Forfaiting is a form of financing of receivable relating to International Trade.
It is a form of supplier's credit under which an Exporter assigns right of export receivables to a Forfaitor, which are usually guaranteed by a Bank in Importer's country. Forfaiting is a mechanism of financing Exports.
The associated parties in a Forfaiting transaction are Exporter, the Importer, the Forfaitor, an Importer's Bank that stands as a guarantee to the Bill of Exchange(BE) or Promissory Note and EXIM Bank of India acts as a facilitating agency between the Exporter and the Forfaitor.
Typically, an Exporter negotiates commercial and credit terms with the overseas buyer then approached EXIM bank, which in turn, asks a quotation from a Forfaiting agency. Having received the quote, Exporter finalizes contract with oversea buyer. Upon settling terms of the contract, Exporter executes the contract with the Importer as well as a separate contract with the Forfaiting agency. Post shipment of goods/services, the exporter obtains guaranteed Bill of Exchange from the Importer (through its Bank). This Bill of Exchange or Promissory Note is endorsed by the Exporter and are routed to the Forfaitor thru EXIM Bank. Upon receipt of endorsed BE, the Forfaitor remits the BE/Invoice value to the account of Exporter through proper channel. The Exporter is provided a Foreign Inward Remittance Certificate (FIRC) as a proof of Export. On maturity, Forfaitor collects the payment of BE from the Importer's Bank that stands guarantee irrespective of the receipt of payment from the importer by that Bank.
By discounting Export Receivables, Forfaitor finances :
* Bill of Exchange or Promissory note evidenced by Export document
* Without recourse to the seller/exporter
* Carrying short term to medium term maturities.
RBi regulations make it mandatory to pass on any kind of discounting fees and documentation fees to the overseas buyer. These charges could form part of the INCOTERMS (FOB, C & I or CIF). The Export contract could be executed in any of the convertible currencies of the world, in order to be eligible for Forfaiting.
Keep watching this space for more interesting updates on Financial Services!
Comments