A correspondent bank is a third-party bank that handles transactions on behalf of another bank in a country where that bank has no presence. No single bank has branches in every country. So when your Indian bank needs to receive dollars from a US client but has no direct tie-up with the client's American bank, it relies on a correspondent to move the money across.

That correspondent does the actual currency clearing and settlement, then passes the funds along the chain. It lets local banks do international business without opening physical branches overseas or signing direct agreements with every foreign bank they might ever deal with.

For example, a freelancer in Pune invoices a client in Texas. The client's bank in the US doesn't deal directly with the freelancer's bank in Pune. So the payment routes through a correspondent bank that both sides can connect to, which clears the dollars before they reach India as rupees.

<a></a>How Does Correspondent Banking Work?

When two banks can't deal with each other directly, a third bank steps in and passes the money along. Here's how that actually plays out.

Say your bank in India gets a request to receive a payment from a US client. The first thing it checks is whether it has a direct relationship with the sender's American bank. If it does, the money moves straight across. If it doesn't, and usually it doesn't, the payment has to be routed through a correspondent.

The sending bank transfers the funds to a special account it maintains at the correspondent bank. The correspondent takes its cut, then forwards what's left to your bank in India, which credits your account.

These banks communicate with each other through <a href="https://www.skydo.com/blog/swift-money-transfer-ultimate-guide">SWIFT</a>. It's worth clearing up a common mix-up here: SWIFT doesn't move any money. It only carries the instructions, the secure messages telling each bank what to do. The money itself moves through the correspondent accounts, not through SWIFT.

To give a sense of scale, the SWIFT network connects over 11,000 financial institutions across more than 200 countries. Every one of them has a unique SWIFT code, which works like a postal address, telling a payment exactly which bank to land at.

The two banks keep mirror-image accounts of each other.

Your Indian bank's account, sitting on the books of the US correspondent, is called a <a href="https://www.skydo.com/blog/nostro-and-vostro-account">nostro</a> account. The word means "ours" in Italian, so think "our account, held with you."

The correspondent's record of that very same account, on its own books, is called a vostro account, meaning "yours," as in "your account, held by us." Same account, two names, depending on whose side you're looking from.

These accounts hold money that's already been placed in advance. That pre-funding allows the correspondent to settle a payment immediately, without waiting for cash to travel halfway around the world.

For example, a US company owes an Indian freelancer $5,000. The company's American bank has no direct line to the freelancer's bank in India. So the payment routes through a correspondent bank, say, JPMorgan Chase or Citibank.

The correspondent deducts a fee somewhere in the range of $25 to $75, then passes the rest down the chain to the Indian bank, which finally deposits it into the freelancer's account.

The freelancer doesn't receive $5,000. The deduction happens mid-chain, before the money ever reaches India. There is no invoice or notification for it. The amount just lands smaller than expected, and freelancers often have no idea where the missing piece went.

<a></a>Which are the Major Correspondent Banks in India?

There's no single official "list of correspondent banks" that applies to everyone, because each Indian bank builds its own network of partners. But a few names come up frequently on both the Indian and global sides. Here's the lay of the land.

<a></a>Indian Banks Acting as Correspondents

As the country's largest bank, SBI runs an extensive global network and maintains nostro accounts in several currencies. It handles foreign currency clearing and settlement for a wide range of inward and outward payments, making it a common touchpoint for cross-border flows into India.

One of the larger private-sector players in cross-border remittances, ICICI maintains correspondent relationships across multiple regions to clear foreign-currency payments into India.

HDFC processes remittances in 22 major currencies through its correspondent network and openly publishes its nostro account details. It's a frequent route for inward payments to Indian businesses and individuals.

Global Banks Serving India as Correspondents

When dollars or euros flow toward India, they often pass through one of these large international banks before reaching an Indian bank:

There's no universal routing. Every Indian bank keeps its own list of correspondent partners and its own SWIFT instructions, and which one your payment uses depends on the currency being sent. A USD payment and a GBP payment to the same Indian bank can travel through entirely different correspondents.

<a></a>How to Find Your Correspondent Bank Details

If you ever need the specifics, your bank publishes them. Indian banks put their nostro and correspondent account details on their official websites, broken down by currency. HDFC Bank's correspondent bank list is a good example of how this looks in practice, and Axis Bank and SBI maintain similar pages.

For an accurate, up-to-date SWIFT code and the correct intermediary routing, always pull it directly from your bank's official site rather than a third-party list. Routing details change, and an outdated code is one of the easiest ways for a payment to get stuck.

<a></a>Correspondent Bank vs Intermediary Bank: Key Differences

Both are third-party banks that facilitate the transfer of funds between two institutions with no direct relationship. But there's a real functional difference worth knowing, especially if you're trying to figure out why a payment took the route it did.

A correspondent bank is the one with the ongoing relationship. It maintains nostro and vostro accounts with its partner banks, handles multiple currencies, and provides recurring services such as FX, clearing, and settlement. It's a standing arrangement, built to handle a steady flow of transactions over time.

An intermediary bank is more of a one-off. It steps in for a single transaction when a smaller bank can't complete an international payment on its own. There's no long-term relationship; it usually deals with just one currency, and once the payment is through, the job is done.

The more intermediary banks a payment passes through, the longer the chain gets. Three or more banks in the path means more stops, more delay, and less visibility into where your money actually is at any given moment. And each one usually charges for the handoff.

<a></a>Do Businesses Need to Know Their Correspondent Bank?

Most of the time, no. The routing happens behind the scenes, and you'll never have to think about it. But there are a few situations where it matters, so here's when you can ignore it and when you can't.

For domestic payments within India, there's no correspondent bank for NEFT, RTGS, or IMPS. The money moves directly between two Indian banks.

For international payments, you'd think it's not different either. When money crosses borders, banks sort out correspondent routing among themselves via SWIFT. You don't pick it, and you rarely even see it.

What you actually need to share is just the beneficiary's own details:

That's it for most cross-border payments, whether it's a service invoice, an export payment, or a regular business transfer. Correspondent bank details normally aren't asked for.

Sometimes a client or a contract will specifically ask you to include correspondent or intermediary bank details, usually because a particular route has a history of delays and they want to smooth it out in advance. If that happens, your bank can provide the correct details to pass along.

And if a payment goes missing or gets stuck, that's the other time correspondent information comes into play. Banks use it to trace where the money is sitting in the chain, so they can find the holdup and push it through.

Every time a $5,000 payment crosses borders via the traditional SWIFT correspondent chain, $25–$75 vanishes in intermediary fees before it reaches your Indian account, and you often don't know how much until the money arrives short. <a href="http://www.skydo.com">Skydo</a> routes international payments differently: one transparent flat fee, no hidden correspondent deductions.

<a></a>How Does Skydo Help You Avoid Correspondent Bank Fees?

The whole problem with the traditional route is that your payment passes through correspondent banks, each one shaving off $25 to $75, and you never know the final amount until it lands short. Skydo skips that chain entirely.

You get a virtual account in USD, EUR, GBP, SGD, AUD, or CAD that your overseas client pays into, like a local transfer. The money then settles directly into your Indian bank account for a flat, upfront fee. No correspondent hop in between.

The pricing is simple and shown before you transact: $19 for payments under $2,000, $29 for payments from $2,000 to $10,000, and 0.3% for amounts above $10,000. Accounts are free to open, with no monthly fee. You only pay when money comes in.

A free FIRA is issued automatically on every payment, so the document you need for GST refunds and export filings is just there, no chasing your bank for it.

Setup takes about 10 to 15 minutes, fully online. <a href="https://www.skydo.com/">Sign up now.</a>

large_Intermediary Banks 

medium_Intermediary Banks 

small_Intermediary Banks 

thumbnail_Intermediary Banks 

Intermediary Banks 

FCNR deposit rates are offered by Indian banks to Non-Resident Indians (NRIs), on depositing their international earnings in a fixed deposit account in India. The rates are quoted per annum and fixed at the time of booking. These deposits provide a safe and practical way to grow overseas income while enjoying tax benefits. They are accessible in key currencies including USD, GBP, EUR, CAD, AUD, JPY and others.

According to the current Reserve Bank of India (RBI) regulations, FCNR deposits can be opened for a minimum tenure of 1 year and a maximum tenure of 5 years. Banks are not allowed to accept or renew FCNR deposits for a period exceeding 5 years.

<a></a>What are the Key Features and Benefits of FCNR Deposits?

Tax-free interest earnings, complete repatriability of principal and interest and protection against changes in currency exchange rates are some of the benefits of FCNR fixed deposits in India. Here is a detailed list of features and benefits of FCNR deposits in India:

<a></a>What are the Current FCNR Interest Rates Across Major Banks in India?

You can make an FCNR deposit rate comparison to choose the right bank for your deposits. Here are the current FCNR deposit rates of major banks for different currencies, including USD, GBP, EUR, CAD, AUD, JPY, and SGD:

<a></a> Kotak Mahindra Bank FCNR Deposit Rates

<a></a>Bank of Baroda FCNR Deposit Rates

<a></a>IDFC First Bank FCNR Deposit Rates

<a></a>Which Bank Offers the Highest FCNR Deposit Rates in India?

Currently, Bank of Baroda is offering the highest FCNR deposit interest rate of 5% on USD deposits for a tenure of 1 to 2 years in comparison to other major Indian banks. IndusInd Bank and IDFC FIRST Bank also provide competitive FCNR deposit rates for select currencies and tenures.

<a></a>How are FCNR Deposit Rates Calculated?

FCNR deposit interest is worked out on a 360-day year rather than the usual 365. This is just the day-count convention banks use for these foreign-currency deposits: each year is treated as 360 days (twelve 30-day months) when calculating how much interest you have earned. It is an international money-market standard, not something that reduces your return in any meaningful way.

The interest is compounded every 180 days, that is, twice a year. Compounding means that at the end of each 180-day period, the interest you have earned is added to your principal, and the next period's interest is then calculated on this larger amount. So your interest earns interest, and the deposit grows a little faster than it would with simple interest. (For deposits of one year or less, interest is simple and not compounded; compounding applies to longer tenures.)

Beyond the day-count method, the rate itself is set by the bank based on its own pricing rules, the tenure, the deposit currency, and global benchmark rates.

The interest rate cannot be changed in the middle of the term. It is fixed at the time of booking, so your funds are protected from market movement.

FCNR(B) deposit rates are subject to strict ceilings set by the RBI, and Indian banks are not allowed to offer rates above these limits. The ceilings are tied to international benchmark rates (the Overnight Alternative Reference Rate, such as SOFR for US dollars), plus a small margin.

<a></a>How to Choose the Best FCNR Deposit Rate?

To choose the best FCNR deposit rate, pick the currency that matches your income source, select a tenure that fits when you will need the money, and compare the spread each bank offers above the international benchmark rate. The factors below explain each of these in turn.

<a></a>Currency That Aligns with Your Income Source

You may save money in any currency, but be sure it fits your financial objectives. Additionally, see if the interest rates are reasonable for the currency of your choosing.

<a></a>Tenure Aligns with Your Repatriation Plans

The best FCNR tenure will depend on when you might need access to your funds. If you are going to repatriate money overseas in 1-2 years, you may want a shorter tenure for more flexibility.

FCNR deposit rates are usually influenced by international benchmark rates such as the USD's SOFR or the GBP's SONIA. Before you invest, check the extra return the bank is offering above current benchmark rates.

large_Skydo alternatives

medium_Skydo alternatives

small_Skydo alternatives

thumbnail_Skydo alternatives

Skydo alternatives

An FCNR (Foreign Currency Non-Resident) account is a fixed deposit account that allows NRIs to hold their savings in designated foreign currencies with an Indian bank. Since the deposit is maintained in foreign currency, both the principal and interest remain protected from fluctuations in the Indian Rupee during the deposit tenure.

The funds in this account, along with the interest earned, are tax-free in India, similar to a Non-Resident External (NRE) bank account. Banks also allow transfers between FCNR (B) and NRE accounts, providing flexibility in managing your NRI savings. The amount will be converted into the chosen foreign currency based on the bank’s prevailing exchange rates.

Commonly accepted currencies include Australian dollars (A$), British pounds (£), Canadian dollars (C$), euros (€), Japanese yen (¥), and US dollars ($). However, banks may accept FCNR (B) deposits in any freely convertible currency, subject to current Foreign Exchange Management Act (FEMA) regulations.

<a></a>What are the Key Features of an FCNR Account?

An FCNR (B) account comes with several notable features, including full repatriation of principal and interest, fixed-tenure deposits in foreign currency and the ability to avail loans or overdrafts against the deposit.

Here is a detailed understanding of these key features:

Instead of being used for ordinary savings, FCNR accounts are intended for fixed-term deposits. This implies that you commit your money for a predetermined amount of time, often 1 to 5 years. Premature withdrawals are possible, but they may result in penalties and interest is usually only paid after a minimum of a year.

You do not have to pay tax on the interest earned from FCNR deposits. This tax-free status allows you to grow your savings and make investments independently while living abroad.

You can avail a loan or overdraft against your FCNR account. It allows you to access funds without prematurely withdrawing your investment. This provides liquidity while your deposit continues to earn interest.

As per FEMA regulations, Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) with foreign currency earnings can open an FCNR account. It is designed for those who wish to invest in India without<a href="https://www.skydo.com/blog/currency-conversion-fees"> currency conversion </a>while enjoying full repatriation benefits.

However, resident Indians are not eligible to open an FCNR account. An FCNR deposit can only be funded using eligible foreign currency funds, such as overseas remittances or transfers from an NRE account. Domestic savings maintained in India are not permitted as a funding source.

<a></a>What are the Benefits of an FCNR Account?

The key benefits of an FCNR account include tax-free returns, the flexibility to hold deposits in foreign currency, multiple tenure options and competitive interest rates. Here is a detailed overview of the benefits of an FCNR account:

<a></a>What Are the Drawbacks of an FCNR Account?

While FCNR accounts offer several benefits, they also come with certain limitations, such as premature withdrawal penalties, funding restrictions, a limited tenure range, and potential currency conversion risk at the time of repatriation or withdrawal. Here is a detailed guide:

<a></a>FCNR vs NRE vs NRO: Differences and Similarities

The table below compares the FCNR account, NRE account, and NRO account:

You can open an FCNR (B) account in person at your local branch or online using mobile or internet banking. Follow the steps below to open an FCNR account online:

<a></a>Choose a Bank and Compare Deposit Options

Start by comparing FCNR deposit rates and tenure options across different banks. Since interest rates vary by bank and currency, selecting the right option can help maximise your returns while meeting your financial goals.

Choose the foreign currency in which you want to hold the deposit and specify the amount you wish to invest. The applicable interest rate will be locked in when the deposit is booked.

Gather the documents required by the bank, such as your passport, a valid visa or residence permit, overseas address proof, PAN card, and any other documents requested for KYC verification.

<a></a>Apply Online or Through a Branch Visit

Most banks allow NRIs to open FCNR deposits online through internet banking or their mobile banking app. You can also open the account by visiting the nearest branch. Review the deposit details carefully before submitting the application.

Once the application is processed, the bank will issue a deposit confirmation. You can then manage the deposit through the bank's online or mobile banking platform.

<a></a>What Documents Are Required to Open an FCNR Account?

To open an FCNR account, you need to submit documents for tax compliance and identity verification. Here is the list of common documents that are required:

<a></a>What Happens to Your FCNR Account When You Return to India?

When an NRI returns and becomes a resident Indian under <a href="https://www.skydo.com/blog/fema-foreign-exchange-management-act">FEMA</a>, the rules for FCNR account change and the account cannot continue indefinitely in the same way. Let us break them down:

Holding option: Existing FCNR deposits can be held until maturity even after returning to India. However, once the depositor becomes a resident, the interest earned thereafter is taxable in India.

Post-maturity conversion: On maturity, FCNR deposits are typically converted into a Resident Foreign Currency (RFC) account or a standard resident fixed deposit, as applicable.

Notification obligation: Depositor must notify the bank about the change in residency status.

Suppose you open an FCNR deposit of $50,000 for 3 years at a fixed interest rate, but you return to India after 2 years and become a resident. In this case, you do not need to break the deposit immediately.

The FCNR account can continue until maturity. During the remaining 1 year, it may continue to earn interest as per applicable rules, but its residential status will be updated. On maturity, the principal plus interest is converted into INR or transferred into a RFC account.

Modernize the Core: Your B2B Payments Strategy Reset

large_Modernize the Core: Your B2B Payments Strategy Reset

medium_Modernize the Core: Your B2B Payments Strategy Reset

small_Modernize the Core: Your B2B Payments Strategy Reset

thumbnail_Modernize the Core: Your B2B Payments Strategy Reset

Factoring is selling unpaid invoices to a third party, known as a factor, for immediate cash. Businesses can get working capital from outstanding invoices instead of waiting for customers to pay.

Generally, a factor advances 80% to 90% of the invoice value upfront, then collects payment from the buyer when the invoice comes due. The remaining sum is released to the seller minus applicable fees once the payment is received.

Factoring is generally used for short-term receivables, with credit periods varying from 30 to 180 days. It is useful for businesses that sell regularly on credit and can support both domestic and international trade.

Here are some facts about the structure of factoring:

Assume a handicrafts exporter in Jaipur who sends goods to a UK retailer for ₹10 lakh on a 60-day credit. So instead of waiting for two months to get paid, the exporter sells the invoice to a factoring company for ₹9.5 lakh.

The exporter gets instant working capital and the factoring company collects the full invoice amount from the buyer when it is due. This will help improve cashflow and reduce the work involved in chasing up international payments.

While a bank can act as a factor, many factoring companies are specialized non-banking financial companies (NBFCs) or independent financial firms.

Forfaiting is also the sale of receivables, particularly medium to long-term trade receivables, that are evidenced by negotiable instruments such as bills of exchange or promissory notes. Here, the comparison with factoring largely stops. Forfaiting generally applies to larger export transactions, longer payment terms and receivables guaranteed by a bank.

When a forfaiter buys the debt, he collects payment directly from the importer. The exporter gets his funds upfront instead of waiting months or years for it to come in.

Forfaiting is mostly used for exports of capital goods like machinery, engineering equipment and infrastructure components where payment is deferred over a long period.

What is structurally different about forfaiting:

Suppose an Indian manufacturer seals a contract to supply heavy machinery worth ₹5 crore to a buyer in the UK. The buyer agrees to make a series of payments over three years, rather than one payment, in the form of promissory notes.

To escape waiting years for the payment, the exporter sells those promissory notes to a forfaiter for ₹4.8 crore and receives the money in advance. The forfaiter then receives payments from the UK buyer on the agreed schedule.

This can help the exporter improve cash flow, reduce collection responsibilities, and focus on business operations rather than managing long-term receivables.

<a></a>Factoring vs Forfaiting: Key Differences

Both factoring and forfaiting allow companies to convert future receivables into immediate cash. But what is right depends on what you are selling and who you are selling to, how big the transaction is and how long it takes the buyer to pay.

Factoring is commonly used for short-term invoices and ongoing business transactions. Forfaiting, however, is used for larger export contracts and longer repayment terms. Here are the key differences between factoring and forfaiting in tabular form:

<a></a>Similarities Between Factoring and Forfaiting

Notwithstanding the difference between factoring and forfaiting, they share some common features:

The two solutions target different kinds of trade transactions, but the underlying objective is identical, i.e. to boost liquidity and reduce the burden of late payments.

Not all cash flow challenges need financing. For many exporters, the bigger problem is delayed settlements, hidden charges and poor visibility of incoming payments. Find out how Indian businesses can collect international payments more efficiently with <a href="https://www.skydo.com/?utm_source=google&amp;utm_campaign=Skydo_Traffic_Sep13&amp;utm_medium=ad&amp;utm_content=Skydo_Traffic_Oct24_exact_match&amp;utm_term=skydo&amp;gad_source=1&amp;gad_campaignid=21700492706&amp;gbraid=0AAAAA9be3yhT2K5QdZKHwOuTIRUUdux97&amp;gclid=Cj0KCQjwrs7RBhDuARIsAIVfBD3NVGMym2ATVGLXATJbWRMy5JdA9jBBJrRWhISr6sOk7v2iKTtzIEoaAvmwEALw_wcB">Skydo.</a>

<a></a>How Much Do Factoring and Forfaiting Actually Cost?

The cost of factoring and forfaiting depends on a variety of factors such as the buyer's creditworthiness, payment terms, transaction size, country risk and the type of goods being exported. Both solutions help cash flow but there is a major difference in pricing.

Factoring costs generally fall into two categories:

In practice, the overall cost of factoring is often in the range of 1% and 5% of the invoice value depending on the transaction and risk profile.

Forfaiting is generally a simple discount of the receivable, and not a combination of financing and service charges. Cost may include:

The rates for forfeiting are usually expressed on an annual basis and may vary depending on the structure and risk profile of the transaction.

The pricing in factoring and forfaiting is strongly influenced by:

These costs are usually passed on to the exporter as fees or discounts on the receivable, and do not impact the importer's obligation to pay.

<a></a>How is Bill Discounting Different From Factoring and Forfaiting?

Bill discounting, factoring and forfaiting all offer businesses the opportunity to get cash before a buyer pays. They do, however, differ as per risk, scope and treatment of receivables.

Bill discounting implies that a bank provides an advance against a particular bill of exchange, but the seller is liable if the buyer does not pay. Factoring is the selling of multiple receivables to a factor, who may also handle collections and administration of receivables. Forfaiting, on the other hand, involves medium to long-term export receivables secured by negotiable instruments, with the forfaiter assuming the collection obligation.

Below is the difference between factoring and forfaiting and bill discounting:

Note: The key difference is in the degree of support and risk transfer involved. Bill discounting is the most limited option of all. It offers financing against a specific bill, but the seller still is exposed to buyer default risk. Factoring provides more receivables management and collection services. Forfaiting is commonly used for large international transactions and can provide complete transfer of collection and credit risk. 

<a></a>Which Is Better for Your Business: Factoring or Forfaiting?

The right choice depends on 5 factors, i.e., the type of goods you sell, buyer's creditworthiness, payment terms, transaction size, and whether your goal is faster cash flow or risk reduction.

Forfaiting is generally more appropriate for exporters who are involved in large and long-term international contracts.

The buyer's credit rating also counts. Forfaiting may be more appropriate for stronger buyers with bank-guaranteed instruments, while non-recourse factoring can offer protection where buyer risk is higher.

But, for many Indian IT, consulting and design exporters, the problem is not financing receivables but getting international payments quickly and cost-effectively. In such cases, a payment collection solution may be more relevant than factoring or forfaiting.

Factoring and forfaiting solve a financing issue. But the bigger hurdle for a lot of Indian service exporters is to get international payments done quickly, transparently and at a reasonable cost. Hidden bank charges, forex markups, unpredictable settlement timelines, and the need to chase SWIFT copies adds friction to the process.

Skydo is a cross-border payment platform that helps Indian businesses and freelancers receive international payments. It is designed for incoming payments, not for sending money abroad. Users can open virtual receiving accounts in USD, EUR, GBP, SGD, AUD, CAD, generally within 10 to 15 minutes. Overseas clients can then make payments into these accounts as if they were a local account.

Pricing is simple and completely transparent:

For every transaction, FIRC certificates are generated automatically, and there are no monthly fees. The platform also offers payment visibility so you don’t need to chase payments or track SWIFT messages.

<a href="https://www.skydo.com/?utm_source=google&amp;utm_campaign=Skydo_Traffic_Sep13&amp;utm_medium=ad&amp;utm_content=Skydo_Traffic_Oct24_exact_match&amp;utm_term=skydo&amp;gad_source=1&amp;gad_campaignid=21700492706&amp;gbraid=0AAAAA9be3yhT2K5QdZKHwOuTIRUUdux97&amp;gclid=Cj0KCQjwrs7RBhDuARIsAIVfBD3NVGMym2ATVGLXATJbWRMy5JdA9jBBJrRWhISr6sOk7v2iKTtzIEoaAvmwEALw_wcB">Skydo </a>is designed for exporters of goods and services, freelancers with valid export documentation, and Amazon sellers generating income overseas. It is not intended for personal transactions, donations, forex trading, jewellery businesses, call centres or transactions with restricted jurisdictions.

For exporters receiving smaller international payments, the cost of collecting funds sometimes has a bigger impact than access to financing. If your invoices are under $10,000, reducing payment collection costs through a transparent flat-fee model may be more beneficial than selling receivables at a discount through factoring or forfaiting.

large_here-are-five-major-payment-problems-that-business-owners-need-solutions-to-thumbnail.jpg

medium_here-are-five-major-payment-problems-that-business-owners-need-solutions-to-thumbnail.jpg

small_here-are-five-major-payment-problems-that-business-owners-need-solutions-to-thumbnail.jpg

thumbnail_here-are-five-major-payment-problems-that-business-owners-need-solutions-to-thumbnail.jpg

here-are-five-major-payment-problems-that-business-owners-need-solutions-to-thumbnail.jpg

Forfaiting is a trade finance arrangement in which an exporter sells their future payment receivables, typically backed by a promissory note or bill of exchange, to a specialized financial institution known as a forfaiter. In return, the exporter gets cash now instead of months or years later when the buyer pays.

In practice, an exporter ships goods to an overseas buyer and agrees to allow that buyer to pay at a later date, sometimes years later. Instead of waiting for that payment, the exporter sells the receivable to a forfaiter today, at a price slightly below its face value. From that point forward, it is the forfaiter's job to collect from the buyer when payment falls due.

This one move shifts the risk of buyer default (and often the political and currency risk tied to the buyer's country) onto the forfaiter. And it removes the receivable from the exporter's balance sheet, because once the exporter sells it, he no longer owns that asset.

Forfaiting is basically for two users on opposite sides of a trade deal.

Exporters and manufacturers selling expensive, hard-to-finance goods are the primary users. They turn to forfaiting when they need cash sooner than the buyer's payment timeline will allow and want to hand off the risk of non-payment, currency movement or political instability in the buyer's country.

Importers benefit too, as forfaiting allows for deferred payment terms from several months to several years, depending on the transaction. This allows buyers to buy capital-intensive goods without having to pay the total cost upfront.

Forfaiters themselves are specialised players. These are dedicated trade finance firms, international banks or forfaiting divisions of larger banks that buy these receivables at a discount, earning their margin on the difference between what they pay and what they ultimately collect.

In order for a receivable to be tradeable at all, the importer normally needs a guarantee from their own bank (an aval, a standby letter of credit or similar instrument) that the deferred payment will be honored even if the importer gets into trouble. Many forfaiting transactions are based on avalised bills of exchange or other payment instruments guaranteed by the banks. The avalisation strengthens the quality of the payment obligation and makes the receivable more attractive to forfaiters.

Forfaiting in India sits within an established regulatory framework. The <a href="https://www.rbi.org.in/commonman/English/Scripts/Notification.aspx?Id=851">Reserve Bank of India </a>permits EXIM bank and AD Category I banks to undertake forfaiting for financing export receivables. Hence, exporters working with these institutions are not operating in a gray area.

It is most commonly seen in deals worth $100,000 or more, especially where long credit periods are part of the commercial agreement. Examples include capital equipment manufacturing, infrastructure projects, aerospace, energy and pharmaceutical exports.

<a></a>How Does Forfaiting Process Work: A Step-by-Step Guide

In a forfaiting transaction, the exporter ships the goods, sells the future payment obligation to a forfaiter at a discount, receives immediate cash, and exits the transaction. The forfaiter then assumes the payment risk and collects the amount from the importer when it becomes due.

oqOrnQAAAAZJREFUAwBQifSVYz4HsQAAAABJRU5ErkJggg==

<a></a>What Are the Different Types of Forfaiting?

Forfaiting can be classified based on two factors: whether the exporter retains any liability after selling the receivable and the type of payment instrument being forfaited. The most common form is non-recourse forfaiting, where the forfaiter assumes the payment risk after purchasing the receivable.

The first split depends on whether the exporter retains any liability after selling the receivable.

A third way to look at forfaiting is by what's actually being sold, as the type of instrument affects how easily a forfaiter can trade it.

<a></a>What Are the Advantages and Disadvantages of Forfaiting?

The main advantages of forfaiting are immediate cash flow, risk transfer, and improved working capital. However, these benefits come at a cost, as forfaiting can be more expensive than traditional financing and often involves strict eligibility and documentation requirements.

Despite this, forfaiting is not suited to every transaction. Exporters should take the costs, documentation requirements and practical limitations into account.

<a></a>Forfaiting vs Factoring: Similarities and Differences

Forfaiting and factoring both help businesses convert receivables into immediate cash by selling them to a financial institution. The key difference is that factoring is typically used for short-term, recurring invoices, while forfaiting is used for larger, medium- to long-term export receivables and is usually structured without recourse to the exporter.

Factoring is a receivables finance solution that allows companies to get cash out of unpaid invoices. A company sells those invoices to a factor and gets most of the invoice amount upfront instead of waiting for customers to pay their dues.

Although they cater to different types of transactions, both factoring and forfaiting convert future receivables into immediate funds. In both cases, a third-party financial institution purchases the receivable and is responsible for collecting payment from the buyer. The institution receives a return on the discount paid for the purchase of the receivable.

Although both solutions offer early access to cash, they differ in aspects like repayment period, transaction size, risk allocation and the types of receivables financed.

To make the mechanism of forfaiting easier, let’s take a look at an example of forfaiting.

Suppose, an Indian machinery manufacturer receives a $2 million export order from a buyer in an emerging market. The buyer wants to pay over 18 months, but the exporter needs to collect money immediately to cover production and operating costs.

Instead of waiting for the buyer to pay over time, the exporter sells the receivable to a forfaiter at a 5% discount and receives $1.9 million in advance. The forfaiter then assumes responsibility for collecting the remaining 2 million from the importer over the agreed period.

Note: This is for illustration purposes only. Actual forfaiting costs vary based on factors such as credit period, transaction size, currency, country risk and the strength of the guaranteeing bank.

Forfaiting is used for a very specific type of transaction, i.e., big export contracts with long payment cycles and high credit risk. Most Indian exporters, freelancers, agencies, consultants and SaaS businesses simply want to receive international payments fast, transparently and without unnecessary deductions.

Growing Global

Understanding Global Payments blogs