Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world.
An outbreak of war or civil war may block or delay payment for the goods supplied. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods, or on transfer of payments for goods imported.
ADVERTISEMENTS:
In addition, one has to contend with the usual commercial risks of the foreign buyer going bankrupt, or losing his capacity to pay. Conducting export business in such conditions of uncertainty is fraught with danger.
The loss of a large payment may spell disaster for any exporter, whatever his prudence and competence. On the other hand, too cautious an attitude in evaluating risks and selecting buyers may result in loss of hard-to-get business opportunities.
Image Source: exportexpertsindia.com
Export credit insurance is designed to protect exporters from the consequences of payment default on account of both adverse political and commercial developments, and to enable them to expand their business without fear of loss.
Export credit insurance also seeks to create a favourable climate in which exporters can hope to get timely and liberal credit facilities from banks at home. For this purpose, export credit insurance provides guarantees to banks to protect them from the risk of loss inherent in granting various types of finance facilities to exporters.
ADVERTISEMENTS:
In order to provide export credit insurance support to Indian exporters, the Government of India set up the Export Risks Insurance Corporation (ERIC) in July, 1957 which was transformed into the Export Credit and Guarantee Corporation (ECGC) in 1964.
To bring it into sharper focus, the Corporation’s name was once again changed to the present Export Credit Guarantee Corporation of India in 1983.
ECGC is a company wholly owned by the Government of India. It functions under the administrative control of the Ministry of Commerce, and is managed by a Board of Directors representing Government, Banking, Insurance, Trade and Industry, etc.
The cover provided by ECGC is of four types:
ADVERTISEMENTS:
i) Standard policy issued to exporters to protect them against payment risks involved in exports on short term credit and Small Exporter’s policy issued for the same purpose to exporters with small exports;
ii) Specific policies designed to protect Indian firms against payment risks involved in (a) exports on deferred terms of payment (b) services rendered to foreign parties and (c) construction works and turnkey projects undertaken abroad,
iii) Financial guarantees issued to banks in India to protect them from risks of loss involved in their extending financial support to exporters at the pre-shipment as well as post-shipment stages; and
iv) Special schemes, viz, Transfer Guarantee meant to protect banks which add confirmation to a Letter of Credit opened by foreign banks, insurance cover for Buyer’s Credit, Line of Credit, Overseas investment Insurance and Exchange Fluctuation Risk insurance.