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Forfeiting:, Which Is A Three Star Export Trading Firm. As

Forfeiting is a method of export trade financing where a bank advances cash to an exporter against invoices or promissory notes guaranteed by the importer's bank. This allows the exporter to obtain payment for their exports while transferring the buyer and country risks to the forfeiting bank. The case study describes an Indian exporter, Satnam, receiving an order from a Dubai importer, Khan International. Due to financial risks, Satnam arranges forfeiting of the trade receivables through ICICI Dubai bank, allowing Satnam to receive payments and transferring the risks to ICICI Dubai bank. ICICI Dubai bank then collects payment from Khan International with interest after the export supplies are delivered.

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66 views4 pages

Forfeiting:, Which Is A Three Star Export Trading Firm. As

Forfeiting is a method of export trade financing where a bank advances cash to an exporter against invoices or promissory notes guaranteed by the importer's bank. This allows the exporter to obtain payment for their exports while transferring the buyer and country risks to the forfeiting bank. The case study describes an Indian exporter, Satnam, receiving an order from a Dubai importer, Khan International. Due to financial risks, Satnam arranges forfeiting of the trade receivables through ICICI Dubai bank, allowing Satnam to receive payments and transferring the risks to ICICI Dubai bank. ICICI Dubai bank then collects payment from Khan International with interest after the export supplies are delivered.

Uploaded by

aditipednekar
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Forfeiting

Forfeiting is a method of export trade financing, especially when dealing in capital


goods (which have long payment periods) or with high risk countries.

In forfeiting, a bank advances cash to an exporter against invoices or promissory


notes guaranteed by the importer's bank or a third party whom we know as guarantor
party/bank . The amount advanced is always 'without recourse' to the exporter, and
is less than the invoice or note amount as it is discounted by the bank. The discount
rates depends on the terms of the invoice/note and the level of the associated risk.

Forfeiting was developed to finance medium to long term contracts for capital goods. It
is now becoming more widely used in the short term especially where the contracts
involve large values. There are specialised finance houses that deal in this business and
many are linked to some of the main banks.

This is a form of fixed rate finance which involves the purchase by the forfeiture of
trade receivables normally in the form of trade Bills of Exchange or promissory notes,
accepted by the buyer with the endorsement or guarantee of a bank in the buyer's
country.

The benefits are that the exporter can obtain the full value of his export contract on or
near shipment without recourse. The importer on the other hand has extended payment
terms at fixed rate finance.

The forfeiture takes over the buyer and country risks. Forfeiting provides a real
alternative to the government backed export finance schemes.

CASE

This is a case of Satnam export house, which is a three star export trading firm. As
located in India, firm is purely engaged in the domestic trading activities and export
supply. They deal in food & beverage sector (F&B) as subsidiary part of fast food, ready
to food packages and confectionary too.

On 1st Jan 2011 firm receives an order from Khan multinationals from Dubai. The
consignment was made of all the possible items which they are engaged into it. It was
declared from the LOI that order values around 50cr INR for 3 months mother shipment
supply.
Following is the list of order and letter of interest by khan MNC.

Particulars Net value( in crore)

Pasta sausages 100000boxes * 20kg 20cr

Cocoa powder 100000 boxes * 50 kg 25cr

Corn flour 1000mt (50kg pkg) 5cr

TOTAL 50cr

Proforma 1

The Khalifa bank of Dubai which is an importers bank issued a L/C at sight for on behalf
of Khan Internationals after the acceptance of LOI from seller & his counterpart bank
i.e. HDFC bank.

OBSERVATIONS

After the complete survey by Satnam management it was observed that the entire
supply is for 3 months and they would require the heavy finance for packing of cocoa
powder and refining the pasta sausages and corn floor. Also the party was not assured
about the Importers banks credit facility so they decided to go under pre-financing
policy and also advance payment. As Dubai is going financial crisis already there were
an insolvency report from other buyers so without going in risky deal, Satnam issued a
pre-finance policy to the buyer’s bank.

Unfortunately Khalifa was neither in state to take the risk on behalf of his party and nor
his party was in position to make such heavy payments initially in pre-shipment stage.

So the HDFC banks associate partners ICICI Dubai took the initiative of entering as
guarantor bank into the deal and decided to forfeit the bill with all the parties and
banks.
TERMS & CONDITIONS

On 15th Jan 2011, ICICI Dubai gave a confirmation to HDFC India to discount the bill ,
with 2% with seller and collection guarantee from Khan MNC after 4 months @ 5%.

18th Jan 2011 - Total value of bill was forfeited as 50cr -2% = 49cr.

20th Jan 2011 - Satnam receives the first installment from ICICI Dubai after the
possession of BLD copy (bill of lading) of first shipment.

Total payment was made of 29cr to satnam in first installment.

25th Jan 2011 - Five mother shipments reached to Jebel-Ali port which gave a
confirmation of saleable goods from Indian counterpart and declaration of 50% of
consignment which cleared the packing list of bill.

27th Jan 2011 - ICICI Dubai made a final installment of 20cr to Satnam as of
confirmation of completing 50 % consignment to buyer.

30th Jan 2011 - Satnam was realized with all payments from international transaction
through his bank HDFC with also paying banking charges of 0.5% of financing activities.

5th Feb 2011 - ICICI made a promissory note with Khalifa & KHAN internationals of
paying a loan of importing goods on their behalf @ 5% for 4months.

10th Feb. 2011 - Due date of bill was forfeited as 50cr * 5% = 52.5cr + L/C charges
0.5cr = 53cr as of paid on 15th may.

CONCLUSION

From the case we can observe that Satnam went under the forfeiting of bill with third
party as guarantor bank with statutory reason of heavy packing credit finance and
liability of importers bank. But the actual reason was something else, to insure his
entire bill Satnam has to pay a 3% surcharges to ECGC for covering risk under Form- A.
because as per ECGC report Khan’s credit ratings comes under black list , so as to avoid
heavy interest they forfeited the bill safely with ICICI Dubai.

From which ICICI Dubai also gained with other two banks for doing their safe financing
activity by generating total revenue of 1cr from satnam and 3r from KHAN
international.

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