To avail of finance under forfaiting, the exporter is required to relinquish the letters of credits and bills of exchange to the forfaiting bank. C V Srikanth, deputy general manager, international business, Kanoria Chemicals & Industries Ltd. says that it will be difficult for most of the small exporters to provide these documents as a lot of export transaction is done on the basis of mutual faith. "Exporters fear that they might lose orders if they ask for an LoC."

S R Rao, general manager, Exim Bank, feels that as theexchange bill is a primary requirement for the process of forfaiting, exporters should not complain but try to get the letter of credit without offending their buyers. "They can give an impression to the importer that they are going for an expansion and want loans which can be issued on the basis of the letter of credit."

Another factor which is preventing the SMEs from availing of forfaiting is the high transaction limit fixed at $ 1,00,000. In India, most of the transactions done by exporters do not exceed $ 60,000. "Keeping such a high transaction limit is not going to help the small exporter at all," says Srikanth.

"In many sectors including garment, leather, tea and spices an exporter can't even manage a commitment value of $ 100,000 in a single year. So there is no question of realising it in a single consignment," says Satish Jain, managing director of Ntex International.

According to Jain, the average value of a garment consignment is very small. "Our consignments are generally worth $ 2,000.Under the present requirements, we can never qualify to gain the benefit of forfaiting." Rao agrees. "The minimum amount of transaction is very high taking Indian conditions into consideration, but the bank may ask the forfaiter to avail of the services for the lower transaction value or consider a series of transactions for that purpose."

While forfaiting is being promoted as a medium of exploring new markets, the absence of branches of major merchant banks in many parts of the world has put a doubt in entrepreneurs' minds about its reach. Exporters are not facing problems in availing forfaiting for exporting to traditional markets like Europe and North America, but exporting to African and South American countries is not smooth. "As these countries do not have a branch of a major merchant bank, it is hard for exporters to get the benefits of forfaiting," says Srikanth.

Though banks like Standard Bank and WestMerchant Bank have their base in southern Africa and America, a large number of exporters areunaware of their spread. Seminars are being organised by various industry associations and banks to create awareness.

There are other problems too. Forfaiting banks recognise the transaction bills of very few Indian banks like the State Bank of India, and reject all others. In buyer countries too, the same rules apply and transaction bills of several banks are rejected. "When letters of credit given by the importer's bank are rejected, the exporter is in trouble," says Srikanth.Exim Bank officials advise that exporters should take the help of authorised agents of the forfaiting banks to know exactly what the transaction requirements are.

Protection against fraud is another worry of exporters as there are a large number of forfaiting agencies entering the market and there are no prescribed guidelines for them. "How can we sit quietly after giving all our documents to the service providers when there is no guarantee against fraud," says Srikanth. The Reserve Bank can't help here as it does not provideaffiliation to any of the organisations for this purpose.

"Exim bank has details of some forfaiting agencies and can advise the exporters to opt for these organisations for minimising risk," says Vinod Goel of Exim Bank The mechanism to calculate discount rate charged by the forfaiters is not clear to entrepreneurs. "The Libor base is not well understood. It is unfair for the entrepreneur to conduct a transaction without knowing the amount he will have to pay," says Srikanth. Libor is charged according to the type of countries one is exporting to. In the case of high-risk countries, Libor charges can go up to 95 per cent of the transaction value whereas the charges can be one per cent in case of low-risk countries.

Srikanth points out that there are no clear-cut rules on some issues like accidents. "In case of an accident on the way to the importer's country, the fate of the bill will hang in the air."