Forfeiting is a mechanism of financing exports.
- By discounting export receivables
- Evidenced by bills of exchange or promissory notes
- Without recourse to the seller (viz. exporter)
- Carrying medium to long term maturities
- On a fixed rate basis (discount)
- Upto 100 percent of the contract value.
The word `forfeit’ is derived from the French word `a forfeit’ which means the surrender of rights.
Simply put, Forfeiting is the non-recourse discounting of export receivables. In a forfeiting transaction, the exporter surrenders, without recourse to him, his rights to claim for payment on goods delivered to an importer, in return for immediate cash payment from a forfeiter. As a result, an exporter in India can convert a credit sale into a cash sale, with no recourse to the exporter or his banker.
Concept of forfeiting:
1. What exports are eligible for forfeiting?
All exports of capital goods and other goods made on medium to long term credit are eligible to be financed through forfeiting.
2. How does forfeiting work?
Receivables under a deferred payment contract for export of goods, evidenced by bills of exchange or promissory notes, can be forfaited.
Bills of exchange or promissory notes, backed by co-acceptance from a bank (which would generally be the buyer’s bank), are endorsed by the exporter, without recourse, in favor of the forfeiting agency in exchange for discounted cash proceeds. The co-accepting bank must be acceptable to the forfeiting agency.
3. Is there a prescribed format for the bills of exchange or promissory notes?
Yes. The bills of exchange or promissory notes should be in the prescribed format.
4. What role will Exim Bank play in forfeiting transactions?
The role of Exim Bank will be that of a facilitator between the Indian exporter and the overseas forfeiting agency.
5. How will Exim Bank facilitate a forfeiting transaction?
On a request from an exporter, for an export transaction which is eligible to be forfaited, Exim Bank will obtain indicative and firm forfeiting quotes – discount rate, commitment and other fees – from overseas agencies.
Exim Bank will receive availed bills of exchange or promissory notes, as the case may be, and send them to the forfeiter for discounting and will arrange for the discounted proceeds to be remitted to the Indian exporter.
Exim Bank will issue appropriate certificates to enable Indian exporters to remit commitment fees and other charges.
6. What does forfeiting cost include?
A forfeiting transaction has typically three cost elements:
- Commitment fee
- Discount fee
- Documentation fee
7. What benefits accrue to an exporter from forfeiting?
- Converts a deferred payment export into a cash transaction, improving liquidity and cash flow
- Frees the exporter from cross-border political or commercial risks associated with export receivables
- Finance up to 100 percent of the export value is possible as compared to 80-85 percent financing available from conventional export credit program
- As forfeiting offers without recourse finance to an exporter, it does not impact the exporter’s borrowing limits. Thus, forfeiting represents an additional source of funding, contributing to improved liquidity and cash flow
- Provides fixed rate finance; hedges against interest and exchange risks arising from deferred export credit
- Exporter is freed from credit administration and collection problems
- Forfaiting is transaction specific. Consequently, a long term banking relationship with the forfeiter is not necessary to arrange a forfeiting transaction
- Exporter saves on insurance costs as forfeiting obviates the need for export credit insurance