Export credit insurance is designed to protect the receivables of an exporter. This insurance tool provides an assurance to the exporter about receiving the amount due from the foreign customer. The insurance pays a portion of the assured value in case the customer or the foreign bank is not able to pay it due to political, commercial, or any other reasons.
As an exporter, it is essential to get yourself export credit insurance for a variety of reasons. Let us look at some of the reasons why this is an indispensable asset for anybody shipping goods overseas:
With a credit insurance policy in place, you don’t have to worry about the timely recovery of sales revenue. Credit insurance saves you the time you might spend on credit risk management and assessment, freeing you to focus on business development and growth.
Credit insurance also enables you to be flexible with your credit period and/or your credit line, increasing them if necessary. Giving buyers greater flexibility with credit will encourage new buyers to do business with you and existing buyers to buy more from you. Thus, export credit can help you increase your sales.
With the backup provided by credit insurance, you can also explore opportunities in new markets with confidence. Credit insurance often covers up to 95% of the invoice you raise, allowing you to take more chances and tackle new markets without worrying unduly about losses.
Export credit insurance companies also provide additional benefits like guidance and information on debts and customers, and support in debt recovery.
Having credit insurance can also boost your chances of arranging for export finance. When you try to finance your export business, if the lender is assured that your invoices are covered by credit insurance, arranging for finance becomes easier because of reduced risk.
In India, export credit insurance is provided by the Export Credit Guarantee Corporation Limited (ECGC). The ECGC was formed in 1957 by the Government of India to promote trade in the country by providing credit risk insurance and related services to exporters. It is under the auspices of the Ministry of Commerce and has a board comprising members from the RBI, the government, and people from banking, export and insurance sectors.
The role of the ECGC is multifaceted, albeit within the scope of credit risk management.
Its primary role is to provide a variety of risk insurance products that cover losses and bad debts on exports.
The ECGC also offers export credit insurance cover to banks and financial institutions so that they can provide trade-risk coverage to exporters.
The Corporation also offers overseas investment insurance to Indian companies that are entering into international joint ventures, in the form of equity or loans.
The ECGC also provides guidance on export-related activities to exporters (Link with: How to select what to export?), including credit rating-based information on different countries.
The ECGC can also help exporters arrange for export finance from banks and financial institutions.
Finally, it assists exporters with debt recovery and checking the creditworthiness of overseas customers.
As mentioned above, the ECGC provides a bouquet of services under the credit risk domain. Below are some of the key ECGC products and services available to Indian exporters:
Shipments Comprehensive Risks Policy (SCRP) is a 12-month policy available to exporters with a turnover of over Rs. 500 crores.
Small Exporters Policy (SEP) is available for exporters with a turnover of Rs. 5 crore or below and has a maximum risk coverage of below Rs. 2 crores.
Specific Shipment Policy (SSP) is valid for shipments made within the policy period and for up to 80% of the shipment value.
Services Policy (SP) is for single, long-term services contracts. It is suited for Indian companies who agree with foreign principals to provide technical or professional services.
Export Turnover Policy (ETP) is for large exporters who contribute not less than Rs. 20 lakhs in annual premium.
Exports (Specific Buyers) Policy (ESBP) provides the same coverage as SCRP, ETP, etc. against shipment sent to a specific buyer.
Consignment Exports Policy (Stockholding Agent) (CEPSA) covers shipments sent by the exporter to their overseas agents on a consignment basis.
Also Read: How to look for buyers for your export firm
Buyer Exposure Policy (BEP) is against many shipments sent to a specific buyer with a simplified process and rationalized premium.
IT-Enabled Services Policy Single Customer (ITESPSC) is available against billings made to a single customer for IT services rendered.
Micro Exporter Policy (MEP) is an exposure policy is for exporters with a turnover of below Rs. 100 lakh and offering up to 90% cover.
Software Project Policy (SPP) is for exporters of software and related services where payment will be received in foreign exchange.
Construction Works Policy (CWP) is designed for an Indian contractor who is carrying out an overseas civil construction contract.
Specific Policy for Supply Contract (SPSC) is meant for exporters who have a credit period of fewer than 180 days and want continuing insurance on the shipments.
Specific Shipment Policy (SSP), like the namesake policy offered for short terms, is intended for exporters who have agreed to supply capital goods to overseas buyers on deferred terms of payment.
Specific Services Policy (SSeP) is designed to cover payment risk emerging out of various overseas service contracts like technical requirements, professional hiring, leasing, etc.
Letter of Credit Confirmation (LCC) covers Indian banks against a foreign bank’s default on lines of credit.
Apart from the above, the ECGC also provides services like export factoring facilities for MSMEs, insurance cover for buyer’s credit and line of credit, overseas investment insurance, customer-specific covers, and the setting up of a national export insurance account to facilitate medium- and long-term exports.
It also offers a wide range of credit risk insurance products for exporters’ banks.
Always keep adequate premium in your ECGC account to cover your shipments for the next month/quarter.
Use the ECGC database to do a background check on your prospective buyers and to see whether exporters/the ECGC have had an adverse experience with them in the past.
You should ensure that the maximum liability of your policy is enough to meet all your outstanding dues at any given point of time.
Just like with any insurance product, a delay in filing claims can lead to rejection of your credit insurance claim.
Don’t make new shipments to a defaulting buyer without the approval of the ECGC.
Don’t fail to intimate the ECGC about bills that are overdue beyond 60 days, at least once in a month.