Forfaiting In India

Origins of Forfaiting

Forfaiting evolved in the 1960s and was originally used to finance exports from countries in Western Europe to East European countries. With the growth in global trade, the product is now widely used to finance trade with all geographic areas, and has also been extended from its traditional role of post-shipment finance to provide pre-export finance, structured trade finance, project finance and even working capital.

In order to remain competitive, exporters are often faced with having to allow their importing partners longer period of payment. Such difficulties expose the exporter to a number of risks which can assume substantial proportions, depending on the country of the importer and the period allowed for payment. On top of typical commercial risks, such as insolvency of the importer, unwillingness or inability to pay, exporters have to consider the difficulties in appraising the monetary, economic and political risks inherent in the importer's country. The requirements placed on the financial institutions by exporters seeking solutions to the ever-growing complexities of international financing have led to an increased demand for Forfaiting.

The term "a forfait" in French means, "relinquish a right". Here, it refers to the exporter relinquishing his right to a receivable due at a future date in exchange for immediate cash payment, at an agreed discount, passing all risks and responsibilities for collecting the debt to the forfaiter.

What is Forfaitng ?

Forfaiting is the discounting of international trade receivable on a 100% "without recourse" basis. It is a form of suppliers credit involving the sale or purchase of receivables falling due at some future date. The exporter is, of course, responsible for the validity of his order and execution thereof, but once documentation has been delivered and accepted and discounting is done, there is absolutely no recourse to the Exporter, with the exception of an underlying fraudulent transaction. Forfaiting effectively transforms a credit sale into a cash sale.

Forfaiting transforms the supplier's credit granted to the importer into cash transaction for the exporter protecting him completely from all the risks associated with selling overseas on credit.

Traditionally forfaiting is fixed interest rate and medium term (3-5 years) financing. It can however, be structured on a floating rate interest basis as well as for longer periods up to 10 years or for shorter periods down to 90 days. Forfaiting is generally suitable for high value exports like heavy machinery, capital goods, consumer durable, vehicles, bulk commodities, consultancy and construction contracts and project exports.

Forfaiting in India - Regulatory Aspects

Forfaiting as an export financing option in India has been approved by the Reserve Bank of India vide its circular A.D. (G.P. Series) No. 3 dated February 13, 1992. The Forfaiting facility is to be provided by an international forfaiting agency through an Authorised Dealer (see RBI Circular No. 42 A. D. (M.A.) series dated October 27, 1997).

Forfaiting proceeds, on a without recourse basis, are to be received in India as soon as possible after shipment but definitely within the 180 day period specified by RBI for all exports. A Forfaiting transaction is to be routed through an Authorised Dealer, who apart from handling documentation will also provide Customs Certification for GR Form purposes.