ECGC

IntroductionThere are two major risks in international trade:a) Risk of loss of or damage to the goods.b) Risk of non-realization of export proceeds.

The risk of loss of damage of the goods is covered by general insurers under marine insurance.

Introduction

Non receipt of export proceeds may be due to the failure of the buyer to accept and/or pay for the goods. This is This is known as commercial risk.known as commercial risk.

Such difficulties mat be attributed to political and economic changes.

The Export Risks Insurance Corporation (ERIC) was set up by Government of India in July 1957 to protect the overseas business from political and economic changes.

Evolution of ECGC Initially the task of ERIC was to protect the overseas

business from political and economic changes. Apart from this ERIC was also to facilitate the timely and

liberal facilities from banks for overseas trade. To give encouragement to the banks to promote

overseas trade ,guarantees were issued in their favor so as to protect them against failure of the exporter to repay the bank advance.

Consequently, the ERIC was transformed into Export Credit and Guarantee Corporation Ltd. In 1964.

ECGC and its administrative structure ECGC is a company wholly owned by GoI. It functions under the administrative control of the

Ministry of Commerce and is managed by board of Directors representing Government, banking, insurance, trade and industry.

Schemes of ECGC The functions of ECGC are reflected in the different

schemes it has evolved to protect the exporter and the exporter’s bank.

Schemes of ECGC for Exporter’s Bank is in the form of various guarantees issued by them.

a)a) Packing Credit GuaranteePacking Credit Guaranteeb)b) Export Production Finance GuaranteeExport Production Finance Guaranteec)c) Post-shipment Export Credit GuaranteePost-shipment Export Credit Guaranteed)d) Export Finance GuaranteeExport Finance Guaranteee)e) Export Performance GuaranteeExport Performance Guaranteef)f) Export Finance (Overseas Lending) GuaranteeExport Finance (Overseas Lending) Guaranteeg)g) Transfer GuaranteeTransfer Guarantee

ECGC Schemes For Exporters ECGC provides three kind of schemes to exporters.a)a) Whole Turnover policyWhole Turnover policy1) Standard Policy2) Small Exporters Policyb)b) FactoringFactoring1) Maturity Factoringc)c) Specific PoliciesSpecific Policies1) Specific Shipment policy ( short term)2) Supply Contracts Policy3) Exporters ( Specific Buyers ) Policy4) Export Turnover policy

ECGC Schemes For Exporters5) Buyer Exposure policy.6) Consignment Exports Policy7) Buyer’s Credit8) Services Policy9) Construction Works Policy10) Software Project Policy11) IT Enabled Services ( Specific Customer) Policy12) Overseas Investment Insurance13) Exchange Fluctuation Risk Cover

For Exporters- Whole Turnover Policy Standard Policy The standard policy issued by ECGC are meant to

provide cover for shipments on short term credit on whole turnover basis.

The risks covered may be divided into two categories a) Commercial risk b) Political risk

For Exporters- Whole Turnover Policy

Commercial risk covered include:1) Insolvency of the buyer2) Buyer’s protracted default to pay for the goods

accepted by him.3) Buyer’s failure to accept goods subject to certain

conditions.

For Exporters- Whole Turnover Policy Political risk covered are:1) Imposition of restrictions on remittances by the

government in the buyer’s country or any action which may block or delay the payment of the exporter.

2) War, revolution or civil disturbances in the buyer’s country.

3) New import licensing restrictions or cancellation of a valid import license in the buyer’s country.

For Exporters- Whole Turnover Policy

4) Cancellation of export license or imposition of new export licensing restrictions in India.

5) Payment of additional handling, transport or insurance charges occasioned by interruption or diversion of the voyage which cannot be covered from the buyer; and

6) Any other cause of loss occurring outside India, not normally insured by commercial insurer, and beyond the control of exporter and/or the buyer.

Risks Not CoveredThe following risks are not covered under Standard Policy1) Commercial disputes raised by the buyer, unless the

exporter obtains a decree from the competent court of law in the buyer’s country in his favor.

2) Causes inherent in the nature of the goods.3) Buyer’s failure to obtain necessary import or export

authorization from authorities in his country.4) Insolvency or default of an agent of the exporter or of

the collecting bank.5) Loss or damage of the goods which can be covered by

commercial insurers.6) Exchange fluctuations.

Types of Policies The policy issued may cover risk from the date of

shipment or from the date of contract and may cover political risk and commercial risk or only commercial risk. On this basis policies issued are classified as

1. Shipment ( Comprehensive Risks) Policy2. Shipment ( Political Risk ) Policy3. Contract ( Comprehensive Risk) Policy4. Contract ( Political Risk ) Policy

Types of Policies Policy covering the political risk alone may be preferred

if the export is covered by letter of credit or where the export is made to an associate concern.

Contract policies, which cover risks from the date of contract, are issued only in special cases when the goods exported are manufactured to non-standard specifications of a buyer.

Extent of CoverECGC’s liability is subject to two limits:a) Maximum liability: is the limit up to which ECGC

would accept liability for shipments made during the period of policy.

b) Credit limit: is the limit up to which ECGC accepts claims in respect of each buyer.

ECGC normally pays 90 percent of the losses on account of political and commercial risk

Obtaining the Cover The exporter submits the proposal to ECGC. After examination, ECGC sends a letter stating the terms

of its cover and premium rates. The policy is issued after the exporter conveys his

consent to the premium rates and pays the stipulated non refundable policy fees

Premium Premium rates are closely related to the risks involved

and vary according to countries to which goods are exported and the payment terms.

Reporting Defaults A monthly declaration of all bills which remain unpaid for

more than 30 days should be submitted to ECGC in the prescribed form, indicating action taken in each case.

Granting extension of time in payment, converting bills from DP to DA terms or resale of unaccepted goods at lower price require the prior approval of ECGC.

Settlement of Claims A claim will arise when any of the risks insured under the

policy materializes. If an overseas buyer goes insolvent, the exporter

becomes eligible for claim one after his loss is admitted to rank against insolvent’s estate or after four months from the due date, which ever is earlier.

Claims in case of additional handling, transport or insurance charges incurred by the exporter because of interruption or diversion of voyage outside India are payable after the proof of loss is furnished.

In all other cases, claim is payable four months from the date of the event causing the loss.

Small Exporter’s Policy It is a standard policy issued to exporters whose

anticipated export turnover for next 12 months does not exceeds Rs. 25 lakhs.

This policy differs from standard policy in following respects:

a) Period of policy: Issued for 12 months as against 24 months in the case of standard policy.

b) Minimum premium: The minimum premium payable is 0.3% of the anticipated turnover on DP and DA terms of payment, plus 0.10% of the anticipated turnover on LC terms or Rs. 1000 whichever is higher.

Small Exporter’s Policyc) Declaration of Shipments: Shipments need to be

declared only twice: in the seventh month and the thirteenth month.

d) Declaration of overdue payment: Monthly declaration of all payments overdue be more than 60 days from the due date, as against 30 days in the case of the standard policy.

e) Percentage of Cover: 95% for loss due to commercial risk and 100% if due to political risk.

f) Waiting period for claim: Two months as against four months in standard policy.

Small Exporter’s Policyg) Change in terms of payment or extension of credit

period:1) A small exporter may without the prior approval of ECGC ,

convert DP bill into DA bill, provided he has already obtained suitable credit limit on the buyer on DA terms.

2) Where the value of the bill is not more than Rs. 3.00 lacs, conversion of DP bills into DA bills is permitted even if credit limit of buyer has been obtained on DP terms only, but not more than one claim can be considered during the policy period on account of losses arising from such conversions.

3) Due date of payment of a DA bill can be extended, provided a credit limit from on the DA terms is in force at the time of such extension.

Small Exporter’s Policyh) Resale of unaccepted goods: If, upon non acceptance

of goods by a buyer, the exporter sells the goods to an alternate buyer without obtaining the prior approval of ECGC. The corporation may consider payment of claims up to an amount considered reasonable by it, provided it is satisfied that the exporter did his best under the circumstances to minimize the loss.

i) Claims due to loss or damage to goods: ECGC may also consider payment of claim up to an amount considered by it as reasonable where loss is due to loss or damage of goods due to certain risks which are not normally included in general/ marine insurance policies.

Specific Policies Specific Shipment Policy ( Short Term): Offers to

cover one or more shipments only under a particular contract. Option is to cover both commercial and political risk. The percentage cover is 80%. This policy is taken by exporters who do not hold standard policy or even by those holding it to cover the shipments specifically permitted to be excluded from the purview of the Standard Policy.

Specific Policies Specific Policy for Supply Contracts: Specific policy

for supply contracts covers exports of commodities for period beyond 180 days. Both contract and shipment policies ( for both comprehensive and political risks) are available. Losses that may be sustained by an exporter at the pre-shipment stage due to frustration of contract are covered under this policy.

Specific Policies Export (Specific Buyer) Policy: Buyer-wise Policies-

Short Term provide cover to Indian exporters against commercial and political risks involved in export of goods on short term credit to a particular buyer. Three types of policies are available:

a) Buyer-wise (commercial and political risks) Policy- Short Term

b) Buyer-wise (political risks) Policy- short term.c) Buyer-wise (insolvency & default of L/C opening bank

and political risks) Policy-Short Term

Specific Policies Export Turnover Policy: Turnover policy is a variation

of the standard policy for the benefit of large exporters who contribute not less than Rs. 10 lakhs per annum towards premium. The policy provides additional discount in premium with an added incentive for increasing the exports beyond projected turnover and also offers simplified procedure for premium remittance and filing of shipment information. It also provides for higher discretionary credit limits on overseas buyers.

Specific Policies Buyer Exposure Policies: Two types of exposure

policies are offereda) Exposure (Single Buyer) Policy- for covering the risks on

a specified buyer; andb) Exposure (Multi Buyer) Policy- for covering the risks on

all buyers.

Specific Policies Consignment Exports Policy: Indian exporters are

increasingly adopting consignment exports where the goods are shipped and held in stocks overseas ready for sale to overseas buyers. To protect the Indian exporters from possible losses under Consignment Policy Cover. There are two policies for covering consignment export viz.

a) Consignment Exports ( Stock-holding Agent)b) Consignment Exports ( Global Entity Policy)

Specific Policies Insurance Cover for Buyer’s Credit and Lines of Insurance Cover for Buyer’s Credit and Lines of

CreditCredit: Buyer’s credit is a loan extended by a financial institutions or a consortium of financial institutions, to the buyer for financing a particular export contract. Under lines of credit, a loan is extended to government or financial institutions in the importing country for financing import of specified item from the lending country. ECGC has evolved schemes to protect financial institutions in India which extend these types of credit for financing exports from India.

Specific Policies Services Policy: When Indian firms render services to

foreign parties they would be exposed to payment risks similar to those involved in export of goods. Service policy offers protection to Indian firms against such payment risks.

Specific Policies Construction Works Policy: ECGC’s Construction

Works Policy covers civil construction as well as turnkey projects involving supplies and services. It provides cover for all payment that fall due to the contractor under the contract. Two types of policies have been evolved to cover contracts with i) Government buyers, and b) Private buyers.

Specific Policies Software Project Policy: These are special policies for

software exporters in addition to general service policy.

Specific Policies Overseas Investment Insurance: ECGC has evolved

a scheme to provide protection for involvement of exporters in capital participation in overseas projects. Any investment made by way of equity capital or untied loan for the purpose of setting up or expansion of overseas projects will be eligible for cover under investment insurance.

Specific Policies Exchange Fluctuation Risk Cover Schemes: The

Exchange Fluctuation Risk Cover Schemes are intended to provide a measure of protection to exporters of capital goods, civil engineering contractors and consultants who have often to receive payments over a period of years for their exports, construction work or services. Where such payment are to be received in foreign currency, they are open to exchange fluctuation risk and the forward exchange market does not provide cover for such deferred payments. The cover is available for payments scheduled over a period of 12 months or more up to a maximum of 15 years.

Maturity Factoring Facility Under maturity factoring the factor initially undertakes

only sales ledger administration and collection functions involving granting of credit to the buyer for a period not exceeding 180 days. The factor pays the amount of each invoice to the client at the end of the credit term or on the agreed maturity date.

Benefits to the Banks: Maturity Factoring Facility

The maturity factoring facility offered by ECGC does not disturb the existing system of banking arrangement.

Banks would be able to finance against the factored bills at zero risk, as they would be protected even in case where the non-payment is due to dispute between the exporter and the buyer.

As the discounting of the bill under the scheme is to be done by the exporter’s bank they would not face any hassle in adjusting advances granted at the packing credit stage.

Benefits to the Exporters: Maturity Factoring Facility

100% risk protection in respect of transactions where the buyer accepts the bills/documents without recourse to the exporter.

Sharing of loss in case of non-acceptance of goods/documents due to insolvency or financial difficulty.

Receivable management and sales ledger maintenance. Enables the exporter to avail bank finance on easier

terms. The exporter can avail of the above benefit without

disturbing existing system of banking arrangement.

Guarantees to Banks Packing Credit Guarantees: This guarantee covers

advances granted to exporters at the pre-shipment stage for the purpose of purchase, manufacture, processing and packing of goods meant for export against firm contracts of sale, whether on credit terms or against irrevocable letters of credit. Advances given by banks to Indian firms engaged in export of services or to those which take up construction work abroad to meet preliminary expenses in connection with such contracts are also eligible. The guarantee protects the bank against failure of exporter to repay the advance because of his insolvency or protracted default to repay.

Guarantees to Banks Post Shipment Export Credit Guarantee: Post

Shipment finance given to exporters by banks through purchase, negotiation or discount of export bills or advance against such bills qualifies for this guarantee. It is necessary, however, that the exporter concerned should hold suitable policy of ECGC to cover the overseas credit risks.

Guarantees to Banks Export Finance Guarantee: This guarantee covers

post-shipment advances granted by banks to exporters against incentive receivable in the form of cash assistance, duty drawback etc.

Guarantees to Banks Export Performance Indemnity: It is an indemnity

which is in nature of a counter guarantee issued to the exporter’s bank to protect against losses that it may suffer on account of guarantees given by it on behalf of the exporters. The cover is available for such guarantees as performance guarantee, advance money guarantee, retention money guarantee, guarantee to foreign bank for finance raised overseas etc.

Guarantees to Banks Export Finance (Overseas Lending) Guarantee: If a

bank financing an overseas project provides a foreign currency loan to the contractor, it can protect itself from the risk of non-payment by the contractor by obtaining Export Finance (Overseas Lending) Guarantee.

Guarantees to Banks Transfer Guarantee: This guarantee seeks to safeguard

the banks on the confirmation they might add to letters of credit opened by banks abroad in favor of Indian exporters. The guarantee covers risks of

a) insolvency of the opening bank.b) Failure of the opening bank to pay within four months

from the due date of payment.c) Operation of law which prevents, restricts or controls

transfer of the amount of the credit to India, in circumstances outside the control of the opening bank and the confirming bank

d) Occurrence of war between the country of the opening bank and India.

e) Occurrence of war, hostilities, civil war, rebellion, insurrection or other disturbances in the country of the opening bank.