Factoring and Forfaiting. Factoring is the system of advancing against book debts. Factoring involves assignment of book debts by clients in favour of the factoring company for a consideration. The factor assumes the credit and collection function for its clients by purchasing his receivables, maintaining the sales ledger, attending to other book-keeping duties and performing ancillary functions.
Factoring differs from bill discounting inasmuch as the factor purchases the entire debts of the unit and is responsible for their collection, while in bills discounting the credit risk rests with the seller. Factoring can be with or without re-course but the former is more common. For the customers (sellers) factoring affords a number of advantages like availability of liquid cash immediately after sales, reduction in bad debts, reduction in the cost of managing book debts etc. Factoring can be both for domestic and export trade.
Following the recommendation of a Study Group on Factoring Services headed by Shri C.S. Kalyanasundaram, Reserve Bank has permitted few subsidiaries of banks to undertake the factoring service.
Forfaiting is similar to export factoring with a difference that while export factoring is generally for short term, forfaiting is for medium term to cover exports on deferred basis. Forfaiting affords advantage of better liquidity and faster turnover of resources, avoidance of credit risks, elimination of exchange risks, etc., to the exporter.
Factoring by Exim Bank
Exim Bank has introduced a scheme of forfaiting as an instrument of financing exports. The arrangement envisages discounting by Indian exporters of bills of exchange/promissory notes relating to export transactions which are ‘avalised’ or guaranteed by buyers’ bankers with overseas forfaiting agencies on ‘without recourse’ basis. Briefly, the procedure involved in the scheme of forfaiting by the Exim Bank is as follows:
(a) Exporter initiates negotiations with the prospective Overseas buyer with regard to the basic contract price, period of credit, rate of interest, etc
(b) After successful negotiations, he furnishes the relevant particulars such as name and country of overseas buyers, contract value, nature of goods, tenor of credit, name and country of guaranteeing bankers to the Exim Bank and requests for an indicative discounting quote. Exim Bank obtains the indicative quote of forfaiting discount together with commitment fee and other charges, if any, to be paid by the exporter, from an overseas forfaiting agency.
(c) On receipt of the indicative quote from the Exim Bank, the exporter finalises the terms of contract, loading the discount and other charges in the value and approaches Exim Bank for obtaining a firm quote. Exim Bank arranges to get the same from an appropriate overseas forfaiting agency and furnishes the same to the exporter. At this stage, exporter would be required to confirm acceptance of the arrangement to Exim Bank within a specific period as stipulated by that Bank.
(d) The export contract should clearly indicate that the overseas buyer shall prepare a series of avalised Promissory Notes in favour of the exporter and hand them over against the shipping document to his banker. The promissory notes will be endorsed with the words ‘without recourse’ by the exporter and handed over to his banker in India for onward transmission to the Exim Bank.
(e) Alternatively the export contract may provide for exporter to draw a series of Bills of Exchange on the overseas buyer which will be sent with the shipping documents through latter’s banker for acceptance by the overseas buyer. Overseas buyer’s banker will hand over the documents against acceptance of Bill of Exchange by the buyer and signature of ‘avail’ or the guaranteeing bank. Avalised and accepted bills of exchange will be returned to the exporter through his banker. Exporter will endorse avalised Bills of Exchange with the words ‘without recourse’ and return them to his banker for onward transmission to the Exim Bank.
(f) Exim Bank will forward the bills of exchange/promissory notes after verification to the forfaiting agency for discounting by the latter.
(g) Exim Bank will arrange to collect the discounted proceeds of promissory notes, bills of exchange from the overseas forfaiting agency and effect payment to the nostro account of the exporter’s bank as per the latter’s instructions.
The role of Exim Bank is as an intermediary between the Indian exporter and the overseas forfaiting agency. Exim Bank will receive avalised bills of exchange or promissory notes, as the case may be, and send them to the forfaiter for discounting and arrange for crediting the discounted proceeds to the nostro account of the exporter’s bank who will repatriate the proceeds to India for payment to the Indian exporter.