Pre and post shipment credits are now available in three different forms. These are:
(1) Pre shipment credit in Rupees followed by post shipment credit in Rupees;
(2) Pre-shipment credit in rupees followed by discounting of export bills abroad and
(3) Foreign currency denominated pre shipment credit (PCFC) followed by rediscounting of export bills abroad.
Under the last one which was introduced in October 1993, exporters with confirmed/firm order and/or letters of credit can avail of credit in major currencies at LIBOR-related interest rates. In conjunction with the facility for post shipment credit in foreign currencies at a fixed rate of 6.5 per cent, Indian exporters now can get credits at globally competitive rates.
Exporters now have the facility of combining Rupees and foreign Currency Credits, if financial or using foreign currency credits only, if that proves to be cheaper. Under the present circumstances there are essentially two low cost possibilities:
(1) Exporter can take Rupee credit at 10 percent. After the shipment has been made, post-shipment finance can be ether in Rupees at 10 per cent or he can discount the bills in the foreign currency market. If PCFC is utilized, credit has to be retired by discounting the export bill in a foreign currency at the time of shipment. Since the repayment has to be in a foreign currency there is no scope for forward trading as there is no transactions in Rupees.
(2) Exporter can avail of PCFC and follow it up by discounting the bill in a foreign currency at the post shipment stage
Re choice as to which one is the least costly will depend upon the prevailing interest rates for different currencies including Rupee as well as the premium/discount of the foreign currency vs Indian Rupees.
Forfaiting enables am exporter to convert an overseas credit sale into a cash sale through the process of discounting of export receivable. The bill of exchange accepted by the importer is surrendered to the fortaiting agency which pays him in cash after deducting a fee. The understanding is that the agency will collect the dues from the importer on expiry of the said period.
The surrender of the receivables is without recourse to the exporter which means he is insulated against the possibility of default in payment by the importer. Thus, forfaiting provides an attractive alternative to the existing modes of finance.
Advantages: Forfaiting holds many advantages to the exporter
(1) As against the traditional discounting of bills the banker and losing as part of the export proceeds, the exporter receives the export value from the fortfaiter sans the cost of forfaiting which is loaded in the contract price and is ultimately borne by the importer.
(2) Since the transaction is without recurs to the exporter, he is absolved of al the risks attached to the transaction.
(3) Exporters’ liquidity position improves with the inflow of funds from the forfaiter as he realizes cash from the credit transaction. Thus forfaiting represents an additional source of funding and does not impact his borrowing limit.
(4) Exporter is saved of all the hassles generally faced in collecting the dues. He is out of the transaction once it is sold to the forfaiter
(5) Documentation procedure is simple.
(6) It frees the exporter from cross border political or commercial risks associated with export receivables
(7) It provides hedge against interest and exchange risks arising from deferred export credit.
(8) Forfaiting is transaction specific, consequently a long term banking relationship with the forfaiters is not necessary to arrange a forfiating transactions.
(9) Exporter saves on insurance costs as forfaiting obviates the need for export credit insurance.
While forfaiting is an attractive alternative all deals qualify of this facility. Especially the international forfaiting agencies do not accept contacts to fortait bills of less than 0.5 million dollars on a single deal is sometimes keeps the small Indian Exports out of the race even before it begins. However, realizing this, some international agencies are now willing to consider small deals also.
In 1994-95, EXIM Bank facilitated 14 forfaiting transactions or an aggregate of us $11million. In 1998-99, 5 forfating transactions for an aggregate amount of Rs 2.43 crores were facilitated.