A severely detrimental risk faced by exporters in the Indian economy is the risk of default in payment by foreign buyers. On the other hand, commercial banks have to bear the risks of default by the exporters while lending credit to the latter. The Export Credit Guarantee Corporation (ECGC) covers both these risks and charges a premium in return to foster exports in the Indian economy. ECGC’s role in providing export credit insurance to banks (ECIB) is as important as its role in insuring the exporters against non-payment by foreign buyers. In this context, a comprehensive study sponsored by ECGC Limited was conducted at the Indian Institute of Foreign Trade (IIFT) to assess the role of ECGC in furnishing short-term export credit insurance (ECI) to exporters and banks with a view to boosting the performance of Indian exporters while simultaneously expanding its own business. The study comprised two primary surveys—one of the exporters and another of the banks.
According to the primary survey, the most important risks that exporters sought protection from by purchasing ECGC insurance policies were the risks of protracted default by the buyer, followed by the insolvency of the buyer and/or insolvency of the letter of credit (LC)-opening bank. Among the risks remaining even after obtaining an ECGC policy, the maximum risks were associated with letters of credit given by importers, risky destination markets, and exchange rate fluctuations. Other risks highlighted by the respondents were those faced in obtaining sample and single-window approvals and those arising due to a lack of adequate information about the role played by banks in assisting exporters. Seventy-five per cent of the exporters, which comprised all policyholders and half of the non-policyholders, were found to be adopting formal risk management practices. Of the exporters that did adopt explicit risk management practices, taking an ECGC policy was the mechanism used by seven out of ten of them. For finance-related risks, the exporters depended either on banks or practised self-management.
Policyholder exporters reportedly performed relatively better than their non-policyholder counterparts in terms of both average domestic and export sales. Moreover, they have been able to employ about three times the number of people employed by non-policyholders, as higher sales expectedly necessitated more manpower.
Most of ECGC’s export credit support is focused on sectors like textiles, ready-made garments, engineering goods, chemicals and pharmaceuticals, and leather and leather products. ECGC can easily expand and diversify its insurance support to other sectors such as marine products, plastic goods, granite, tea, etc., by framing nuanced policies to address the common and special risks faced by the exporters in these sectors.
To further enhance ECGC policy adoption among exporters, removing procedural obstacles to ensure faster approvals and smoother claims settlement emerged as the top suggestions in the responses of the primary survey. Other important suggestions included introducing flexible premium rates and discounts, expanding credit limits, and removing restrictions on the coverage of risky destination markets.
Banks provide export credit services and other financing solutions to enterprises of all sizes and scales, most of which are micro, small, and medium enterprises (MSMEs), to assist them in improving their export performances. Most of these banks furnish short-term working capital export credit services, while some of them also provide medium- and long-term export credit services. The key sectors to which banks are providing export credit services are textiles and ready-made garments, engineering goods, chemicals and pharmaceuticals, and gems and jewellery. Banks would not readily assist exporters if they were not supported by ECGC in turn. ECGC’s export credit insurance to banks (ECIB) encourages them to extend credit to exporters by offering capital provisioning and indemnification to banks through its insurance cover and payment of claims, respectively.
The primary survey of banks identified the most important factor motivating them to take ECGC cover as the protracted default of exporters due to their insolvency. By buying ECGC cover, banks secure indirect risk protection and prevention of capital loss in case of default by exporters. On the other hand, the chief reasons for the low adoption of ECGC policies among banks were found to be a lack of funds, procedural obstacles, and the unavailability of features in the insurance cover specifically desired by the banks. These challenges can be overcome by ECGC with minimal adjustments to its insurance policies.
ECGC could also nudge banks to enhance insurance policy adoption by providing greater relief to them in capital provisioning through insurance covers and indemnification through claims. Other important suggestions for ECGC Limited to improve the reach and use of its policies to increase its ECIB business are similar to those for enhancing policy adoption among exporters. These include faster approval, a smoother process of claim settlement, reducing the premium amount, increasing the risk cover, raising awareness of its policies by providing relevant information through online and offline channels, and introducing customised policies for the banks.
In order to run its own business by extending insurance support to exporters and banks, ECGC provides insurance cover to around 20 per cent of the merchandise exports from the country destined for more than 200 countries of the world. In recent years, ECGC has introduced several new products/measures to bolster support for Indian exporters. For example, it has introduced new insurance products like the Export Factoring Facility, which provides a package of benefits comprising finance against receivables, fulfilment of working capital needs, and maintenance of a sales ledger for transactions with a specific buyer to meet the growing demand of Indian MSME exporters. ECGC is the implementing agency for the Ministry of MSME’s scheme called Capacity Building of First Time Exporters (CBFTE), the objective of which is to enable micro and small enterprises (MSE) to promote their products and services in the international markets through incentivisation at various stages of the business cycle. ECGC has also introduced a new scheme under its Whole Turnover Export Credit Insurance for Banks (WT-ECIB) to offer enhanced cover of 90 per cent to small exporters with an aggregate export credit working capital limit up to Rs 20 crore. This encourages banks to lend affordable and adequate export credit to small exporters, enabling them to explore new markets and buyers and to diversify their product portfolios competitively.
ECGC has an impressive track record of adopting innovative insurance policies to aid and assist Indian exporters in enhancing their export performance. Hence, incorporating the above-mentioned improvements in its policy formulation is an eminently doable task for ECGC. Once that is done, ECGC will be comfortably placed in the virtuous cycle of expanding its own business and boosting Indian exports.
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First Published: Aug 23 2024 | 8:45 PM IS