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Forfaiting: Dr. Prashanta K. Banerjee

Forfaiting refers to the non-recourse financing of long-term receivables such as promissory notes arising from international trade. It originated in Switzerland after WWII to provide financing for exports to Eastern Europe. Forfaiting involves a forfaiter purchasing trade bills or promissory notes from an exporter at a discount and collecting payment from the importer on the maturity date. The forfaiter assumes the credit risk of the importer rather than relying on the creditworthiness of the exporter. Forfaiting is typically used for medium to large export contracts of capital goods between 1-8 years in length. It provides exporters with financing without recourse to fluctuations in exchange rates or interest rates.

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85 views4 pages

Forfaiting: Dr. Prashanta K. Banerjee

Forfaiting refers to the non-recourse financing of long-term receivables such as promissory notes arising from international trade. It originated in Switzerland after WWII to provide financing for exports to Eastern Europe. Forfaiting involves a forfaiter purchasing trade bills or promissory notes from an exporter at a discount and collecting payment from the importer on the maturity date. The forfaiter assumes the credit risk of the importer rather than relying on the creditworthiness of the exporter. Forfaiting is typically used for medium to large export contracts of capital goods between 1-8 years in length. It provides exporters with financing without recourse to fluctuations in exchange rates or interest rates.

Uploaded by

nurul000
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© © All Rights Reserved
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Forfaiting

Dr. Prashanta K. Banerjee


1. The term forfait is a French word, which means to give something or give up
ones right. Forfaiting refers to non-recourse financing of receivabes simiar to
factoring. !hie a factor norma" purchases a compan"s short-term receivabes,
a forfait ban# $ financia institution purchases trade bis$ promissor" notes that
are ong-term receivabes with ma%imum maturities of eight "ears. &t is on"
pertaining to internationa trade. Forfaiting had origina" deveoped in
'wit(erand after word war && in response to fet need for financing e%ports to the
)astern )urope for which financing was not avaiabe through the norma ban#ing
channes. *ow, goba", forfaiting voume stands at around +' , -. biion. &t
accounts for / 0. per cent of the tota internationa trade.
2. Forfaiting is we compared to e%port factoring with the difference that the
former finances notes$ bis arising out of deferred credit transactions for capita
goods spread over 1-2 "ears whereas factoring is essentia" a short-term
financing dea reating to the e%port of consumer goods. The forfaiting is a
hundred per cent financing arrangement on non-recourse basis. But the e%tent of
advance against receivabes with a factoring arrangement is on" partia, ranging
between 3.-2. per cent on recourse or without recourse basis. The forfaiters
decision to provide financing depends upon the financia standing of the avaiing
ban# whereas factors decision, particuar" in non-recourse, depends on the
credit standing of the e%porter. 4oreover, cost of forfaiting is eventua" borne b"
the overseas bu"er whereas in case of factoring it is usua" borne b" the seer.
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5ssociate Professor, Bangadesh &nstitute of Ban# 4anagement
182
3. The mechanics of operation of forfaiting are presented in the following
Chart .
Mechanics of Forfaiting Transactions
Exporter 1 Importer
3
4 5 6 8 7 4
2
Exporters Bank Importer Bank
8 7
4 6
Forfaiter 8
5 7
4
Source: 4asarguppi, 5runa 6788/9, :5dvantage of Forfaiting, ;hartered
Financia 5na"st, *ovember, P.7. 6'ight" changed9.
79 ;ommercia contract between the e%porter and the importer.
-9 ;ommitment to forfait bis of e%change $ promissor" notes 6Debt instruments9.
19 Deiver" of goods b" the e%porter to the importer.
/9 Deiver" of debt instruments.
.9 )ndorsement of debt instruments without recourse in favour of the forfaiter.
<9 ;ash pa"ment of discounted debt instruments.
39 Presentation of debt instruments on maturit".
29 Pa"ment of debt instruments on maturit".
183
4. The benefits accruing to the e%porter are numerous. The e%porter receives the
fu e%port vaue minus the cost of forfaiting for credit transactions from the
forfaiter. !ith forfaiting, the e%porter can easi" avai credit periods of /-3 "ears .
The finance is provided without recourse. This means that the fuctuations in
interest rates and e%change rates do not matter during the commitment period.
The e%porter has, therefore, an assurance of receiving pa"ment notwithstanding
the ris#s regarding the bu"er, the bu"ers ban# and the bu"ers countr". The
e%porters botherations about administering the saes edger and coection of
pa"ments are aso ta#en over b" the forfaiter. This gives considerabe reief to
e%porters. 4oreover, the forfaiter does not insist on getting credit insurance from
officia agencies.
.. Forfaiting concudes the dea for the medium and arge e%port contract. The
internationa forfaiting agencies do not accept contracts to forfait bis ess than
=.. miion +' doars on a singe dea. &t is most" imited to capita goods. &t is
estimated that 2= to 2. per cent of the forfaiting mar#et toda" invoves the capita
goods e%porting . >owever, with growing e%ports, products i#e commodities,
eather, d"es, etc. are aso coming under the forfaiting umbrea. Forfaiting can be
used when ?overnment e%port credits or credit guarantees are not avaiabe. &t
aso hepfu for the sma si(ed companies because it enabes them to negotiate
transactions that norma" e%ceed their financia capabiities
<. Forfaiters are @uite active in Paris, ?eneva, Aienna, Brusses, etc . &n &ndia,
the )B&4 ban# has aread" received green signa from the CB& to faciitate e%port
financing through forfaiting. 4oreover, >ong Kong Ban#, 4eghraj Financia
'ervices, *atwest Ban#, &ndo 5va and 5B* 54CD Ban# offer forfaiting services
. 5ccording to their annua reports, the" have aread" faciitated forfaiting
services for commercia vehices, printed cotton fabrics, mechanica power
transmission, gems, etc. &n Bangadesh, forfaiting is "et to catch up. The main
reasons ma" be ac# of awareness among the e%porting communit", and itte
184
voume and ow amount of capita goods e%port. 4oreover, neither ?overnment
nor ban#s have ta#en an" step to aunch this e%port-promoting too.
3. For forfaiting to be successfu, e%istence of the secondar" mar#et is an
essentia condition. 5 forfaiter ma" not be incined to hod the discounted bis $
notes upto maturit" because of its own cash fow consideration. &n the secondar"
mar#et, forfaiters bu" and se these bis in the usua manner in which the
traditiona securities are traded. >owever, ever" transaction in the secondar"
mar#et is done on without recourse basis. &n that case, the hoder of the paper
6forfaited bi9 can go on" to the origina guarantor 6the ban#9 and not to the
previous forfait owner, or to the e%porter.
185

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