How Exportes can protect themselves against credit risk
One of the
main protection available to Indian exporters against default by overseas
buyers is the export credit insurance provided by the Export Credit Guarantee
Corporation of India (ECGC), which is a government-owned enterprise that offers
various credit risk insurance covers to Indian exporters and banks. ECGC covers
both commercial and political risks that may cause non-payment or delayed
payment by the foreign buyers. ECGC also provides information on the
creditworthiness of foreign buyers and the country risk ratings to help Indian
exporters assess the risks involved in exporting to different markets. ECGC
also offers export factoring facility for MSME sector, which is a package of
financial products that includes working capital financing, credit risk
protection, maintenance of sales ledger and collection of export receivables
from the overseas buyers.
Some of the
export credit insurance covers offered by ECGC are:
- Standard
policies: These are suitable for exporters who export on short-term credit (up
to 180 days) on a regular basis. They cover various types of losses such as
insolvency of the buyer, protracted credit by the buyer, non-acceptance of
goods by the buyer, non-payment due to war, civil war, revolution or any other
disturbances in the buyer's country, etc. The percentage of cover ranges from
60% to 90% depending on the type of policy and the country of export.
- Specific
policies: These are suitable for exporters who export on medium or long-term
credit (more than 180 days) or who export capital goods or projects. They cover
various types of losses such as insolvency of the buyer, protracted credit by
the buyer, non-payment due to war, civil war, revolution or any other
disturbances in the buyer's country, termination or frustration of contract due
to any reason beyond the control of the exporter or the buyer, etc. The
percentage of cover ranges from 65% to 85% depending on the type of policy and
the country of export.
- Bank
policies: These are suitable for banks and other financial institutions that
provide pre-shipment and post-shipment finance to Indian exporters. They cover
various types of losses such as insolvency of the exporter, credit by the
exporter in repaying the loan, non-realization of export proceeds due to
commercial or political risks, etc. The percentage of cover ranges from 60% to
90% depending on the type of policy and the country of export.
Apart
from ECGC cover, some other protection mechanisms available to an Indian
exporter are:
• Export credit insurance from private
insurers: Some private insurance companies also offer export credit insurance
to Indian exporters, covering the risks of non-payment or delayed payment by
the foreign buyers due to commercial or political reasons. The premium rates
and coverage terms may vary depending on the insurer and the product.
• Letter of credit (LC): A letter of credit is
a document issued by a bank or a financial institution on behalf of the
importer, guaranteeing the payment to the exporter upon the presentation of
specified documents within a stipulated time. A letter of credit reduces the
risk of non-payment by the importer as the bank or the financial institution
assumes the obligation to pay the exporter.
• Advance payment: An advance payment is a partial or full payment made by the importer before the shipment of goods or services by the exporter. An advance payment reduces the risk of non-payment by the importer as the exporter receives the payment before delivering the goods or services. However, an advance payment may not be feasible or acceptable for some importers who may prefer other modes of payment.
• Bank guarantee: A bank guarantee is a
document issued by a bank or a financial institution on behalf of the importer,
assuring the exporter that the bank or the financial institution will pay a
specified amount to the exporter in case of credit or non-performance by the
importer. A bank guarantee reduces the risk of non-payment by the importer as
the bank or the financial institution acts as a guarantor for the exporter
Commercial
wing of Indian Embassies also play a very important role safeguarding interests of the Indian Exporters.
The
role of Indian Embassies in providing protection to exporters against credit
risk is mainly to assist and support the exporters in case of any trade
disputes, frauds or non-payments by the foreign buyers. Some of the ways in
which Indian Embassies help the exporters are:
Providing information and guidance on the legal and regulatory framework, dispute resolution mechanisms, arbitration and mediation facilities, etc. in the host country.
Contacting
the embassy of the buyer’s country or any other diplomatic presence the country
has in India to seek their intervention and cooperation in resolving the trade
dispute or recovering the payment.
Contacting
the Chamber of Commerce or other trade associations of the host country to help
in following up with the crediting buyer or taking legal action against them.
Providing
consular services such as attestation of documents, issuing certificates of
origin, etc. to facilitate the export documentation and procedures.
Coordinating
with the Export Credit Guarantee Corporation of India (ECGC) or other export
credit agencies to provide export credit insurance or other financial support
to the exporters.
It shall be clear from above that fairly elaborate mechanism is
available for protecting exporters from credit risk, It shall be clear from above that
fairly elaborate mechanism is available for protecting exporters from credit
risk, Still sometime some exporter tend to ignore this protection mechanism and
indulge in highly risky transactions
It has been seen that exporters get into deals without
proper due diligence or without taking suitable cover that result in loss. One
such case was observed where a company from Dubai started importing rice from
Indian exporters and paid a reasonably good price. The exporter visited the
office of the importer in Dubai and satisfied themselves with the genuineness
of the party. The buyer initially imported small quantities and made the
payment. After sometime one fine day they ordered one ship load of rice and as
usual there was not any insurance cover or any Letter of credit. When the
payment was not received on time and follow-up also did not yield any result
and later calls went unanswered, the exporter decided to visit the office of
the buyer. He was shocked when he reached the office of the buyer he had last
visited. There was no office! everything there had vanished.
Conclusion:
The
exporters should take proper cover either in the form of Letter of credit, Bank
Guarantee, ECGC Cover etc. Services offered by Indian embassies can also be
availed where ever applicable.
---------------------
No comments:
Post a Comment