Corporation Ltd: http://www.hsbc.co.in/1/2/corporate/trade-and-factoring-services Foremost Factors Limited: http://www.foremostfactors.net
Global Trade Finance Limited: http://www.gtfindia.com
Export Credit Guarantee Corporation of India Ltd: https://www.ecgc.in/Portal/productnservices/maturity/mfactoring.asp Citibank NA, India: http://www.citibank.co.in Small Industries Development Bank of India (SIDBI): http://www.sidbi.in/fac.asp Standard Chartered Bank: www.standardchartered.co.in
Indian factoring market has matured: Arvind Sonmale 1. What kind of services is Global Trade Finance Limited providing to the export import community for easy trade? Mr. Sonmale: Finance: The financing provided by Global Trade Finance Ltd. (GTF) is flexible and linked directly to the client’s sales. Finance is made available up to 95% of the invoice value. Credit Protection: GTF provides credit protection against payment default of buyer. In the event of a claim on account of default, the payment to the seller is simple without any elaborate procedures. Collection Service: GTF assumes responsibility for collection of receivables under the factoring agreement. GTF has systems in place for tracking receivables on an invoice-to-invoice basis and has an effective correspondent network in more than 80 countries for follow up of receivables. Professional Sales Ledger Management & Analysis: GTF manages for its clients the complete sales ledger maintenance. GTF has now provided web access to its clients for accessing their accounts online via its “GTF Client Access” module.
GTF is the first factoring company in India to provide online access to its clients. 2. Can you please explain the meaning of Factoring, which could be easily understood by our members? Mr. Sonmale: Factoring is conversion of a credit sale into cash without recourse to seller. It is a receivables management and financing service designed to improve the seller’s cash flow and cover risk. It is frequently referred to as receivables factoring or accounts receivable financing, invoice discounting, or invoice finance. It allows businesses to sell outstanding invoices to a factoring company, like GTF, and immediately receive cash for working capital. The immediate injection of cash will help you in strengthening your company’s daily operations and improving your financial situation. It should be borne in mind that factoring is not a loan. It is a financial structure in which businesses sell outstanding invoices to a factoring company for immediate cash. Although some may refer to this practice as accounts receivable loans or factoring loans, these are misnomers.
When your company decides to participate in accounts receivable financing, you are taking a cash advance, not a loan, as a down payment for the sale of your receivables to the factor. When your client pays the final invoice, you receive the balance after the factor deducts its advance and fees. And the best part about receivables factoring is that it is your customer’s credit, not your own, that is most important in qualifying for accounts receivable financing. 3. Though India has a vast SME sector, yet the growth of factoring has been slow. What in your perception has been the stumbling block for growth? Mr. Sonmale: Growth of factoring in India has been far from slow. According to a World Bank report, India’s factoring activity grew by over 800% between 1998 and 2003. According to the latest report from Factors Chain International (FCI), the Indian factoring market has grown from Euro 1290 million to Euro 3560 million (a growth of 176%) between 2002 and 2006. There are signs that show that the Indian factoring market is maturing fast. In fact, GTF is the founding member of Factors Association of India (FAI), a grouping of factoring companies operating in India. FAI is a strategic conglomeration that will ensure wider dissemination of knowledge of factoring in India.
There are no insurmountable stumbling blocks for growth in India. However, there are certain minor hiccups that have come in the way of unleashing the full potential of factoring in India. For instance, India lacks a proper legal framework to protect factoring services. Factoring companies need legal protection as all advances are uncollateralized. We can’t initiate summary proceedings as we are categorized as a Non Banking Finance Company (NBFC). There is no protection under either Debt Recovery Tribunal (DRT) or Securitisation Act. Another issue that needs to be addressed is stamp duty. When a debt is assigned, the stamp duty has to be paid. This duty is decided by the respective State Governments and it does not have a uniform structure. 4. How is factoring different from financial solutions given by banks? In factoring does an exporter has to pledge his other assets besides receivables? Mr. Sonmale: In the pre-liberalization era, a generation of CFOs have grown up with the short term financing formula ‘Working capital = Bank Finance’.
Obtaining that bank finance was always a maddening rush to meet the complex norms specified by a plethora of official committees. This resulted in a rationing mechanism and robbed the credit delivery system of the flexibility to cope with even intra-year seasonal fluctuations, let alone full-blown business cycles. This obviated the need to develop strategies to bridge the working capital gap. For years, the business expansion capabilities of Indian entrepreneurs have been sacrificed at the altar of Maximum Permissible Bank Finance (MPBF). Though detailed regulations relating to MPBF are abolished now, the banking system is still characterized by a lot of quirks and bottlenecks. For a fast expanding business, bank overdraft facility cannot keep pace with the order book and cannot supply the funds needed. An overdraft is the equivalent of a company straightjacket.
So, if a business sells quality products or provides reliable services to other businesses on credit terms, then factoring is the logical option. Banks generally insist on collateral for any kind of financing. In factoring, no collateral is required. For overseas sales, banks insist on Letter of Credit (LC) or Bill of Exchange (BOE). Besides, bank financing tends to be cyclical in nature: there is little scope for increasing limits more than once a year. With Global Trade Finance Ltd. (GTF), a customer can seek an increase in limit possibly every week. Customers don’t have to wait for their audited results to be published to avail an increase in limit. Besides, we don’t insist on LC or BOE. 5. What are the benefits of Factoring? Mr. Sonmale: There are multifarious reasons to go for factoring. Some of them are quite obvious, where as others are more subtle. A few of the benefits of factoring are listed below: Factoring is easy and fast Turn accounts receivable into cash immediately Avoid giving up equity to raise cash Meet increasing sales demands Offer better credit terms to customers Take advantage of early payment discounts using cash freed by factoring Concentrate on core functions like marketing and production Stop offering early payment discounts to customers Improve your credit worthiness by meeting obligations on time
Don’t incur any new debt Use your customer’s good credit as leverage Get invoices paid faster Reduce your company’s bad debt Early detection and warning of customer service problems Credit screening Credit monitoring No geographical limits Receive professional collections and invoice processing assistance Receive detailed management reports 6. What are the various types of factoring available? Mr. Sonmale: Export Factoring: GTF is a market leader in export factoring services in India. Export Factoring is a specialized service involving a continuing arrangement between GTF and the exporter client.
GTF purchases the client’s receivables as they arise and assumes the functions of finance, credit control/protection, collection, and administration of debt. Product Features: Immediate finance up to 90% of the eligible export receivables Bad debt protection up to an extent of 100% is offered, thus ensuring total predictability of cash flow Constant liaison is maintained with the debtors in importing countries and collections are effected in a diplomatic but efficient manner ensuring faster payment and saving in financial costs Maintenance of entire sales ledger of the exporter handled by GTF Efficient and fast communication system through letters, e-mail, telephone or in person in the buyer’s language and in line with national business practices Sufficient liquidity source to grant competitive credit terms to the debtors Import Factoring: GTF is a pioneer in import factoring services in India.
This facility enables its customers to import goods and services without the administrative hassles of opening a LC. This facility can be provided either on a fund based or a non-fund based platform. Should the overseas supplier already have a relationship with a factoring entity abroad, GTF could provide credit protection and collection services to the factoring entity on behalf of the importer in India thus enabling GTF’s customer to import on open account terms. Alternatively, if the goods are supplied on open account terms, GTF could arrange to make payments to the overseas supplier on behalf of the importer. Domestic Factoring: With the introduction of domestic factoring facility, GTF has on offer more solutions for its customers. Now, customers having sales in the domestic as well as international markets can find a single solution at GTF.
Depending on the client’s requirement GTF offers two variants in its domestic factoring product: Domestic factoring with recourse Domestic factoring with credit protection Like International Factoring, in domestic factoring invoices are raised on open account sale of goods and are assigned to GTF for financing, collection, and sales ledger administration. Usually, this arrangement is used when the buyer and the seller have a long-term trading relationship. Product feature Finance up to 90% of the invoice/bill value Credit protection & management (optional) Collection Service Sales ledger management and analysis Reverse Factoring: Reverse Factoring is the discounting of supplier bills in respect of the client’s regular purchases. GTF assesses and considers only regular suppliers of the client having a relationship of minimum 6 months. Suppliers have to be pre-approved by GTF. Product features: Finance up to 100% of the invoice/Bill value Credit tenor up to 120 days 7. What kind of companies can avail the service of Factoring? Is it applicable to new companies too? Can all export industries avail the service of Factoring?
Mr. Sonmale: Industries that typically benefit most from factoring account receivables: Manufacturers Transportation Companies Distributors Wholesalers Staffing Firms Telecommunication Companies Service Providers However, GTF can tailor the facility to cover export of the following services: Advertising Solicitors & Legal firms Architect firms Medical firms Construction & Engineering Contracts Software Media & Entertainment Much as GTF would like to factor every company, those having the following characteristics are normally unsuitable: Where the credit offered to customer is more than 180 days Where there are contra sale, consignment sale, sale or return arrangements Where most of the sales are to associated companies Where sales are to retail consumers, to small retail outlets, or to the public at large Where sales are to countries not covered by GTF’s overseas correspondents 8. What is the fee structure involved in factoring? Mr. Sonmale: Factoring is flexible in every aspect.
It is not an off-the-shelf package with rigid formulae that cannot be altered to the business requirements or the financial stature of the client. As such, the fee structure is not fixed and is determined on a case-by-case basis based on the value of services we provide. One thing we need to clarify though is that we don’t define ourselves by the interest rate we offer. Instead, our focus is on providing value added services that no bank can provide. In a highly competitive market scenario, it makes eminent sense not to make it a race to the bottom. We don’t just provide finance; we also look after debt collection, credit protection, and sales ledger management. In general, the fee structure for factoring companies is as following: Factoring discount or interest on funds utilized (11.5% currently) Credit protection fee (0.5% currently) Document handling fee (0.1% of invoice value currently) A one-time limit fee payable at the time of sanction Our products have been developed on the basis of user feedback and hence are highly customized. Another important point to be noted is that interest rates can be deceptive at times, as they don’t give the complete picture.
A potential customer needs to evaluate the transaction cost involved. Commercial banks’ transaction cost is definitely higher than that of factoring companies. 9. Global players are looking at India as an alternative to China for their manufacturing needs. Do you feel this will lead to factoring growth in India? If yes, where do see the growth of factoring in India heading in the next couple of years? Mr. Sonmale: Even a few years back, the question on top of many peoples’ minds was, ‘Is it going to be India or China’? The answer is increasingly becoming clear. It is not India or China; it is India and China. The long held view that India is just a services hub is also changing fast. India’s manufacturing sector is making rapid strides and could really be the base for the next wave of growth. There is a well-known saying in investment circles that you should invest in an emerging economy when the first international airport is built and you should exit when the second airport comes up ie, exit at the first signal of over-investment.
China may soon reach the second airport stage. In that event, India would make an even bigger potential growth story in the years to come. India is evolving from a command economy focused on self-sufficiency to becoming a key link in the global economic chain. India is well positioned by geography, language, and historical association to service customers in advanced economies. India also has historical trading links with the Middle East and Africa as well as its own South Asian neighbors. Over the years, India has become less dependent on the traditional markets of Western Europe and trade is moving towards the Middle East, the Americas, and above all other Asian markets. The Indian century is taking shape in trade. Historically, factoring has shown positive correlation to growth in the manufacturing sector. As the manufacturing base of a country expands, the scope for factoring also increases.
At the micro level, factoring is tailor-made for a company on the path of high-octane growth; just as at the macro level it is suited for a growing economy like India. There is only one direction in which factoring can go in India: upwards. As the awareness level about the benefits of factoring increases, factoring will spread its wings across the length and breadth of the country. It is not perhaps a coincidence that the rise of factoring in India has coincided with the rise of Global Trade Finance Ltd. (GTF) to the forefront. In every industry, every once in a while, a player suddenly emerges who changes the entire paradigm of the business. In India, ICICI Bank did this to retail banking. We believe that GTF is in a position to do that to factoring.
Exporters also find that there is a considerable delay in receiving payment from the importers. In such situation international factoring comes really handy to find the required resources. In international factoring transaction, there are four parties namely: o Exporter.
o Export Factor.
o Import Factor.
There are two factors under this system one in exporter’s country and other in importer’s country. When the exporter wants to do the business with some importers, he approaches factor in his country and informs him about the size of business proposal, the likely size of business, number of invoices likely to be raised, the value of the consignment and currency involved. Export factor inturn informs the same to his counter-part i.e. import factor in the importing country. The import factor makes enquiries regarding the financial position of the importer and his dealings and if satisfied, he conveys the message to export factor. Then, the export factor contacts the exporter and conveys the positive findings and his readiness to cover the credit risk through factoring. Once this factoring is established, the exporter sends the goods to the importer along with the invoice with a condition that payments should made to the import factor. Export factor informs import factor about the financial deal by sending a copy of invoice. Now it becomes the responsibility of the import factor to monitor and maintain the account and take all possible efforts to collect the money on due date. When the amount is collected, it is sent to the export factor.
The term “a forfeit” in French means, “relinquish a right”. Here it refers to the exporter relinquishing his right to receivable due in the future date in exchange of immediate cash payment, at an agreed price, passing all risks and responsibilities for collecting the debt to the forfeiter. Thus, the exporter is able to get 100 % of the amount of bill minus discount charges immediately and get benefit of cash sale. Thus, it is a unique medium which he amount Forfeiting transform the supplier’s credit granted to importer into cash transaction for the exporter protecting him completely from all the risks associated with selling overseas on credit.Forfeting is done without any recourse to the exporter i.e. in case importer makes a default, the forfeiter cannot go back to the exporter for recovery of money. Traditionally forfeiting is for fixed interest rate and for medium term (3-5 years).
Differences between factoring and forfeting:
1. Factoring is always used as a tool for short term financing, whereas forfeting is for medium term financing at a fixed rate of interest.
2. Factoring is generally employed to finance both domestic and export business. But, forfeiting is invariably employed in export business.
3. Factoring is a much broader concept in the sense it includes purchase of receivable sales ledger management, advisory services, assumption of credit risk, collection of debts. On the other hand, forfeiting mainly concentrate on financing aspects only and that in respect of a particular export bill.
4. Under factoring, the client is able to get only 80% of the total invoices as credit facility whereas the 100% of the value of the export bill is given as credit under forfeiting.
5. Forfeiting is done without recourse to the client where it may or may not be so under factoring..
6. The bills under forfeting may be held by the forfeiter till the due date or they be sold in the secondary market or to any investor for cash. Such a possibility does not exist under factoring.
7. Forfeiting is a specific one in the sense that it is based on a single export bill arising out of an individual transaction only. But, factoring is based on the whole turnover i.e. bulk finance is provided against number unpaid invoices.
Working of forfeiting:
In forfeiting transaction, the exporter (client), importer (debtor) and forfeiter (financial institution). When an exporter intends to export goods and services, he approaches the forfeiter and gives full details of his likely export dealing such as name of the importer, the country to which it belongs, the currency in which the export of goods belongs, the price of goods and services, terms and condition of finance. Sale contract is signed between exporter and importer on condition that payment should be signed between exporter and importer on condition that payment should be made by importer to the forfeiter. The exporter’s bank, than forwards the shipping documents to the importer’s bank after receiving the same from exporter. These documents finally reach the hands of importer through his bank. Thereafter, the exporter gives shipping documents, invoices to the forfeiter who purchases them and gives ready cash after deducting discount charges.
Cost of forfeiting:
Forfeiting is fixed interest rate and for medium term (3-5 years).Cost of forfeting depending upon the arrangements. Cost of factoring depends upon the period of credit, credit worthiness of the party, country of importer, currency in which exporter is dealing and over all importers country. Since the forfeiter has to assume currency fluctuation risk, interest rate fluctuation risk and country’s risk, he charges fee and obviously it varies according to the risk factor involved in the deal.
Benefits of Forfeiting:
1. Profitable and Liquid: From the forfeiter’s point of view, it is advantageous because he not only gets immediate income in the form of discount charge, but also he can sell in the secondary market or to any investor.
2. Avoids Export credit risks: The exporter is free from many export credit risk such as bad debts, interest rate fluctuations, exchange rate fluctuations, political instability Forfeiting act as an insurance against all these risks.
3. Avoids Export Credit Insurance: In absence of forfeiting the exporter has to go for credit insurance. It is very costly and at same time involves very cumbersome procedure.
4. 100% finance: The exporter is able to get 100% finance against export receivable, thus the exporter is able to convert its international entire credit sale into cash sale.
5. Suitable for all kinds of export Deal: It is suitable for any kind of goods whether capital goods or commodity exports.
6. Confidential and speedy: International trade transactions can be carried out very quickly through a forfeiter, as it does not involve much transaction. The speed and confidentiality with which deals are made are beneficial to both exporter and importer.
1. Non- availability for short and long periods: Forfeiting is suitable for medium term financing. Forfeiting is not suitable for long period, since it involves much credit risk.
2. Non-availability for financially weak countries: Forfeiter generally do not come forward to undertake, forfeiting of financially weak country.
3. Difficulty in procuring International Bank’s guarantee: Forfeiters do not normally finance an export deal unless it is supported by an unconditional and irrevocable guarantee from an international bank known to the forfeiter. Generally it is the duty of the exporter to procure the guarantee.
4. Dominance of western countries: International forfeiting transactions are dominated in leading western countries like dollar, pound, and sterling, Deutshe Mark, French Francs and Swiss Francs.Hence our trade have to be in such currencies rather than Indian rupee. Forfeiting covers only export transaction and not Indian rupee.
Forfeiting in India:
Forfeiting as a source of finance has gained substantial momentum abroad. Though it had its origin in Zurich. It has been well established in all financial centers all over the world such as London, Zurich, Hong Kong, Singapore and Frankfurt. It has been popular source of finance among Europeans.
In India, forfeiting is slowly emerging in the liberalised financial market. It is approved by the union government only in January, 1994. The existing scheme available for exporters like concesssional finance by commercial banks, insurance cover against export credit risk by ECGC etc are available to large and well established exporters. In this context, forfeiting may be real boon to small as well new exporter.
In India, forfeiting is done by EXIM Bank The minimum value of a forfeiting transaction is Rs 5,00,000/-.. An exporter who wants to avail the service has to approach the EXIM bank through his bank. EXIM bank would obtain the forfeiting quotation from agency abroad. Based on this, exporter would work the price to be quoted. If the importer accepts the price and payment terms, the contract would be finalised and executed. The exporter would then get cash through forfeiting arrangements for which he has enter into separate contract. The exporter would than get cash through, for which he has to enter into the agreement with the forfeiter through EXIM bank.
In order to promote forfeiting it is necessary to delegate the transaction in leading international currencies. Globilsation, liberalisation and opening our economy to the global has good prospects for forfeiting business.