Here is an essay on ‘Export Credit Guarantee Corporation (ECGC)’ especially written for school and banking students.
Export Credit Guarantee Corporation (ECGC)
Essay Contents:
- Essay on the Introduction to Export Credit Guarantee Corporation (ECGC)
- Essay on the Role and Products of ECGC of India
- Essay on the Policies of ECGC
- Essay on the Financial Guarantees Offered by ECGC
Essay # 1. Introduction to Export Credit Guarantee Corporation (ECGC):
Exports grow on the backing of export financing by banks. Governments, in order to support exports, provide cheap financing options and provide comfort to exporters and financing banks, by way of export credit insurance. Export credit insurance, provides protection against losses from political and commercial risk to the exports and financing institutions.
Countries have set up special corporations to provide these services of export credit insurance. Some general insurance companies also provide credit guarantee for exports. Credit insurance lowers the cost of borrowing/financing, as the government agency bears the risk of default as per policy terms. Usually, the insurance is on risk sharing basis- as such it covers a large part of credit default, but requires the insured exporter/financer to bear some part of the loss.
In India, export credit is guaranteed by ECGC of India, which was set up by the government of India, to support growth of export. Several countries, small or big have institutions to guarantee credit for exports, like ECGD in USA, in Germany, etc. Globally, some of the non- life insurance companies offer credit insurance products.
These products are meant specifically for providing risk cover to exporters, for any default on their export receivables. In India, too some non-life insurance companies, (e.g. New India assurance company) offer export credit insurance for defaults in receivables.
Essay # 2. Role and Products of ECGC of India:
1. About Export Credit Guarantee Corporation of India Ltd.:
It is a credit guarantee institution, set up for the promotion of exports, by protecting the exporters from any financial loss due to the buyer’s failure to pay or due to the problem of externalization in the country of import, by issuing various types of policies to the exporters. At the same time, ECGC issues various types of guarantees to banks, financing exporters, which protect banks in case of loss from their advances to exporters.
In other words, ECGC provides credit enhancements to augment the credit worthiness of the exporters so that they could get more and better facilities from banks.
In 1957 the Government of India established Export Risks Insurance Corporation (ERIC) to provide credit risk insurance to exporters, which was then transformed to Export Credit Guarantee Corporation Ltd., in 1964.
ECGC was established with the primary goal to support and strengthen the export promotion drive in India so that the trade gap between exports and imports is reduced to a minimum.
2. Main Activities of ECGC:
ECGC provides a wide range of credit risk insurance cover to exporters against loss in export of goods and services. It also offers guarantees to banks and financial institutions to enable exports to obtain facilities, credit or otherwise, from banks. Recently they have started giving credit reports of overseas buyers also.
(A) Some of the main policies offered by ECGC to the exporters are:
(i) Standard Policies to exporters to protect them against payment risks involved in exports on short-term credit.
(ii) Small Exporters Policy basically a Standard Policy, but incorporating certain improvements in terms of covers to enable to encourage small exporters.
(iii) Specific Shipment Policies designed to protect firms in India, against payment risks involved in:
(a) Exports on Deferred Payment Terms
(b) Insurance for Buyers’ Credit and Lines of Credit
(c) Services rendered to Foreign Parties
(d) Construction Works and Turnkey Projects Undertaken Abroad.
(iv) Exports (Specific Buyer) Policy
(v) Export Turnover Policy
(vi) Buyer Exposure Policy
(vii) Consignment Exports Policy
(viii) Multi-buyer Exposure Policy.
(B) The guarantees/policies offered by ECGC to the banks are:
(i) Export Credit Insurance for Banks (Whole turnover – Packing Credit) – ECIB (WT-PC).
(ii) Export Production Finance Guarantee
(iii) Export Credit Insurance for Banks (Whole turnover – Post shipment Credit) – ECIB (WT-PS).
(iv) Export Finance Guarantee
(v) Export Performance Indemnity
(vi) Export Finance (Overseas Lending) Guarantee
(vii) Transfer Guarantees
Besides above, ECGC also offers some Special Schemes, such as Transfer guarantees, (covering risk on transfer of funds), Scheme for Small Exporters, Exchange Fluctuation Risk Insurance Scheme, etc.
Essay # 3. Policies of ECGC:
Let us now go through the main features of some of the policies and guarantees.
A. Standard Policies:
The Standard Policies of ECGC provide cover for exporters for short-term exports.
The different types of policies are:
(i) Shipment (Comprehensive Risk) Policy – to cover both commercial and political risks from the date of shipment.
(ii) Shipment (Political Risks) – to cover only political risks from the date of shipment.
(iii) Contracts (Comprehensive Risks) Policy – to cover both commercial and political risks from the date of contract.
(iv) Contracts (Political Risks) Policy – to cover only political risks from the date of contract.
Standard policies cover following risks:
(i) Commercial Risks:
Covering Insolvency of the Overseas Buyer, Protracted Default by the overseas buyer to pay for goods accepted by him within a specified period usually 4 months from the due date, Repudiation – Buyers’ failure to accept goods subject to certain conditions.
(ii) Political Risks:
Which covers imposition of restrictions on remittance by the Government in buyers’ country or any Government action which may block or delay payment to exporter, war, revolution or civil disturbances in buyers’ country, New Import Licensing restrictions or cancellations of a valid import license in the buyers’ country, interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer, any other cause of loss occurring outside India, not normally insured by general insurers and beyond the control of both the exporter and the buyer.
Standard policies do not cover following risks:
(i) Commercial disputes raised by the buyer.
(ii) Causes inherent in the nature of goods.
(iii) Buyer’s failure to obtain necessary import or exchange authorization from authorities in his country.
(iv) Default or insolvency of any agent of the exporter or collecting bank. Loss or damage to goods which can be covered by general insurers.
(v) Exchange rate fluctuation risk.
(vi) Failure of the exporter to fulfill the terms of the export contract or negligence on his part. The cover granted by ECGC on Standard policies is 90% of the value of exports. The premium for such policies varies for different countries and payment terms.
B. Small Exporters’ Policy:
The Standard Policy (Shipments comprehensive Risks Policy) issued by the Corporation to exporters is a declaration type of policy and is issued to cover shipments that may be made in period of 24 months ahead. For the purpose of issuing the Policy, a Small Exporter is defined as an exporter whose anticipated total export turnover for the period of 12 months ahead is not more than Rs 50 lacs. (Projected Export Turnover)
This policy provides cover against Commercial risks, covering insolvency of the buyer, failure of the buyer to make the payment due within 2 months from the due date, buyer’s failure to accept the goods, due to no fault of the exporter, provided that legal action against the buyer is considered to be inadvisable.
It also provides cover against Political risks, covering:
(i) imposition of restrictions by the Government of the buyers’ country or any Government action which may block or delay the transfer of payment made by the buyer,
(ii) War, civil war, revolution or civil disturbances in the buyers’ country,
(iii) New import restrictions or cancellation of a valid import license,
(iv) Interruption or diversion of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer.
Small exporter’s policy does not cover losses arising due to the following risks:
(a) Commercial disputes including quality disputes raised by the buyer, unless the exporter obtains a decree from a competent court of law in the buyers’ country in his favour.
(b) Causes inherent in the nature of the goods.
(c) Buyer’s failure to obtain necessary import or exchange authorization from authorities in his country.
(d) Insolvency or default of any agent of the exporter of the collecting bank.
(e) Loss or damage to goods, which can be covered by general insurers.
(f) Exchange rate fluctuation.
(g) Failure of the exporters to fulfill the terms of the export contract or negligence on his part.
(h) Non-payment under LC due to any discrepancy pointed out by the LC opening bank.
This policy is issued for a period of 12 months and its coverage is 95% where the loss is due to commercial risks and 100%, if the loss is caused by any of the political risks and the waiting period for claims is four months from the due date of payment.
C. Specific Shipment Policies – Short-Term:
The Specific Shipment Short-Term Policies provides cover against commercial and political risks involved in export of goods on short-term credit not exceeding 180 days. Cover under these policies can be taken for shipment(s) made/to be made by the exporter to a buyer under a contract. These policies can be availed of by exporters who do not hold Comprehensive policy covering shipments in the specific contracts.
Short-term policies could be:
(a) Specific shipments policy covering commercial and political risks
(b) Specific shipments (political risk) policy, to cover only political risk at the Post-shipment stage in cases where the buyer is an overseas government or payments are guaranteed by a Government or by banks or are made to associates, and
(c) Specific Shipments (insolvency and default of L/C opening bank and political risks) Policy.
Commercial risks covered by the Short-Term policies, include:
i. Insolvency of the buyer,
ii. Failure of the buyer to make the payment due within a specified period normally 4 months from the due date,
iii. Buyers’ failure to accept the goods (subject to certain conditions)
Political risks covered under this policy are:
i. Imposition of restrictions by the Government of the buyer’s country or any Government action, which may block or delay the transfer of payment made by the buyer,
ii. War, civil war, revolution or civil disturbances in the buyer’s country,
iii. New import restrictions or cancellation of a valid import licence, interruption of voyage outside India resulting in payment of additional freight or insurance charges which cannot be recovered from the buyer,
iv. Any other cause of loss occurring outside India, not normally insured by general insurers and beyond the control of both the exporter and the buyer.
Short-Term policies do not cover following losses:
(a) Commercial disputes including quality disputes raised by the buyer unless the exporter obtains a decree from a competent court of law in the buyer’s country in his favour,
(b) Causes inherent in the nature of goods,
(c) Buyer’s failure to obtain necessary import or exchange authorization from authorities in his country,
(d) Insolvency or default of any agent of the exporter or of the collecting bank,
(e) Loss or damage to goods,
(f) Exchange rate fluctuation,
(g) Failure of the exporter to fulfill the terms of the export contract or negligence on his part.
D. Exports (Specific Buyers) Policy:
Exports – Buyerwise Policies – Short Term (BP-ST) provides cover to Indian exporters against commercial and political risks involved in export of goods on short-term credit to a particular buyer. All shipments to the buyer in respect of whom the policy is issued will have to be covered.
However, there is a provision to permit exclusion of shipments under LC. These policies can be availed of by exporters who do not hold Standard Policy and also by exporters already having Standard Policy.
These policies are of three types:
(a) Buyerwise (commercial and political risks) Policy – short-term
(b) Buyerwise (political risks) Policy – short-term.
(c) Buyerwise (insolvency & default of L/C opening bank and political risks) Policy – short-term.
E. Buyer Exposure Policy:
A variant to this policy is Buyer Exposure policy, which is specifically designed for large exporters to enable them to cover their exposure on a particular buyer on the basis of expected exposure. Two types of exposure policies – one for covering the risks on a specified buyer and another for covering the risks on all buyers – are offered.
The Buyer Exposure policy provides flexibility to exporters to choose to obtain exposure based cover on a selected buyer, which provides cover against commercial and political risks attached to the buyer for both non-LC and LC transactions. A separate Buyer Exposure Policy is issued for each buyer covering all the exports to be made to the buyer during a period of twelve months.
If the exporter has opted for commercial and political risks cover, failure of the LC opening bank in respect of exports against LC will also be covered, for the banks with World Rank (WR) up to 25,000 as per latest Banker’s almanac. For covering any bank with ranking beyond that level, the exporter has to obtain specific approval from the branch, which issued the policy prior to making the shipment.
For covering the political risks only, in respect of LC transactions or shipments to associates, Buyer Exposure policy with endorsement restricting the cover to political risks only with significantly less premium is offered.
This policy can be availed by exporters holding Standard Policy in respect of any of their buyers, where shipments to the buyers covered under Buyer Exposure Policies can be excluded from the purview of the Standard Policy, so that double premium payment and cover can be avoided.
F. Export Turnover Policy:
Export Turnover policy is a variation of the standard policy for the benefit of large exporters who contribute not less than Rs. 10 lacs per annum towards premium. Therefore all the exporters whose turnover is likely to exceed the premium payable to ECGC by Rs. 10 lacs in a year are entitled to avail of it.
This policy envisages projection of the export turnover of the exporter for a year and the initial determination of the premium payable on that basis, subject to adjustment at the end of the year based on actuals. It provides for an additional discount in premium with an added incentive for increasing the exports beyond the 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, based on the total premium paid by the exporter under the policy. The turnover policy is issued with a validity period of one year. In most of the other respects the provisions relating to standard policy will apply to turnover policy.
G. Consignment Exports Policy:
Economic liberalization and relaxing of trade barriers for trade have lead to new methods of trade – supplies and payments. One of the methods now being increasingly adopted by Indian exporters is consignment exports where the goods are shipped and held in stock at overseas centers, ready for sale to overseas buyers, as and when orders are received.
Thus there is a time lag between the shipment and actual sale to the buyer, in such trade systems. To protect the Indian Exporters from possible losses when selling goods to ultimate buyers, ECGC has introduced a Consignment Policy Cover, to take care of such needs.
There are two policies available for covering consignment export:
(a) Consignment Exports (Stockholding Agent), and
(b) Consignment Exports (Global Entity Policy)
The consignment exports (stock-holding agent) policy provides cover subject to:
(i) Merchandise shipped to an overseas entity in pursuance of an agency agreement;
(ii) The overseas agent is an independent and separate legal entity with no associate/sister concern relationship with the exporter;
(iii) The agent’s responsibilities could be any or all of the following, viz., receiving the shipment, holding the goods in stock, identifying ultimate buyers and selling the goods to them in accordance with the directions, if any, of his principal (exporter); and
(iv) The sales being made by the agent would be at the risk and on behalf of the exporter (whether or not such sales are in the agent’s own name or otherwise) in consideration of a commission or some similar reward or compensation on sales completed.
Essay # 4. Financial Guarantees Offered by ECGC:
While it is essential that exporters continue to get timely and adequate export credit both at pre-shipment and post-shipment stage, so that the best possible potential for exporters can be realized, banks will be willing to release such facilities freely only if the advances are utilized properly and realized in time. ECGC, with the intention of giving protection to the bankers against losses on account of their financial lending to their exporter clientele, has been giving guarantees to financial institutions/banks. This in turn leads to an additional security for the bankers and thus translates into adequate financial support to exporters.
ECGC issues following types of guarantees looking to the various needs of exporters/financial institutions:
1. Packing Credit Insurance:
Any loan given to an exporter for the manufacture, processing, purchasing or packing of goods meant for export against a firm order or letter of credit qualifies for packing credit guarantee.
It is issued for a period of one year against a proposal made for the purpose and covers all advances that may be made by the bank during the period to a given exporter within an approved limit. The claim is payable, in case the pre-shipment credit granted is not paid within 4 months from the due date of the loan.
Export Credit Insurance for Banks (Whole turnover – Packing Credit) – ECIB (WT-PC), is issued by ECGC to banks wherein a higher percentage of cover is available at a lower premium since a large volume of business is offered to cover in this guarantee.
Bank is required to notify the limits sanctioned to their exporter customer within 30 days of the sanction and banks are required to take the approval of the Corporation if they exceed an agreed value, called Discretionary limit.
The premium and cover available varies from bank to bank and is specifically approved/prescribed by the ECGC, during the annual renewal of the guarantee. The premium ranges from 6 to 10 paise per Rs 100.00 per month, and cover ranges from 50 to 75%.
2. Export Production Finance Guarantee:
This guarantee covers the advances given by banks against incentives/receivable at the Pre-shipment stage. While the extent of cover and the premium are the same as for packing credit guarantee, banks having ECIB (WT-PC) are eligible for concessional premium rate and higher coverage.
3. Post-Shipment Export Credit Insurance:
Advances against export bills by way of purchase, negotiation or discount or rupee finance by banks are covered under this guarantee. Under this guarantee, the exporter should hold suitable shipments or contracts policy of ECGC to cover the overseas credit risks.
Export Credit Insurance for Banks (Whole turnover – Packing Credit) – ECIB (WT-PC), is issued by ECGC on whole turnover basis also, wherein the advances granted by the bank to exporters by way of purchase, negotiation, or discount of export bills or advances against export bills sent on collection are covered. In this a higher percentage of cover is available at a lesser premium.
The premium for this guarantee is 5-9 paise per Rs 100.00 per month and cover is usually 60-75%. Wherever, the exports are covered under individual policy taken by the exporter, the cover under whole turnover guarantee increases to 75-90%.
4. Export Finance Guarantee:
When banks grant post-shipment advances to their exporters against export incentives receivables in the form of cash assistance, duty drawback, etc., it can be covered under this guarantee. The cover available is 75% of the finance, while the premium ranges from 7 paise upwards.
5. Export Performance Indemnity:
It is issued by ECGC in the nature of a counter guarantee to the bank against possible losses that they may suffer on account of the guarantees issued by them on behalf of its exporter clients. Guarantees are required to be issued on account of exporters clients, in favour of overseas buyers, for performance of contracts, Bid-bonds, quality, etc. Guarantees are also required in favour of customs, for import of capital as well as raw material free of customs duty, or on reduced duty, against export commitments.
6. 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. The premium on such guarantee are payable in Indian Rupees.
7. Other Special Guarantees and Schemes:
A. Transfer Guarantee:
When a bank in India adds its confirmation to a foreign letter of credit, it binds itself to honour the drafts drawn by the beneficiary of the letter of credit without recourse to him provided such drafts are in accordance with the terms of the letter of credit.
The confirming bank will suffer a loss if the foreign bank fails to reimburse it with the amount paid to the Exporter. It is this transfer guarantee that safeguards banks in India against a possible loss arising out of such risks.
B. Exchange Fluctuation Risk Covers Scheme:
The cover under the scheme is available for payment scheduled over a period beyond 12 months up to a maximum period of 15 years. Cover under the scheme is available for payments specified in US dollar, Pound Sterling, EURO, Japanese Yen, Swiss Francs, UAE Dirham and Australian Dollars. However, cover can be extended for payments specified in other convertible currencies at the discretion of the ECGC.
The contract cover provides a franchise of 2%. Loss or gain within a range of 2% of the reference rate will go to the exporters’ account. If loss exceeds 2% ECGC will make good the portion of loss in excess of 2%, but not exceeding 35% of the reference rate. In other words, gains/losses up to 2% and beyond 35% of reference rate will be to the exporters’ account. Gains or losses beyond 2% and up to 35% will be to ECGC’s account.
C. Maturity Factoring:
ECGC full-fledged factoring service takes care of the export credit guarantee for the exporters, besides their financing needs. Factoring service covers financing and collection of receivable of series of transactions between the buyer and the seller. It also includes credit protection, besides improving exporter’s cash flows.
Factoring applies when the export has sales on open account, on a continuous relationship, the past track record of the seller is clear, the buyer is given a notice of assignment, and the sale does not involve counter trade.
ECGC factoring service provides:
Facilitates purchase of account receivables.
Provides upto 90% finance against approved transactions.
Full credit guarantee on buyer’s default or insolvency.
Maintenance of sales ledger.
Follow-up for collection of export proceeds.
Eligibility:
Exports with good track record.
Dealing on DA terms/open account terms with buyers.
Having unexpected bulk orders to execute.
Exporters facing large working capital shortfall by way of bill financing.
The facility allows exporters to avail additional finance, eliminates the need for routing export bills through commercial banks and also the need for follow up with the buyers for payments. The export factoring also reduces the administrative costs to the exporters.
Other Aspects Relating to ECGC-Policies and Guarantees:
(i) Credit guarantees and policies of risk sharing basis- All ECGC policies and financial guarantees are issued on risk sharing basis, i.e. the cover provided by ECGC is not for 100 % value of exports made or finance allowed by Banks, but the exporter or the financing bank, who takes the policy or the financial guarantee has to bear a small part of the loss to share the loss incurred in the export/financing. The maximum cover is for 90% —95 %, of the value/financed amount.
(ii) Since ECGC provides credit insurance for export credit allowed by banks/exporters, its policies and guarantees fall under the purview of Insurance Regulatory & Development Authority (IRDA). The Schemes of ECGC are thus; governed by IRDA and certain guidelines as applicable to general insurance shall apply to these schemes.
As in case of any other insurance, even banks, which were earlier required to pay the premium on ECGC financial guarantees, on monthly basis, in arrears (after the end of the month) on the basis of products of financed amounts, are now required to pay up front one month premium, based on previous years’ average, so as to comply with the IRDA guidelines.
(iii) Monthly declarations are to be submitted by exporters having policies covering their whole export turnover. Similarly, banks having financial guarantees covering Pre-shipment and Post- shipment finance, are required to submit a monthly declaration to local offices or nearest offices of ECGC, showing total amounts financed during the month and products thereof along with the premium for the month.
(iv) The whole turn over insurance cover issued to banks, by ECGC, are now called as Export Credit Insurance for Banks – (WT-PC) {ECIB-, (WT-PC)} and Export Credit Insurance for Banks – (WT-PS). {ECIB (WT-PS)}.
(v) ECGC prescribes: Discretionary Limits (DL) for financial guarantees, up to which limit banks are permitted to allow finance without prior approval of ECGC, and only a notification (report) is to be sent in prescribed format. In other cases, where the limits sanctioned are beyond the DL, prior approval of ECGC is required to be obtained before release of limits.
(vi) Notice of Default and lodging of Claims: Under the financial guarantees, banks are required to file with ECGC, a notice of default within 4 months from the due date or one month from the date of recall. Similarly, claims are to be filed within 6 months form the date of lodging default notice.
(vii) Since the policies and guarantees are on risk sharing basis, any recovery made by the exporter or the financing bank, is to be refunded to the ECGC in the ratio the risk has been shared.
For example, in case of an export bill where claim has been settled under WT-PS, for 65% of the outstanding amount of advance, the bank, on getting collateral securities realized for a part amount, has to pay back 65% of the realized amount to ECGC, thus continuing the risk sharing ratio at 65:35.
(viii) For a large majority of countries, the Corporation places on limit for covering political risks. Such countries are referred to as ‘open cover’ countries. However, in the case of certain countries, where the political risks are very high, cover is granted on a restricted basis. In respect of the few remaining countries under restricted cover, which are high risk countries, specific approvals are given on the merits of each case. The period of validity of specific approval is six months.
In addition ECGC provides the list of borrowers, Directors, Corporates, etc., under their Specific Approval List (SAL) for which, in case of finance, banks should seek prior approval from ECGC.