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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

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3.The mechanics of operation of forfaiting are presented in the following

Chart .

Mechanics of Forfaiting Transactions

Exporter 1 Importer3

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, ;harteredFinancia 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.


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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. &taso hepfu for the sma si(ed companies because it enabes them to negotiate

transactions that norma" e%ceed their financia capabiities


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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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