Export Credit Guarantee

Corporation

Dr. A.K. Sengupta

Former Dean, Indian Institute of Foreign Trade
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In the context of growing competition in international markets
no exporter can manage without selling goods on credit.
Giving credit poses two problems to an exporter:

(i) he should find enough money to offer credit to his overseas

buyer, and

(ii) he should be prepared to take the credit risks.

Exporting on credit is not without risk. The overseas buyer

may default; he may go bankrupt; there may be an
earthquake or typhoon, a war or coup in his country which
may wreck his fortunes. There may be sudden import or
exchange restrictions. The Export Credit Guarantee
Corporation (ECGC) covers the exporter against these risks,.
The ECGC also provides guarantees to the financing banks
to enable them to provide adequate finance to the exporters.
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Covers Issued by ECGC

The covers issued by ECGC could be divided broadly into

four groups:

I.Standard policies issued to exporters to protect them

against the risk of not receiving payments while trading
with overseas buyers on short-term credit:
II.Specific policies designed to protect Indian firms against
the risk of not receiving payments in respect of (a)
exports on deferred payment terms, (b) services rendered
to foreign parties, and (c) construction works
undertaken abroad;
III.Financial guarantees issued to banks against the risks
involved in providing credit to exporters; and
IV.Special Schemes Insurance Cover for Buyer’s Credit,
Line of Credit, Joint Ventures and Overseas
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Investment.
Risks Covered under Standard Policies

Under its policies intended to protect the exporters against

overseas credit risks, ECGC bears the main brunt of the risk
and pays the exporter 95 percent of his loss on account of
‘commercial’ and ‘political’ risks

Commercial Risk

I.The insolvency of the buyer;

II.The buyer’s default to pay (within 4 months of the
date for goods accepted by him); and
III.In some special circumstances specified in the policy,
buyer’s failure to accept the goods, when such non-
acceptance is not due to the exporter’s actions.

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Political Risks

I.Restriction on remittances in the buyer’s country or any

governance action which may block or delay payment
to the exporter;
II.War, revolution or civil disturbances in the buyer’s
country;
III.New import licensing restrictions or cancellation of a
valid import license in the buyer’s country;
IV.Cancellation of export license or imposition of new
export licensing restrictions in India
V.Additional handling, transport or insurance charges due
to interruption or diversion of voyage which cannot be
recovered from the buyer, and
VI.Any other cause of loss occurring outside India, not
normally insured by commercial insurers, and beyond the
control of both the exporter and the buyer. 5
Risks not Covered

ECGC, however, does not cover risks of loss due to (i)

commercial disputes including quality disputes raised by the
buyer unless the exporter obtains a decree from competent
courts of law in the buyer’s country in his favour, (ii) causes
inherent in the nature of goods, (iii) a buyer’s failure to obtain
import or exchange authorization from the appropriate
authority, (iv) insolvency or default of any agent of the
exporter or of the collection bank, (v) loss or damage to
goods which can be covered by general insurers, (vi)
fluctuations in exchange rates and (vii) failure of the exporter
to fulfill the terms of the importer contract or negligence on his
part.

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Contracts/Shipments Policies

An exporter may either take a comprehensive risks policy

covering both political and commercial risks or secure himself
against political risks alone.

Though normally the cover starts from the date of shipment, in

the case of good manufactured according to the buyer’s
specifications and which cannot easily be sold to alternate
buyers, cover could be provided from the date contract under
the Contracts (Comprehensive or Political Risks) Policy.

Basic Principles

There are two basic principles on which the ECGC operates:

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 I.Spread of Risks – An exporter is normally expected to
insure the whole of his turnover for a minimum period of
24 months . Where an exporter deals in different types of
goods, he may insure the allied items, excluding those
which are not allied. The exporter cannot pick and
choose bad risks only for insurance.
II.An Exporter is a Co-insurer - The ECGC covers 95
percent of the loss. The insurer will have to bear the rest
of the risks. This is necessary to ensure that (i) the
exporter also takes necessary precaution in selection the
parties to which he may decides to export, (ii) he may
not over extend credit, and (iii) he may take all
possible care to minimize the risk.

The premium rates are closely related to the risks involved

and depend upon (i) length of the credit, (ii) terms of
payment, (iii) credit worthiness of the buyer and his country,
and (iv) the past record of the exporter. 8
Specific Policies

Contracts for export of capital goods or projects for

construction works and for rendering services abroad are
insured by ECGC on case-to-case basis under specific
policies. Special mention may be made of the services policy
to project Indian firms against payment for their services and
the construction works policy to cover all payments that fall
due to a contractor under a composite contract for execution
of civil engineering works which may involve provision of
services as well as supply of material.

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Five guarantees have been evolved for this purpose:

a. Packing Credit Guarantee,

b. Post-shipment Export Credit Guarantee
c. Export Finance Guarantee,
d. Export Production Finance Guarantee, and

These guarantees give protection to the bank against losses

due to non- payment by an exporter. ECGC pays the bank
three-fourths of the loss in the case of Export Finance
Guarantee, Post-shipment Export Credit Guarantee and
two-thirds of the loss .

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Financial Guarantees
Exporters require adequate financial support from banks to
carry out their export contracts effectively. ECGC’s
guarantees to the banks protect the latter from losses on their
lendings to exporters.

The beneficiaries under the guarantees given by ECGC are

not the banks alone but the exporters as well. These
guarantees have been designed to encourage banks to give
liberal credit and other facilities connected with exports, both
at pre-shipment and post-shipment stages.

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Again, ECGC agree to pay, in special cases, 80 per cent of
the loss in respect of advances made under the Post-
shipment Export Credit Guarantee against shipments of
engineering and metallurgical items of the value of Rs. 2
crores or more under a single contract. .

Special Schemes

i. Transfer Guarantee.
ii. Insurance cover for buyer’s credit and line of credit.
iii. Overseas Investment insurance

Special Schemes for Small Scale Exporters. For small

scale industries the ECGC provides a higher percentage of
cover and makes procedural relaxations in matters like
settlement of claims. Sanction of credit limit.
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