Subject:- Indian Financial System

Topic:-Factoring and Forfaiting

Guided By:-Dr. Ami Pandya Ma’am

Submitted to:- Department of Business Administration

Maharaja Krishnakumarsinhji Bhavnagar
University
 Batch:-2017-19

Semester:-3rd

Prepared By:- Hussaini Merchant (Roll no.16)

Naman Shah (Roll no.24)
Priya Shah(Roll no.26)
Munira Vohra (Roll no.35)
 • WHAT IS FACTORING ?

Factoring is the Sale of Book Debts by a firm (Client) to a financial institution

(Factor) on the understanding that the Factor will pay for the Book Debts as
and when they are collected or on a guaranteed payment date. Normally, the
Factor makes a part payment (usually up to 80%) immediately after the debts
are purchased thereby providing immediate liquidity to the Client.
• So, a Factor is,
a) A Financial Intermediary
b) That buys invoices of a manufacturer or a trader, at a discount,
and
c) Takes responsibility for collection of payments.

The parties involved in the factoring transaction are:-

a) Supplier or Seller (Client)
b) Buyer or Debtor (Customer)
c) Financial Intermediary (Factor)
 Features of Factoring:
• (i) Credit Cover:

• (ii) Case advances:

• (iii) Sales ledgering:

• (iv) Collection Service:

• (v) Provide Valuable advice:

Market for factoring in India
• The list of NBFC Factors registered with RBI as on September 11, 2018
is mentioned below:
Regional Office Name of the Company
Bengaluru Canbank Factors Limited
New Delhi IFCI Factors Ltd.

Bibby Financial Services (India) Pvt. Ltd.

Mumbai SBI Global Factors Ltd. [Formerly: Global Trade Finance
Limited]

India Factoring & Finance Solutions Pvt Ltd

Siemens Factoring Private Limited

Patna Pinnacle Capital Solutions Private Limited
Since its inception, factoring business has made a significant progress in
India. The total factoring volume has increased in the past 7 years. The
factoring volume was highest in 2013 and subsequently decreased till
2015. In the years 2016 and 2017, there was again a rise in the volume
• The following graph depicts this increase:
 MECHANICS OF FACTORING
• The Client (Seller) sells goods to the buyer and prepares invoice with a notation that debt due
on account of this invoice is assigned to and must be paid to the Factor (Financial
Intermediary).
• The Client (Seller) submits invoice copy only with Delivery Challan showing receipt of goods by
buyer, to the Factor.
• The Factor, after scrutiny of these papers, allows payment (,usually up to 80% of invoice value).
The balance is retained as Retention Money (Margin Money). This is also called Factor Reserve.
• The drawing limit is adjusted on a continuous basis after taking into account the collection of
Factored Debts.
• Once the invoice is honoured by the buyer on due date, the Retention Money credited to the
Client’s Account.
• Till the payment of bills, the Factor follows up the payment and sends regular statements to
the Client.
 Benefits Of Factoring
• Financial Services
• Collection Service
• ‘Credit Risk’ Service
• Provision of expertise ‘sales ledger management’ service
• Consultancy service
• Economy in Servicing
• Trade Benefits
• Miscellaneous service
 TYPES OF FACTORING

• Recourse Factoring
• Non-recourse Factoring (Old line factoring)
• Maturity Factoring
• Advance Factoring
• Full factoring
• Undisclosed factoring
 DISADVANTAGES OF FACTORING
1.Factoring is a high risk area, and it may result in over dependence on
factoring, mismanagement, over trading of even dishonesty on behalf
of the clients.
2. It is uneconomical for small companies with less turnover.
3. The factoring is not suitable to the companies manufacturing and
selling highly specialized items because the factor may not have
sufficient expertise to asses the credit risk.
 FORFAITING

“Forfait” is derived from French word “a forfait” which means forfeiting or

surrender of rights
It is a mechanism of financing exports
by discounting export receivables
evidenced by Bills of Exchange or Promissory Notes
without recourse to the seller (viz exporter)
carrying medium to long term maturities
on a fixed rate basis (discount)
upto 100 per cent of the contract value
• It is a highly flexible technique that allows an Exporter to grant attractive credit
terms to foreign Buyers, without tying up cash flow or assuming the risks of
possible late payment or default. Simultaneously, the Exporter is fully protected
against interest and/or currency rates moving unfavourably during the credit
period
• Forfaiting is a highly effective sales tool, which simultaneously improves cash-
flow and eliminates.
•The major parties involved in a transaction of Forfaiting are :
An exporter
an importer
a domestic bank
a foreign bank
a primary forfaiter
 FORFAITING PROCESS

• Exporter sells the goods to importer on deferred payment basis.

• Importer issues series of promissory notes undertaking to pay the exporter in
instalments with interest.
• Importer approaches its banker (Avalling Bank) for adding the bank guarantee on
the promissory note that the payment will be made on each maturity date.
• The promissory notes are now avallised and sent to exporter.
• Avalled notes are sold to forfaiter (usually exporter’s bank) as a discount at a non
recourse basis and exporter obtain finance from forfaiter.
• Forfaiter hold till maturity date and obtain payment from importer’s bank /
avalling bank or sell it in the secondary market or sell it to a group of investors.
 Benefits to Exporters

• Converts a Deferred Payment export into a cash transaction, improves liquidity

• Frees Exporter from cross-border political or commercial risks associated
• Finances upto 100 percent of export value
• It is a “Without Recourse” finance
• Hedges against Interest and Exchange Risks
 Benefits to the importer

• Match repayments to projected revenues, allowing for grace periods.

• Obtain 100% financing, and avoid paying out cash in advance.
• Pay interest on a fixed rate basis for the life of the credit, which will
make budgeting simpler and safer.
• Access medium to long term financing which may be prohibitively
expensive or completely unavailable locally.
• Able to take advantage of export subsidy schemes which are often
available from the Exporter's government.
 Drawbacks of forfaiting

• Non-availability for short Periods

• Non-availability for financially weak countries
• Dominance of western currencies
• Difficulty in procuring international bank’s guarantee