The Concept of Forfeiting in Export Finance: You Are Here

Financial assistence is extended by the banks to the exporters at pre-shipment and post-shipment
stages. Financial assitence extended to the exporter priorto shipment of goods from India falls
within the scope of pre-shipment finance while that extended after shipment of the goods falls
under post-shipment finance. While the pre-shipment finance is provided for working capital for
the purchase of raw material, processing, packaging, transportation, warehousing etc.of the
goods meant for export, post-shipment finance is generally provided in order to bridge the gap
between shipment of goods and and the realisation of proceeds.
For raising funds in India, investors can raise a substantial portion of the project cost in India
through debt and equity instruments. Applications for long-term loans can be made to State
Financial Corporations when the project is small - generally less than Rs.50 million - or to
national-level financial institutions, such as IDBI and IFCI, when the project is large. Institutions
expect concrete project and market reports, with reasonably firm costs and implementation plans.
Other long term financing options include leasing, hire purchase, deferred payment guarantee
etc. Capital markets are increasingly the preferred route for raising finances in India, through
equity shares, debentures and hybrids. Investors can freely access the capital market and in most
cases freely price the issue. Investors with both small as well as large fund requirements can
mobilise funds from the market. Private placement with institutional investors is also possible.
Indian companies also have the option of raising funds from international capital markets. Short-
term finances for working capital requirements are available from commercial banks and through
instruments such as fixed deposits, inter-corporate deposits and commercial paper.
The concept of Forfeiting in Export Finance

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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 favour 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

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Financial assistence is extended by the banks to the exporters at pre-shipment and post-shipment

The concept of Forfeiting in Export Finance

Forfeiting is a mechanism of financing exports.

 By discounting export receivables

1. What exports are eligible for forfeiting?

2. How does forfeiting work?

3. Is there a prescribed format for the bills of exchange or promissory notes?

4. What role will Exim Bank play in forfeiting transactions?

5. How will Exim Bank facilitate a forfeiting transaction?

6. What does forfeiting cost include?

7. What benefits accrue to an exporter from forfeiting?

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