MODULE 18

RISK MANAGEMENT IN EXPORTS –

COMMERCIAL AND POLITICAL
RISK MANAGEMENT
– ROLE OF ECGC.
LEARNING OBJECTIVES
• To understand the meaning of credit risk;
• To compare and analyse various types of policies issued by ECGC
• To understand the principles of ECGC operation
• To understand the procedure of taking a policy and for making a claim
• To understand financial guarantees provided by ECGC

18.1 INTRODUCTION

In recent years, exports have become very complex and highly risky. Insolvency rate
is on the increase and balance of payment difficulties have severely affected the
capacity of manycountries to pay the import price. In such a high risk situation, the
need for export credit insurance rise. Export credit insurance is extremely helpful for
exporters as well as banks which aid in financing of export transactions. It is also
important to understand various types of covers issued by ECGC and basic principles
of its operation.In order to benefit from these covers, one must be well acquainted
with the procedure for making a claim and financial guaranteesprovided to banks.

18.2 MEANING OF CREDIT RISK

To compete with exporters in the foreign markets over and above the domestic
markets, Indian exporters have to take into consideration various parameters like
quality, price, delivery schedules, and also payment terms. Success of exporters
depends mainly on their ability to offer competitive terms of credit to the foreign
buyers as par with other countries. Credit risk is inherent in all transactions but more
in case of export transactions. Insolvency of the buyer or any other reason of non-
realisation of import payment may expose the exporter to credit risk despite having
checked the credit worthiness of the buyer. Credit risk is greater in export transactions
because reliable information about foreign buyers is difficult to obtain and hence, it is
difficult to evaluate their credit worthiness. Credit riskhasreached a large volume
today, mainly because of the changes in the political and economic arena of doing
business. Any political or economic disturbance raises the chances of block ordelay in
the payment for goods exported. Balance of Payment difficulties may lead to
transferdelays despite the ability of the buyer to pay. Over and above this, a buyer
may not pay due to the possibilities of the insolvency or protected default of the
buyers.

In recent years, there has been a significant increase in insolvencies and business
failures even in many developed countries. In such a risk situation export credit
insurance can beof immense help to exporters and the banks who provide finance for
the exporttransactions.

18.3 ORGANISATION COVERING CREDIT RISK

There are around 40 organisations which provide cover against credit risk over the
world. These organisations are members of the International Union of Credit &
Investment Insurers also known as the Berne Union. In most of the countries these
organisations are governed by variousdepartments of the government. In India, under
the Ministry of Commerce and Industry, Export CreditGuarantee Corporation of India
Limited has been established to cover exportcredit risks.

Soon after independence, government of India in order to boost exports, in 1957 set up
Export Risk InsuranceCorporation of India (ERIC) with its head office in Mumbai.
This organisation had to provide various guarantees to bankers providing export
finance. In 1964 this organisation was renamed as the Export Credit and Guarantee
CorporationLimited. To bring the Indian identity into sharper focus, the Corporation's
name was onceagain changed in 1983 to Export Credit Guarantee Corporation of India
(ECGC).

The ECGC is a company wholly owned by the Government of India. It functions

under theadministrative control of the Ministry of Commerceand is managed by the
Board ofDirectorsrepresenting Government, Banking, Insurance, Trade and Industry,
etc.

18.4 RISKS COVERED BY ECGC

It is also important to enumerate the risks covered under Standard Policies. These
risks are broadly divided into two categories i.e. Commercial and Political.

Commercial Risks include:

i) The insolvency of the buyer
ii) The buyer's protracted default to pay (within 4 months of due date) for
goodsaccepted by him; and
iii) In some special circumstances specified in the policy, buyer's failure to accept
thegoods, when such non-acceptance is not due to exporter's action.

Political Risks includes:

i) Imposition of restrictions on remittances by the Government in the buyer's
countryor any government 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 licence in
thebuyer's country, after the date of shipment or contract as applicable
iv) Cancellation of export licence or imposition of new export licensing restrictions in
India after effective date of contract (under contracts policy)
v) Payment of additional handling, transport or insurance charges occasioned
byinterruption 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
generalinsurers, and beyond the control of the exporter and or the buyer.

The risks which are not covered under the standard policies do not cover losses due to
the following risks:
i) Commercial disputes including quality disputes raised by the buyer, unless the
exporterobtains a decree from a competent court of law in the buyer's country in his
favour
ii) causes inherent in the nature of the goods
iii) buyer's failure to obtain necessary import or exchange authorisation from
authorities inhis country
iv) Insolvency or default of any agent of the exporter or of the collecting bank
v) Loss or damage to goods which can be covered by general insurers
vi) Failure of the exporter to fulfil the terms of the export contract or negligence on his
part
vii) Exchange rate fluctuation (except under schemes mentioned later in the chapter).

ECGC also does not cover risks which can normally be insured with
commercialinsurers.
An exporter may either take a comprehensive risks policy covering both political and
commercial risks or secure himself against political risks only, depending upon
hisrequirements. It must, however, be noted that ECGC does not issue policies to
cover commercial risks only.

18.5 TYPES OF COVER ISSUED BY ECGC

A number of covers are issued by ECGC for exporters and banks along with special
schemes.

18.5.1Export Credit Insurance for Exporter

There are a number of policies under this which are:

1. Short Term – Turnover Based
 i. Shipments Comprehensive Risks Policy – (SCR)
ii. Small Exporters Policy – (SEP)
iii. Specific Shipment Policy-(SSP)
iv. Services Policy – (SRC)
v. Export Turnover Policy – (ETP)
vi. Exports (Specific Buyers) Policy (BWP)
vii. Consignment Exports Policy (Stockholding Agent) – (CSA)

2. ECIE Short Term – Exposure Based

i. Buyer Exposure Policy (BEP)

ii. IT-Enabled Services Policy-Single Customer (SITES)
iii. Small And Medium Enterprise – (SME)
iv. Software Project Policy (SPP)

3. ECIE – Medium & Long Term

i. Construction Works Policy-(CWP)

ii. Specific Policy for Supply Contract
iii. Specific Shipment Policy-(SSP)
iv. Specific Services Policy-(SRC)
v. Letter of Credit confirmation Cover

18.5.2 Export Credit Insurance for Bank

1. ECIB – Short Term – Pre-Shipment(PC)

i. Individual Packing Credit -(INPC)
ii. Whole Turnover Packing Credit – (WTPC)
iii. Branch Wise Packing Credit – (BIPC)

2. ECIB – Short Term – Post-Shipment

i. Individual Post Shipment-(INPS)

ii. ECIB-INPS (With Exclusion)
iii. ECIB-INPS (Without Any Exclusion)
iv. ECIB-INPS (Not Holding Standard Policy)
v. Whole Turnover Post Shipment – (WTPS)
vi. Export Finance (EF)
3. ECIB – Short Term – Cover against Bank Guarantee
i. Export Credit Insurance for Banks- Surety Cover (ECIB-SC)
 ii. Advance Payment-cum-Performance

4. ECIB – Medium & Long Term

i. Individual Packing Credit -(INPC)

ii. Individual Post Shipment-(INPS)
iii. Export Performance (EP)
iv. Export Finance[Overseas Lending](EF-OL)
v. ECIB-Cash Flow Deficit Financing

18.5 PRINCIPLES OF ECGC OPERATION

ECGC functions on a number of principles, which are

i) An exporter who wants to avail the policies of ECGC, has to insure all the
shipments made during the next two years. This condition doesn’t apply in
cases where transactions are made against advance payments. Confirmed
irrevocable letters of credit and shipments made to agents. This condition
helps in reducing the premium and also to share the liability of bad risks
being insured.
ii) ECGC normally pays 90 per cent of the losses on account of political or
commercial risks. In such cases, the exporter has to bear the rest of the loss.
This condition is helpful for ECGC as it will ensure that the exporter also
takes necessary precautions in choosing the overseas buyer, takes care to
minimise the risk involved and doesn’t overextend the credit.
iii) The exporter has to disclose all the details of the contract to ECGC else the
cover provided by ECGC will be rendered null and void.

18.6 PROCEDURE FOR CLAIMING A POLICY

The exporter willing to take the policy has to apply to the regional office of ECGC.
After the proposal submitted by the exporter is examined by ECGC, an acceptance
letter is issued stating the terms of the cover and the premium rates. The policy is
issued on acceptance pf the terms by the exporter and he has to pay a non refundable
fee. The premium rates are fixed based on the risks involved and depend on length of
the credit, terms of payment, credit worthiness of the buyer and his country andthe
past record of the exporter.ECGC also fixes a maximum limit of its liability in each
policy year for each cover.
18.7 PROCEDURE FOR MAKING A CLAIM

An exporter can make a claim in cases where an overseas buyer goes insolvent or a
political or commercial risk materialises. The exporter becomes eligible for the claim
one month after his loss or after four months of the due date. Claims in respect of
additional handling, transport or insurance charges incurred bythe exporter because of
interruption or diversion of voyage outside India are payable after proof of loss is
furnished. In cases where there are delays in shipment, ECGC may extend the time
period of making claims. In case there is a dispute between the exporter and buyer in
terms of non conformity of the goods or contract, ECGC will consider the claims only
after dispute resolution.
ECGC extends the mode of taking a claim in three ways:
i. Claims arising due to non-payment of goods accepted by the buyer
ii. Claims arising because of thenon-acceptance of goods/documents by the
buyer
iii. Claims onaccount of delay in transfer of funds to India.
Other types of claims can be filed by means of a letter,giving full particulars of the
cause and extent of loss. The claims have to be submitted to theECGC office that
issued the policy and has to be sent through a bank. ECGC will not entertain any
claim filed after 24 months from the due date of the concerned bills.

Each claim has to be supported by documentary evidence. Important documents that

should accompany the claim forms are the following:
a) Certified copy of the export order
b) Certified copies of invoices
c) Certified copies of bills of lading
d) Copies of the correspondence with the buyer
e) In case of insolvency of the buyer, copy of the letter from the official
receiver/liquidatoradmitting the claim.

In case of protracted default, the documents required are

(i) protect note
(ii) original of unpaid bills,
(iii) advice ofnonpayment received from the bank, and
(iv) copy of the plaintiff if a suit has been filed.
In case of transfer delays, certified copy of payment advice received from the
collectingbanker indicating the date on which payment was made by the buyer in local
currency.This should also certify that all exchange control formalities necessary for
transfer of
funds to India have been complied with by the buyer.

All claims will be paid in Indian rupees through the Bank which handled the bills
concerned.

18.8 FINANCIAL GUARANTEES

Banks provide credit to exporters for fulfilling the terms of the contract. ECGC also
provides guarantees to banks to protect them from losses due to the exporters. ECGC
has designed these guarantees in order to encourage banks to provide credit to
exporters at pre and post shipment stages. The guarantees provided by ECGC are:
1) Packing Credit Guarantee
2) Export Production Finance Guarantee
3) Post-Shipment Export Credit Guarantee
4) Export Finance Guarantee
5) Export Performance Guarantee
6) Export Finance (Overseas Lending) Guarantee
These guarantees give protection to banks against losses due to non-payment by
exporters due to their insolvency or default.

18.9SUMMARY

Export business is highly risky due to the current trends of insolvency of buyers and
frequent changes in the political and commercial environment of doing business. This
leads to a high probability of incurring credit risk. In such a high risk situation, export
credit insurance can be of immense help to exporters and the banks who provide
finance for the export business.Export Credit Guarantee Corporation of India (ECGC)
is a company wholly owned by the Government of India.The covers issued by ECGC
are for both exporters and banks. Claims can be made to ECGC by furnishing the
required documents.

SUGGESTED READINGS
Trade Operations: Export Import Procedure & Documentation, Dr. Ram Singh, Excel
Publications, New Delhi, (2009)
https://www.ecgc.in/
Learning Outcomes: Application of Knowledge

Case-Let 1: Mr. Krishnan, an exporter of auto parts from India to Germany and
Kenya, wishes to undertake an ECGC cover for his shipment. When exporting to
Kenya, he wishes to cover political and commercial risks while for Germany he is
interested only in covering of political risks. Mr. Krishnan is not a small exporter.
Compare the policies which he will avail for exporting to the two mentioned
countries.

Case- Let 2: Ms. Kiran takes a pre shipment credit of USD 50,000 in order to finance
her export shipment from a Royal Bank of Scotland. The bank wants to protect its risk
by taking a cover from ECGC. Which cover will the bank take and Why?

LEARNING OUTCOMES

1. One knows the various policies of ECGC for exporters and banks
2. One knows various risks involved in exports and how to cover them
3. One knows the procedures of taking a policy and making a claim