Home JAIIB Factoring, Forfaiting Servicing and off Balance Sheet items

Factoring, Forfaiting Servicing and off Balance Sheet items



Factoring ……… receivables created out of sale of goods and services are sold to an agency know as “factor’. •On  invoice  submission ,  factor will pay 80 to 85% of invoice to the seller. •Balance  paid to the seller on recovering from the purchaser. •The Factor  recovers finance / service charges for funds prepaid to the seller •

Types of Factoring:

1.Recourse Factoring (with recourse):

2.Non – recourse Factoring (without recourse):

       but in India without recourse is not permitted •Domestic Factoring •International Factoring- Export factoring & import Factoring

Forfaiting Services

•When an exporter transfers his right to receive payment in favour of forfaiter, the transaction is called forfaiting. • • • •It is on without recourse basis. • •Exporter is fully protected against interest and/or currency rate moving unfavorable during the credit period as the entire risk is passed on to the forfaiter.

Off Balance sheet Items

Which are not mentioned in the balance sheet of the bank. These contingent liabilities are disclosed as ‘Notes to the Balance sheet’.

● 1.Guarantees

Performance Guarantees: Issued in respect of performance of a contract or obligation.

Financial Guarantees: In lieu of financial commitments. Guarantee in favour of custom authorities, Tax Authorities, an respect of any disputed liabilities.

Deferred Payment Guarantees: DPG normally arise in the case of purchase of machinery or such other capital equipment by customers.

Letter of Credit:

LC is a definite undertaking by bank, on behalf of buyer to the seller to pay for goods and/or service, provided that the seller presents documents &  complies with all the terms and conditions of the documentary credit.

Parties to LC: 1

.Applicant: Importer or buyer.

2.Issuing Bank: Usually the applicant’s bank. Issuing bank is ultimately responsible for payment under LC.

3.Advising Bank: A correspondent or a branch of the issuing bank is able to authenticate the LC message before advising the same to the beneficiary.

4.Confirming Bank: Same role as advising bank except that the confirming bank provides an undertaking to the beneficiary 5.Beneficiary: Exporter or seller of the goods.

Types of LC

1.Irrevocable LC  

2.Revocable LC – can`t be issued

3.Unconfirmed LC: Advising bank has no responsibility for payment.

4.Confirmed LC: Undertaking of the confirming bank to effect payment

5.Revolving LC:

6.Standby LC: Similar to BG but is issued in a format corresponding to that of a documentary credit.

7.Transferable LC: When seller is acting as an agent in the export order. The LC is transferred to the actual supplier of the goods. 8.Back to back LC: Open  LC locally  in favour of manufacturer for supply of goods to himself on the security of Foreign LC 

9.Red clause LC is the one which provides for advance payment to exporter for the procuring shipment material and arranging for its actual shipment.

10.If LC provides for further advance to facilitate temporary storage of goods at exporters end, the LC will be know as Green Clause LC

Forward Exchange Contract

•A  contract between the bank and its customer • •for  purchase/sale of a  foreign currency on a future date

at a pre determined rate. • •On the due date when the contract is executed, the transaction will be put through at the Contracted rate of exchange irrespective of the spot rate then prevailing.

Interest Rate Swap (IRS)

•    Interest Rate Swap(IRS): –Financial contract between two parties exchanging a stream of interest payments for a notional principal amount –

–on multiple occasions during a specified period.

–Such contracts generally involve exchange of fixed to floating or floating to fixed rate of interest.

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