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
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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".
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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
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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.
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