MONDAY EXPORT CLASS

 

With

GODWIN OYEFESO (SUCCESSEDGE EXPORTERS NETWORK)

 

Topic: Business Risk Coverage (Part 2)

Meaning of Credit Risk

Once goods are sold on credit, risks arising in realising the sale proceeds are referred as credit risks. Risk may arise due to inability of the buyers to pay on the due date. Alternatively, even if the buyer makes the payment, situations may change in the buyer’s country that the funds of buyer do not reach the exporter. An outbreak of war, civil war, coup or an insurrection may block or delay the payment for goods exported. Whatever the reason may be, if funds are not received, sufferer is, finally, exporter. Credit risk has assumed an alarming proportion on account of large volumes in international business and sweeping changes in political and economic conditions, globally. In such a high risky situation, credit risk insurance is of immense help to the exporters as well as banks that finance the exporters.

Organisation covering Credit Risk

There are more than 40 organisations covering the credit risk, all the world over. In India, we have Export Credit Guarantee Corporation of India Limited to cover export credit risks. This is a Government of India enterprise, with its Head office located in Mumbai, under the administrative control of the Ministry of Commerce. Board of Directors representing Government, Banking, Insurance, Trade and Industry manages this organisation.

Types of Cover issued by ECGC: They are broadly divided into four groups:

1. Standard Policies: They are ideally suitable to exporters to cover payment risks involved in exports on short-term credit
2. Specific Policies: These policies are specifically designed to protect Indian exporters from the risks involved in
   • Exports on deferred  payment  contracts
   • Services rendered to  foreign  parties  and
   • Construction works and  turnkey  projects  undertaken

Special Policies, beside the risks covered under Standard policies, are issued  by ECGC to meet the specific requirements of export transactions.

3. Financial Guarantee: They are the policies issued to banks for covering risks in extending credit at pre-shipment as well as post shipment
4. Special Schemes: They are meant to cover risks involved in confirmation to letters of credit opened by foreign banks, insurance cover for Buyers Credit, Line of Credit and exchange fluctuations

Standard Policies: The ECGC has designed four types of standard policies for shipment made on short-term credit.

• Shipments (Comprehensive Risks) Policy: This covers from commercial and political risks from the date of
• Shipments (Political Risks): This covers from political risks from the date of
• Contracts (Comprehensive Risks) Policy: This covers from commercial and political risks from the date of
• Contracts (Political Risks) Policy: This covers from political risks from the date of

The Shipments (Comprehensive Risks) policy is the one ideally suitable for goods exported on short-term credit basis. This policy covers from commercial and political risks from the date of shipment. Risk of pre-shipment losses on account of frustration of contract  are practically nil in respect  of  export  of  raw  materials,  consumer  durable  or  consumer  goods as they can be sold easily. Contract policies cover  from  the  date  of  contract  so  they  are ideally suitable in case goods are to be manufactured to meet the specific requirements of buyers and do not have alternative buyers. Further, the risk of ban on export of  goods  is covered by the contract policy only.

Risks Covered under Standard Policies

Risks covered  by  Standard  Policies  fall  into  two  categories.

• Commercial Risks: This includes:
  • insolvency of the buyer;
  • protracted default in payment (Importer has to pay within four months of due date) and
  • Under special circumstances specified in the policy, buyer’s  failure  to  accept the goods though there is no fault on the part of
• Political Risks: This includes:
  • imposition of restrictions in buyer’s country by the Government  for  remittance  of sale proceeds which may block or delay the payment to the exporter;
  • war, revolution or  civil  disturbances  in  the  buyer’s  country;
  • new import restrictions in the buyer’s country or cancellation of valid import licence, after the date of shipment or contract, as applicable;
  • cancellation of valid export licence or imposition of new licensing restrictions after the date of contract, applicable under Contracts Policy;
  • payment of additional transportation and insurance charges occasioned by interruption or diversion of voyage which can not be recovered from the buyer and
  • Any other loss that has occurred in buyer’s country, which is not covered under general insurance and beyond the control of exporter and/or the

In case, where the buyer happens to be foreign Government or Government department and it  refuses  to  pay, the default will fall under the category of political risks.

Risks Not  Covered:  The  Standard  policies  do  not  cover  the  following  risks:

1. Commercial disputes including the quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court in the importer’s country in his favour;
2. Causes inherent in the nature of the goods;
3. Buyer’s failure to obtain import licence or exchange authorisation in his country;
4. Insolvency or default  of  an  agent  of  the  exporter  or  the  collecting  banks;
5. Losses or damages  which  can  be  covered  by  commercial  insurers;  and
6. Exchange

ECGC does not cover those risks that are covered by the commercial insurers. Exporter can take comprehensive policy that covers both commercial and political risks. If the exporter wants, he can take only policy that covers political risks, depending on the requirements. However, it is important to note ECGC does not issue the policy covering only commercial risks.

If the goods are confiscated by the  customs  on  charges  of  smuggling,  then  insurance does not cover.

6.  Foreign Exchange Fluctuations Risks

If the exporter has invoiced in the buyer’s currency, he will be subjected to risk of foreign exchange fluctuations. If the foreign currency depreciates in terms of rupees, exporter will receive lesser amount in terms of rupees or vice versa. In the same circumstances, if the Indian currency depreciates, exporter stands to gain.

If the export bill is purchased or negotiated under letter of credit and the foreign currency undergoes fluctuation, the bank will be bearing the risk. However, if the exporter has sent the bill for collection, the exchange rate on the date of receipt of foreign currency in India will be given to the exporter. If there is intervening difference in the exchange rate between the date of giving the bill for collection and date of realisation, exporter stands to lose or gain, depending on the trend in fluctuation.

There will be no foreign exchange risk in case the invoice is made in Indian rupees. In such a case, the importer will be subjected to foreign exchange fluctuation risk.

Transferring Risk to Third Parties

The exporter can manage  to  transfer  some  of  the  risks  to  third  parties  that  specialise in managing the risks of exports. These parties are known as insurance agencies. The

various agencies  and  the  type  of  risk  they  cover  are  as  under:

Category of Risk                                              Agency

1. Credit Risk                                                        ECGC
2. Physical Risk                                                    General Insurance Company
3. Product Liability Risk                                        General Insurance Company
4. Exchange Fluctuation  Risk                              Commercial Bank

 

If you have questions on today’s class send them on whatsapp to +2348037163281 for answers to such questions.

Till then, you will succeed