ECGC

Prof Mahesh Kumar

Amity Business School
profmaheshkumar@rediffmail.com
Introduction
There 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 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) Packing Credit Guarantee
b) Export Production Finance Guarantee
c) Post-shipment Export Credit Guarantee
d) Export Finance Guarantee
e) Export Performance Guarantee
f) Export Finance (Overseas Lending) Guarantee
g) Transfer Guarantee
ECGC Schemes For Exporters
 ECGC provides three kind of schemes to exporters.
a) Whole Turnover policy
2) Standard Policy
3) Small Exporters Policy
b) Factoring
1) Maturity Factoring
c) Specific Policies
1) Specific Shipment policy ( short term)
2) Supply Contracts Policy
3) Exporters ( Specific Buyers ) Policy
4) Export Turnover policy
ECGC Schemes For Exporters
5) Buyer Exposure policy.
6) Consignment Exports Policy
7) Buyer’s Credit
8) Services Policy
9) Construction Works Policy
10) Software Project Policy
11) IT Enabled Services ( Specific Customer) Policy
12) Overseas Investment Insurance
13) 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 buyer

2) 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 Covered
The following risks are not covered under Standard Policy
1) 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) Policy
2. Shipment ( Political Risk ) Policy
3. Contract ( Comprehensive Risk) Policy
4. 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 Cover
ECGC’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 Policy
c) 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 Policy
g) 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
h)Resale Exporter’s
of unacceptedPolicy
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 offered
a) Exposure (Single Buyer) Policy- for
covering the risks on a specified
buyer; and
b) 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
Credit:
Credit 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.