Forfaiting Explained
Medium-term export paper, guaranteed by the buyer's bank, sold at a discount with no recourse to the exporter.
Forfaiting is the purchase of an exporter's medium-term receivables, usually bills of exchange or promissory notes guaranteed by the buyer's bank, at a discount and without recourse to the exporter. The word comes from the French "à forfait": surrendering rights. Once the exporter sells the paper, the forfaiter has no claim back on the exporter if the buyer or its bank fails to pay.
It suits capital goods and project-type exports where the buyer wants credit stretching over years. The exporter gets cash on shipment, takes the receivable off its books and passes the credit, interest rate, country and transfer risks to the forfaiter.
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Parties and Terms
- Exporter
- Sells the goods on deferred payment terms and then sells the resulting debt instruments to the forfaiter.
- Importer
- Buys the goods and accepts a series of bills of exchange or issues promissory notes, usually maturing in instalments.
- Importer's bank (avalising bank)
- Guarantees the instruments, making them acceptable to the forfaiter because the risk is now on a bank, not the buyer alone.
- Aval (availisation)
- The bank's guarantee written on the bill or note itself, an irrevocable co-acceptance. Where an aval is not available, a separate bank guarantee may be used.
- Primary forfaiter
- The bank or institution that buys the paper from the exporter.
- Secondary forfaiter
- A buyer of the paper from the primary forfaiter. Forfaiting paper trades in a secondary market, which is how primary forfaiters manage limits and liquidity.
How a Forfaiting Deal Runs
- 1
Exporter gets a quote
Before signing the export contract, the exporter asks the forfaiter for an indicative discount rate so the financing cost can be built into the price.
- 2
Commitment
The forfaiter commits to buy the paper at an agreed rate within a set period. A commitment fee is payable for this period whether or not the deal goes through.
- 3
Shipment and acceptance
The exporter ships; the importer accepts the bills or issues notes, and the importer's bank avalises them.
- 4
Discounting
The exporter endorses the paper to the forfaiter without recourse and receives the face value less the discount for the full credit period.
- 5
Collection
At each maturity the forfaiter presents the instrument to the avalising bank for payment. The exporter is no longer involved.
What the Exporter Pays
| Cost | What it is for |
|---|---|
| Discount | Interest for the full period to maturity, deducted upfront from the amount paid to the exporter. |
| Commitment fee | Compensates the forfaiter for holding a fixed rate open between commitment and delivery of the paper. Payable even if the export contract falls through. |
| Documentation fee | Charged where the deal involves elaborate legal work, such as unusual guarantees or jurisdictions. |
Questions on aval, commitment fees and parties. No signup.
The Regulatory Position in India
RBI's Master Direction on Export of Goods and Services permits EXIM Bank and AD Category-I banks to undertake forfaiting for financing export receivables. The commitment fee and service charges approved by EXIM Bank or the AD bank concerned may be remitted through an AD bank, either in advance as a lump sum or at monthly intervals.
Internationally, the ICC's Uniform Rules for Forfaiting (URF 800), in effect since 1 January 2013, give a standard set of terms for both the primary market (exporter to forfaiter) and the secondary market (forfaiter to forfaiter). Like UCP 600, they apply when the parties incorporate them.
How CCFE Tests This
Expect term-recognition questions: "availisation" means the importer's bank's co-acceptance or guarantee on the instrument; the commitment fee is paid for holding the rate and is payable even if the export does not happen; the discount is deducted upfront. Party lists come up too (exporter, importer, the two banks, primary and secondary forfaiter). The courseware also quotes a typical tenor band and minimum deal size; treat those as market practice from the study material, not RBI limits. The common trap is answering "with recourse": forfaiting is always without recourse.
FAQs
What is forfaiting in export finance?expand_more
The sale of an exporter's medium-term, bank-guaranteed receivables to a forfaiter at a discount, without recourse. The exporter gets cash at shipment and the forfaiter carries all payment risks.
Who can do forfaiting in India?expand_more
RBI permits EXIM Bank and AD Category-I banks to undertake forfaiting for financing export receivables.
What is availisation in forfaiting?expand_more
The importer's bank's guarantee written on the bill of exchange or promissory note itself. It moves the risk from the buyer to a bank, which is what makes the paper saleable.
Why is a commitment fee charged in forfaiting?expand_more
It pays the forfaiter for committing to buy the paper at a fixed discount rate during an agreed period. It is payable even if the underlying export contract is not executed.
Next steps
- Factoring vs Forfaitingarrow_forward
- International Factoringarrow_forward
- ECGC Explainedarrow_forward
- FEMA & Trade Finance Conceptsarrow_forward
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