bill discounting and forfaiting
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Bill Disocunting
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What is it?
Meaning
A contract
Source of short-term finance
Process of calculating the PV of future amount
Asset based financial service/Fund based
activity
Funds :Rs. 3,00,000 Rs. 20,00,000
Tenure : 60 days upto 180 days
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Types
Purchase Bill Discounting
Sales Bill Discounting
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Instrument(s) used
B/E(principal), LC(cross border)
Used for financing transaction of goods
Trade related instrument
According to NI Act,1881:
an instrument in writing, containing an
unconditional order, signed by the maker,
directing a certain person to pay a certain sum ofmoney, only to, or to the order of, a certainperson, or to the bearer of that instrument
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Types of B/E
Demand Bill payable immediately onpresentment
Usance Bill Time period recognised for
payment of bills Documentary Bill Acconpanied by
documents confirming transaction(invoice, Bill
of Lading, receipt from transporter) Clean Bills Not accompanied by documents.
Interest rate higher
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Parties to a B/E
The Drawer(seller of goods) draws the bill
The Drawee(buyer of goods) on whom the
bill is drawn
The Payee Whom/to whose order bill is paid
The Endorser signs the bill on negotiation
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Procedure
Broker Contactsthe investor with
proposal
Company gives aPN & a PDC to the
investor
Investor encashesthe cheque aftermaturity of PN
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Benefits to investors
Short-term source of finance
Rate of discount better than available on ICDs
No tax deducted at source Flexibility both in quantum and duration of
investments
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Benefits for Bankers
No risk in lending Safety!
Certainty of payment self-liquidating asset.
Greater liquidity No change in the value of the bill
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Discount Rates
Better rated firms 13% to 15%; poorly rated 17% to 28%
Influencing factors:
The Broker through relations with the companyand the investor
Market liquidity
Volume/Value of Discounting
Frequency
Companys financial resources
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Caveat
Company information
Industry
Competition
Management
Brokers known people
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RBI Guidelines
Bill discounting policy approved by banks BOD
Consistency with policy of working capital limits
Ensure Genuineness of underlying transaction
and transaction documents Rediscounting restricted to usance bills held by
other banks
Accommodation bills NOT to be
purchased/discounted/negotiated Banks should not enter into Repo transaction
using bills (re)discounted as collateral
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Bill Market in India
Yet to develop fully despite measures taken by
RBI. Reasons:
Reluctance of industry
Procedural delay in getting prompt legal remedy
for dishonored bills
Competitive domestic marketa buyers market
High Cost(discounting, collection, handlingcharges, Stamp duties etc.)
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Forfaiting
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An Introduction
Source of Trade Finance
Enables exporters to get funds from
forfaiters
Debt instrument purchased at a discount
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Features
Specific form of export trade finance
Export receivables discounted at fixed discountrate
Commonly used instruments B/E, PN Payment guaranteed by importers bank(Aval)
Always without recourse to seller(Exporter)
Full value of export receivable(100% of contract
value) taken into account Export receivables carrying medium to long-term
maturities taken in to account
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Cost of Forfaiting
Commitment fee, discount rate, documentation
fee
Factors determining discount rate
Charge for credit extended
Charge based on risk of interest rate and exchange
rate movements
Charge based on sovereign risk, political risk, transferrisk
Charge based on credit risk attached to the importer
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Mechanism
Commercial contract between exporter and importer
Delivery of goods by exporter to importer on credit
Contract between importer and his bank to have
guarantees Delivery of avulsed negotiable instrument to exporter
Forfating contract between exporter and forfaitor
Cash payment of discounted avulsed NI by forfaiter to
the exporter Presentation of the avulsed NI to the importer
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Forfaiting services in India
1992- EXIM bank authorized by RBI to offer
forfaiting services
Scheduled banks also permitted to play
agents/facilitators in forfaiting services