Page 232 - DMGT303_BANKING_AND_INSURANCE

Unit 11: Innovations in Banking

the purchasing of an exporter’s receivables at a discount price by paying cash. By buying these Notes
receivables, the forfeiter frees the exporter from credit and the risk of not receiving the payment
from the importer.

11.13.3 How forfeiting Works in International Trade

The exporter and importer negotiate according to the proposed export sales contract. Then the
exporter approaches the forfeiter to ascertain the terms of forfeiting. After collecting the details
about the importer, and other necessary documents, forfeiter estimates risk involved in it and
then quotes the discount rate.

The exporter then quotes a contract price to the overseas buyer by loading the discount rate and
commitment fee on the sales price of the goods to be exported and sign a contract with the
forfeiter. Export takes place against documents guaranteed by the importer’s bank and discounts
the bill with the forfeiter and presents the same to the importer for payment on due date.

11.13.4 Documentary Requirements

In case of Indian exporters availing forfeiting facility, the forfeiting transaction is to be reflected
in the following documents associated with an export transaction in the manner suggested
below:

 Invoice: Forfeiting discount, commitment fees, etc. needs not be shown separately instead,
these could be built into the FOB price, stated on the invoice.
 Shipping Bill and GR form: Details of the forfeiting costs are to be included along with the
other details, such FOB price, commission insurance, normally included in the “Analysis
of Export Value” on the shipping bill. The claim for duty drawback, if any is to be certified
only with reference to the FOB value of the exports stated on the shipping bill.

11.13.5 Forfeiting Cost Elements

The forfeiting typically involves the following cost elements:
1. Commitment fee, payable by the exporter to the forfeiter ‘for latter’s’ commitment to
execute a specific forfeiting transaction at a firm discount rate with in a specified time.
2. 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 availed
promissory notes or bills of exchange.

11.13.6 Benefits to Exporter

 100 per cent financing: Without recourse and not occupying exporter’s credit line That is to
say once the exporter obtains the financed fund, he will be exempted from the responsibility
to repay the debt.
 Improved cash flow: Receivables become current cash in flow and its is beneficial to the
exporters to improve financial status and liquidation ability so as to heighten further the
funds raising capability.

 Reduced administration cost: By using forfeiting , the exporter will spare from the
management of the receivables. The relative costs, as a result, are reduced greatly.
 Advance tax refund: Through forfeiting the exporter can make the verification of export
and get tax refund in advance just after financing.

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