Page 201 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes Mechanics for Forfeiting

The exporter and importer negotiate the proposed export sale contract. Then the exporter
approaches the forfeiter to ascertain the terms of forfeiting. The forfeiter collects details about
the importer, supply and credit terms, documentation etc.
Forfeiter ascertains the country risk and credit risk involved. The forfeiter quotes the discount
rate. The exporter then quotes a contract price to the overseas buyer by loading the discount rate,
commitment fee etc. on the sale price of the goods to be exported. The exporter and forfeiter sign
a contract. Export takes place against documents guaranteed by the importer's bank. The exporter
discounts the bill with the forfeiter and the latter presents the same to the importer for payment
on due date or even sell it in secondary market.

13.3 Discounting of Bills

In addition to the rendering of factoring services, banks financial institutions also provide bills
discounting facilities provide finance to the client.

Bill discounting, as a fund-based activity, emerged as a profitable business in the early nineties
for finance companies and represented a diversification in their activities in tune with the
emerging financial scene in India.

According to the Indian Negotiable Instruments Act, 1881:
"The bill of exchange is an instrument in writing containing an unconditional order, signed by the maker,
directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the
bearer of that instrument."
The bill of exchange (B/E) is used for financing a transaction in goods which means that it is
essentially a trade-related instrument.
Following are the dissimilarities and similarities between the services.

Dissimilarities/Differences

The two services differ from each other in the following respects:

Bills Discounting

1. It is a provision of finance against bills.
2. Advances are made against the bills.
3. The drawer undertakes the responsibility of collecting the bills and remitting the proceeds
to financing agency.
4. Bills discounted may be rediscounted several times before the maturity.
5. Bill discounting is always with recourse, i.e. in case of default the client will have to make
good the loss.
6. Bill financing is individual transaction oriented i.e. each bill is separately assessed on its
merits and got discounted purchased.

7. Bill finance is always 'In Balance Sheet' financing i.e. both the amounts of receivables and
bank credit are reflected in the balance sheet of the clients as current assets and current
liabilities respectively.

This is because of the 'with recourse' nature of the facility.

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