Future Prospects of factoring

Future Prospects of factoring

In the advent of globalization and opening up of an Indian economy, financial sector is to play a pivotal role in the overall economic development of the country. Mergers and acquisitions are the need of the hour and the corporate giants are taking birth to derive the maximum advantage of optimum size and economies of scale of production. Syndication of loans are to replace the consortium advances. Securitization of assets is the new mantra heard about recently. Factoring is going to play an important role in filling the gap and the SSI sector to become profitable and competitive. A factoring law which would address the present inadequacies and impediments stalling the growth of factoring business is also likely to be passed shortly.

Conclusion

Factoring is likely to help in systematizing trade credit in India. The factoring institution takes over the responsibility and computerizes the operations to generate enough data on the payment’s behavior of a large number of firms and companies in the country. Factoring would relieve the businesses, particularly the small industry and trade, of the burden of collecting their dues from their trade debtors. An efficient financial system like factoring can sustain itself on a viable basis only if a conductive environment is created and fostered.

Forfaiting

‘Forfaiting’ is a French term “forfeit’ which means to surrender (forfeit) ones’ rights on something to someone else. It is a form or mechanism of financing of receivables arising from international trade by discounting export receivables evidenced by bills of exchanges or promissory notes without recourse to the exporter carrying medium to long-term maturities on a fixed rate basis up to 100% of the contract value.

‘Forfaiting’ is generally extended for export of capital goods, commodities and services where the importer insists on supplies on credit terms. There are four parties in a transaction of forfaiting. They are Exporter, Importer, Importer’s bank (the guarantor) and the discounting bank (the forfeiter).

Forfaiting mechanism solves the problem of importer and exporter in the following way:

The importer is purchasing machinery for which he is unwilling or unable to pay cash until the machinery begins to generate income.

The exporter wants immediate payment in full in order to meet his ongoing business commitments.

Role of EXIM Bank in Forfeiting Transactions

The role of EXIM Bank will be that of an intermediary between the Indian exporter and overseas forfeiting agency. On a request from an exporter, for an export transaction which is eligible to be forfeited, the EXIM bank will obtain indicative and firm forfeiting quotes- discount rate, commitment and other fees- from overseas agencies. EXIM bank will also receive avulsed 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.

Process of Forfaiting Mechanism

The proposed export sales contract is a negotiation made between the two parties (exporter and importer).

The importer approaches his local bank to issue Letter of Credit (guarantee) in support of promissory notes or bills of exchange drawn in favour of the exporter.

The exporter approaches the forfeiter to establish the terms of forfeiting.

The forfaiter quotes the discount rate after estimating the risk involved in it.

The exporter sells and delivers the goods.

The importer draws a promissory note in favour of the exporter.

The exporter draws bill and gets acceptance of the importer.

The exporter enters into a forfeiting agreement with a forfaiter.

The exporter sells the bills/notes to the forfeiter at a discount without recourse after quoting the contract price to the overseas buyer including discount rate and commitment fee on the sales price of the goods to be exported.

The forfeiter presents the bill to the importer for payment on the due date if he holds the bill till the date of maturity or he may sell the bills in the capital market (short term security) before the maturity period.

The forfaiting typically involves the following cost elements

Commitment fee, payable by the exporter to the forfaiter ‘for latter’s’ commitment to execute a specific forfaiting transaction at a firm discount rate within a specified time.

Discount fee, interest payable by the exporter for the entire period of credit involved and deducted by the forfaiter from the amount paid to the exporter against the promissory notes or bills of exchange.