bill discounting and forfaiting

7/31/2019 Bill Discounting and Forfaiting

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Bill Disocunting


2/19

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


5/19

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

bill discounting and forfaiting

Documents