Unit – 6 : Risks in Foreign Trade – Role of ECGC

Risks in International Trade

Foreign trade risk may be defined as Uncertainty or Unplanned events with financial consequences resulting into loss. Types of Risks are as under:

• Buyers’ Risk: Non-Acceptance or non-payment
• Sellers’ Risk: Non- shipping or Shipping of poor quality goods or delay.
• Shipping Risk: Mishandling, Goods siphoned off, Strike by potters or wrong delivery.
• Other Risks: 
  • Credit Risk
  • Legal Risk
  • Country Risk
  • Operational Risk
  • Exchange Risk
  • Country Risk

          Provision of risk is made if Exposure to one country is 1% or more of       total assets. ECGC has the list of Country Risk Ratings which can be        referred to by the Banks and the banks can make their own country         risk policy. 

Risk Classification of Countries

Export Credit and Guarantee Corporation provides guarantee cover for risks which can be availed by the banks after making payment of Premium. ECGC adopts 7 fold classification covering 204 countries. The list is updated and published on quarterly basis. The latest classification is as under:

• Insignificant Risks A1
• Low Risk A2
• Moderately Low Risk B1
• Moderate Risk B2
• Moderately High Risk C1
• High Risk C2
• Very High Risk D
• Besides above, 20 countries have been placed in “Restricted Cover Group-1” where revolving limits are approved by ECGC and these are valid for 1 year.
• The other 13 countries are placed in “Restricted Cover Group-2” where specific approval is given on case to case basis by ECGC. 

ECGC

ECGC was established in 1964. Export Credit and Guarantee Corporation provides guarantee cover for risks which can be availed by the banks after making payment of Premium. Its activities are governed by IRDA.
The functions of ECGC are 3 fold:

• It rates the different countries.
• It issues Insurance Policies.
• It guarantees proceeds of Exports. 

Types of Policies:

Standard Policies

It provides cover for exporters for short term exports. These cover Commercial and Political Risks.

The different types of Policies are:

• Shipment (Comprehensive Risk) Policy – to cover commercial and political risks from date of shipment. Default of 4 months.
• Shipment (Political Risks) Policy.
• Contracts (Comprehensive Risk) Policy for both commercial and Political risks.
• Contracts (Political Risks) Policy

Small Exporters’ policy

A small exporter is defined whose anticipated total export turnover for the period of 12 M is not more than 50 lac. The policy is issued to cover shipments 24 M ahead.

The policy provides cover against Commercial risks and Political risks covering insolvency of the buyer, failure of the borrower to make payment due within 2 months from due date, borrower’s failure to accept the goods due to no fault of exporter.

Specific Shipment Policy

Commercial risks – Failure to pay within 4M. It covers short term credit not exceeding 180 days

Exports Specific Buyer Policy

Commercial risks – Failure to pay within 4M and Political Risks

The other Policies are Exports (specific buyers’ Policy), Buyers’ Exposure Policy, Export Turnover Policy (exporters who pay minimum 10 lac premium to ECGC are eligible) and Consignment export Policy.

Financial Guarantees

ECGC issues following types of Guarantees for the benefit of Exporters:

Packing Credit Insurance

 Exporters Credit Insurance for Banks (whole Turnover Packing Credit) - ECIB (WT-PC)

This policy is issued to banks to guarantee export risks:

For all exporters

• Minimum 25 accounts should be there.
• Minimum assured premium is Rs. 5.00 lac.
• Period of cover is 12M.
• The claim is payable if there is default of 4 Months.
• Premium for fresh covers is 8 paisa per month and for others is 6-9.5 paisa percent. It is calculated on average outstanding.
• Percentage of cover ranges from 50-75%
• If due date of export proceeds is extended beyond 360 days, approval of ECGC is required.
• Claim is to be filed within 6M of report of default to ECGC.

ECIB – PC – for individual exporters.

• The advance should be categorized as Standard Asset.
• The period of coverage is 12M and %age of cover is 66-2/3 %.
• The premium is 12 paisa% on highest outstanding.
• Monthly declaration by banks before 10th.
• Approval of Corporation beyond 360 days PC.
• Report of default within 4M from due date.
• Filing of claim within 6M of the report.

ECIB –(WT- PS) – Whole Turnover Post Shipment Credit Policy

• It is a common policy for all exporters.32
• Advances against export bills are covered.
• Premium is 5-9 paisa % per month.
• Over is usually 60-75%.
• If the cover is taken by exporter individually, the cover increases to 75-90%.

Export Finance Guarantee

When banks make advance to exporters against export incentives receivables like Duty Drawback etc. The cover available is 75% and the premium ranges from 7 paisa onwards.

Exchange Fluctuation Risk Cover Scheme

• The cover is available for payment schedule over 12 months up to maximum period of 15 years.
• Cover is available for payments specified in USD, GBP, EURO, JPY, SWF, AUD and it can be extended for other convertible currencies.
• The contract cover provided a franchise of 2% Loss or gain within range of 2% of reference rate will go to the account of the exporter.
• If the loss exceeds 2% , the ECGC will make good the portion of loss in excess of 2% but not exceeding 35%.

The other guarantees are:

• Export Performance Guarantee
• Export Finance (Overseas Lending) Guarantee.
• Transfer guarantee – cover to the confirming bank in India. 

Maturity Factoring

• ECGC provides full fledged Factoring Insurance services. It facilitates purchase of account receivables.
• It provides up to 90% finance against approved transactions.
• It follows up collection of sales proceeds.
• Exporters of good track record and dealing on DA terms having unexpected bulk orders are eligible to apply.

Common Guidelines

Notice of Default

Notice of default must be served within a period of 4 months from due date or 1 month from date of recall.

Lodging of Claim

The claim should be filed with ECGC within maximum period of 6 months date of lodging of Default Notice.