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UNCONVENTIONAL MEANS OF
FINANCING
FORFAITING
FACTORING
SECURITIZATION
INNOVATIVE CONCEPTS IN
PROJECT FINANCING
FORFAITING
FORFAITING.
Typical Forfaiting
Transaction
Step 1
Step 2
Step 4
FORFAITER
(usually a subsidiary of a
European bank)
Step 5
Step 3
Step 6
Investor
(institutional or individual)
Importers Bank
Step 7
How it works?
How it works?
How it works?
IN INDIAN CONTEXT
Products Suitable
Bulk Commodities
Textiles / Leather
Granites
CHARACTERISTICS OF FORFAITING
BENEFITS OF FORFAITING
Eliminates Risk
BEGINNING MADE
Export-Import Bank of India, (EXIM Bank) has started with a
scheme for the Indian exporters by working out an intermediary
between the exporter and the forfaiter.
The scheme takes place in the following stages:
1. Negotiations being between exporter and importer with regard
to contract price, period of credit, rate of interest, etc.
2. Exporter approaches EXIM Bank with all the relevant details
for an indicative discount quote.
3. EXIM Bank approaches an overseas forfaiter, obtain the quote
and gets back to exporter with the offer.
IN INDIA
4.
5.
6.
IN INDIA
7.
8.
9.
10.
Forfaiter discounts the documents at the predetermined rate and passes on funds to EXIM Bank
for onward disbursement to exporters bank nostro
account of exporters bank.
Exporters bank credits the amount to the exporter.
Forfaiter presents the documents on due date to the
importers bank and receives the dues.
Exporters bank recovers the amount from the
importer.
2. FACTORING
FACTORING
FACTORING
purchase of receivables,
FACTORING (contd.)
Customers
credit sale of
goods
Invoice
Client
Comapany
3
5
Factor
TYPES OF FACTORING
TYPES OF FACTORING
CHARACTERISTICS OF FACTORING
CHARACTERISTICS OF FACTORING
Advantages of factoring
All the sales practically become cash sales for the seller
Factoring is thus a method of off balance sheet financing.
Money blocked with sundry debtors becomes available
for business.
The seller also can get rid of collection of the receivables
Sellers working capital management becomes efficient,
which also reduce his cost and in turn improve the
possibility of better profits.
FACTORING COMPANIES IN
INDIA
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
1. Suitable for ongoing
open account sales, not
backed by LC or
accepted
bills
or
exchange.
2. Usually
provides
financing for short-term
credit period of upto
180 days.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
3. Requires a continuous
arrangements between
factor
and
client,
whereby all sales are
routed
through
the
factor.
4. Factor
assumes
responsibility
for
collection, helps client
to reduce his own
overheads.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
5. Separate charges are
applied for
financing
collection
administration
credit protection and
provision
of
information.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
6.
DIFFERENCE BETWEEN
FACTORING AND FORFAITING
8. Usually no restriction on
minimum
size
of
transactions that can be
covered by factoring
.
9. Factor can assist with
completing
import
formalities in the buyers
country and provide ongoing
contract with buyers.
8. Transactions should be of a
minimum value of USD
100,000
to
250,000
depending on the forfaiter.
9. Forfaiting will accept only
clean documentation in
conformity
with
all
regulations
in
the
exporting/importing
countries
3. SECURITIZATION
2. SECURITIZATION
What is securitization?
What is securitization?
It is the process by which assets on a companys
balance sheet are converted into marketable securities.
Definition
Securitization (literally: to turn into securities) is
the process by which a company converts various assets
on its balance sheet into marketable securities which
can then be sold to investors and traded in the capital
markets.
We can say that Securitization is the process of
transforming collateral or obligations into traded
securities.
EXAMPLE
EXAMPLE
In this case, assume the average loan size was Rs. 20,00,000/and the average interest rate was 9.5%. The 100 loans could be
packaged together to create a Rs.200,000,000 security paying
9.25% or lower rate.
Such a security would have a prospectus, which outlines the
terms of the bond, and also would get a credit rating. The
process of securitization transforms those smaller loans into a
larger, more uniform, liquid security.
This security could then be sold to an investor, such as a hedge
fund, insurance company, mutual fund, or even another bank.
The Seller provides goods and/or services to its customers (the "Obligors") with
payment to be received at a later date and in doing so, creates an asset. (e.g.
HDFC giving housing loans against mortage of houses. Loans are assets on the
books of HDFC). A pool of assets is then sold to the special purpose
securitization vehicle ("SPV") which funds the purchase of the relevant assets by
issuing debt instruments to Investors.
To meet investor requirements, the debt instruments are typically structured to
meet the highest possible credit rating levels as provided for by the
internationally recognized ratings agencies. This approach also benefits the Seller
in that these highly-rated debt instruments attract the finest pricing.
In general, the credit rating of the debt instruments is dependent upon the credit
quality of the pool of assets to be securitized and also on the credit and liquidity
support provided to the SPV.
MECHANICS OF
SECURITIZATION
Source: Wikipedia
Benefits of Securitization
For the Seller...
Benefits of Securitisation
Flexible finance
The Seller can vary the level of funding required dependent on
its financing needs and the volume of assets available for sale
to the SPV.
Invisible to customers
As the sale of assets is typically by way of equitable
assignment, there is no notification required to customers and
the Seller maintains the direct relationship with those
customers.
Limitation of risk
As the transaction is an asset sale, recourse is generally limited
to the level of credit support provided by the Seller.
Benefits of Securitization
For the Investor...
The main benefits flowing for an Investor in acquiring debt
securities issued under an asset securitization programme
include: High credit quality
Asset securitization typically results in the securities issued
carrying the highest possible credit ratings accorded by the
internationally recognized rating agencies.
A diversification of investment opportunities
Asset securitization allows investors to indirectly invest in a
variety of asset classes.
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