The following article was printed in DCInsight Volume 10 number 4 - Oct - Dec 2004.

Source: DCInsight Published monthly by ICCBOOKS.COM

DCInsight is the voice of the International Chamber of Commerce on letters of credit. The ICC, which over 70 years ago created the UCP - its universally used rules on letters of credit, has in DCInsight, a quarterly magazine which brings the views of its L/C experts to readers in more than 100 countries. With a new UCP revision now on the way, practitioners need DCInsight to get ready for the new rules.

Reports from three key countries: India

DCInsight: Volume 10  No 4 Oct - Dec 2004

India

 

Is forfaiting available in India's financial market? Yes. India does have a forfaiting market, set up in 1992 when the country's central bank, Reserve Bank of India (RBI), approved forfaiting as a new option to boost export financing for export promotion. Who are the sellers: the indigenous banks? Generally speaking, no. The foreign banks? Yes. The indigenous banks, for example Canara Bank, that are authorized dealers in foreign exchange, may broker to sell the forfaiting services of foreign forfaiters to their clients in India. The RBI authorizes foreign forfaiters to market their forfaiting service in India through the country's authorized dealers. The Export-Import Bank of India (EXIM Bank) and a German financing company, WestLB (Westdeutsche Landesbank Girozentrale), have linked up to form a joint venture for selling forfaiting service in the country.

At present forfaiting services are not very popular in India. This is mainly because the amount required for forfaiting transactions by foreign banks is too high for an average Indian exporter. What are the alternative export financing services available in India's market, which exporters can buy where forfaiting is not accessible or affordable? One is negotiation of documents under export L/Cs. This is more popular than avalization in forfaiting, mainly because avalizationbased forfaiting requires bills of exchange or promissory notes, but for negotiation these financial documents are not prerequisites. The full set of compliant documents under L/Cs may or may not contain a bill of exchange; it depends on the stipulations in the export L/C. All that is required in negotiation is that there be an L/C and documentary compliance with it. The banks advance value, to use an UCP term, against the compliant documents as post-shipment finance. Though negotiation may be with recourse to the exporter, and may be under reserve or against an indemnity, whereas forfaiting is carried out essentially on non-recourse terms, negotiation is still popular because it is easily accessible and affordable.

If an exporter, whether large or small, has an export L/C he has a triple advantage: he can easily get pre-shipment finance, called packing credit in India, against the L/C at low cost; he can obtain post-shipment finance by way of negotiation, easily and cheaply; he can acquire maximum risk cover at low cost under the credit insurance schemes of the country's public sector credit insurer, Export Credit Guarantee Corporation of India (ECGC); and he may find it easier to obtain an L/C for export marketing than to obtain an avalization, which can be pricey and cumbersome.

Where there is no export L/C, financing in India is often made against documentary collections. In fact, even where open account rather than documentary collection is used as the payment method, financing is available from any indigenous authorized dealer. However, efforts are being made to promote forfaiting. These are aimed at overcoming the factors that limit this service in the Indian environment. Foreign forfaiters are learning that they need to customize their forfaiting service to fit the characteristics of Indian exporters, by proposing eligibility requirements in accordance with the indigenous capability to fulfil them. For this purpose, they are becoming aware that in forfaiting matters they may need to link up with an indigenous authorized dealer as their business partner. Clearly, foreign forfaiting skills and indigenous marketing skills can help forfaiting services to grow in the Indian climate.

Ravi Mehta
Ph.D.