The sale of goods and services are exposed to significant number of risks, many of which are not within the control of the supplier. The highest of these risks are the one that can have a catastrophic impact on the viability of the supplier, i.e., is the failure of the buyer to pay for the goods or services he has purchased.
In today's challenged domestic and global economic climate, recognizing and managing the future risks have become a priority for businesses. Losses attributed to non-payment of a trade debt or bankruptcy can do occur regularly. Default rates vary from industry-to-industry and from country-to-country in a year, and no industry or company is immune from trade credit risk.
To overcome the risk of trade credit,Trade Credit Risk Insurance was introduced which is an insurance policy and a risk management product offered by insurance companies and governmental export credit agencies to business entities wishing to protect their account receivables from loss due to credit risks, such as protracted default, insolvency, bankruptcy, etc.
Trade credit insurance is a useful tool for firms to insure themselves against the risk of non-payment by the importers, especially in the circumstances of cross-border transactions where it becomes more expensive to monitor the risk and more difficult to enforce the payment from the importers residing in the other country.
Export Credit Guarantee Corporation (ECGC) :
The Export Credit Guarantee Corporation of India Limited (ECGC), is a company wholly owned by the Government of India. It provides Export Credit Insurance support to Indian exporters and is controlled by the Ministry of Commerce. Government of India had initially set up Export Risks Insurance Corporation (ERIC) in July 1957 which was later transformed into Export Credit and Guarantee Corporation Limited (ECGC) in 1964.
Benefits Of Credit Insurance :
Credit Insurance provides cover to the exporters against Credit Risk losses in export of goods & services, both under Short-term and Medium and Long-term exports.
It also provides cover to the banks so as to protect them against the risks of non-payment by exporters, both under Short-term and Medium and Long-term exports.
It also provides Domestic Credit Insurance cover to the Exporters and Banks in respect of their local sales and working capital finance, respectively.
ECGC also provides Overseas Investment Insurance cover to protect the Indian Entrepreneurs those who are investing in Overseas Ventures (Equity/Loans) against expropriation risks.
It also provides for Exchange Fluctuation Cover to exporters to protect them in respect of their exchange losses under Medium and Long-term exports.
Functions Of Export Credit Guarantee Corporation :
Provides credit risk cover to the Exporters against non-payment risks of the overseas buyer / buyer's country in respect of the exports made.
Provides Credit Insurance cover to the banks against lending risks of exporters.
Assessment of buyers for the purpose of underwriting.
Preparation of country reports.
International experience to enhance Indian capabilities.
An ISO organization excelling in credit insurance services.
Rated "AAA" by CRISIL for claim paying ability.
Risks Covered By Export Credit Guarantee Corporation :
Commercial Risk
Insolvency of buyer / LC opening bank
Protracted Default of Buyer
Repudiation by Buyer
Political Risk
War / civil war / revolutions
Import restrictions
Exchange transfer delay / embargo
Any other cause attributable to importing country
Products Offered To Exporters By ECGC :
Standard Policy :
Shipments (Comprehensive Risks) Policy, commonly known as the Standard Policy, is the one which is ideally suited to cover the risks in respect of goods exported on short-term credit, i.e., credit not exceeding 180 days. This policy covers both, commercial and political risks from the date of shipment. It is issued to the exporters whose anticipated export turnover for the next 12 months is more than Rs.50 lakhs.
Small Exporters Policy :
The Small Exporter's Policy is basically the Standard Policy, incorporating certain improvements in terms of cover, in order to encourage the small exporters to obtain and operate the policy. It is issued to the exporters whose anticipated export turnover for the period of one year does not exceed Rs.50 lakhs.
Period of Policy: Small Exporter's Policy is issued for a period of 12 months and not for 24 months as in the case of Standard Policy.
Minimum premium: Premium payable will be determined on the basis of projected exports on an annual basis subject to a minimum premium of Rs. 2000/- for the policy period.
Declaration of shipments: Shipments need to be declared quarterly (instead of monthly as in the case of Standard Policy).
Declaration of overdue payments: Small exporters are required to submit monthly declarations of all payments remaining overdue by more than 60 days from the due date, as against 30 days in the case of exporters holding the Standard Policy.
Percentage of cover: For shipments covered under the Small Exporter's Policy, ECGC will pay claims to the extent of 95% where the loss is due to commercial risks and 100% if the loss is caused by any of the political risks (Under the Standard Policy, the extent of cover is 90% for both commercial and political risks).
Waiting period for claims: The normal waiting period of 4 months under the Standard Policy has been reduced to 2 months in the case of claims arising under the Small Exporter's Policy.
Specific Shipment Policy (Short-term) :
Specific Shipment Policy provide cover to the Indian exporters against commercial and political risks involved in export of goods on short-term credit not exceeding more than 180 days. Exporters can take the cover under this policy for either one single shipment or for few shipments to a buyer under the contract.
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 the premium. Therefore all the exporters who will pay a premium of Rs. 10 lakhs in a year are entitled to avail this policy.
Specific Buyer-wise Policy :
Specific Buyer-wise Policy 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 (with a provision to permit exclusion of shipments under LC).
Consignment Export ( Stock Holding Agent & Global Entity) Policy :
Economic liberalization and gradual removal of international barriers for trade and commerce gradually opened up various new avenues of export opportunities for the Indian exporters for providing quality goods. One of the method which is being increasingly adopted by Indian exporters is that of consignment exports where the goods are shipped and held in stock ready for sale to overseas buyers, as and when orders are received.
Hence, to protect the Indian Exporters from the possible losses while selling of goods to the ultimate buyers, it was decided to introduce Consignment Policy Cover.
Buyer Exposure Policy (Single Buyer & Multi Buyer):
Presently, in the policies offered to the exporters, the premium is charged on the export turnover, though the Corporation's exposure on each buyer is controlled through the system of approval of credit limits of the buyer for covering the commercial risks. While this is suitable for the small and medium exporters, many large exporters having large number of shipments have been complaining about the volume of returns to be filed under the policy necessitating the deployment of their resources for this purpose and it also results into possible unintentional omissions and commissions in such reporting, which have an impact on the settlement of the claims. There has been a demand for simplification of the procedure as well as for rationalization of the premium structure. Considering the requirements of such exporters, the Corporation has decided to introduce policies on which premium will be charged on the basis of the expected level of exposure.
There are two type of Exposure Policies which are being offered for the purpose, namely :
Single Buyer Exposure Policy :- For covering the risk of a specified buyer
Multi Buyer Exposure Policy :- For covering the risks of multiple buyers
Software Project Export Policy :
The Services Policies of the Corporation which have been in existence for some time were offered to provide protection to exporters of services including software and related services. However it was found that the general services policy did not meet with the exact requirements of software exporters. It was therefore decided to introduce a new credit insurance policy cover to meet the requirements of the software exporters, namely, software projects policy, where the payments will be received in terms of foreign exchange. The general services policies will continue to be offered for the export of services other than software and related services.
The software service exports that will be eligible for cover under the Software Project Policy….
The following software services will be eligible for cover under the Software Project Policy :
Software project services, either on one time/turnkey basis or progressive basis, involving the following :-
Development of software off-shore (i.e. at the exporters location in India) to be delivered and implemented in the buyer's (client) location; or
Development of software on-site of the client and supply and implementation; or
Both off-shore and on-site development.
NEED OF THE STUDY
The rationale of my study is to create awareness of Credit Insurance among the exporters and also to know the reasons for low awareness of Credit Insurance in International Trade. And while interacting with the exporters I will try to find out the reasons for low awareness of Credit Insurance among them.
OBJECTIVE OF THE STUDY
To create awareness of Credit Insurance among the exporters.
Why is Credit Insurance required by the exporters.
What is the effect of Credit Insurance on international Trade.
SCOPE OF THE STUDY
My research study is confined to Delhi and NCR only. My time of conducting the survey is from 28th Dec 2012 to 28th Jan 2013.
LIMITATIONS OF THE STUDY
There are certain limitations in respect of my research study which needs to be acknowledged and taken care of for the future research work.
They are listed below :
The time for this research work was concentrated for nearly about 2 months, so there was the time limitation for the purpose of collecting Primary Data from the market.
The targeted sample were very rigid and conservative for providing the information in respect of the research survey.
There were constraints of finance.
LITERATURE REVIEW
[1] Rise Of Credit Insurance ; since the early 1990s, trade credit insurance has registered strong growth and now dominates the short-term market wherein more than 95 percent of the short-term business is now being underwritten by both, private and public sector. The need for Trade Credit Insurance has grown for firms because of the risk of non-payment by the buyer especially in cross-border transactions where it is more costly to monitor risks and more difficult to enforce the payment. The trade-promoting effect of credit insurance is described in a formal model which shows that insurance cover of trade credit will result in a higher output level as compared to the case without insurance.Empirically, the evidence of a trade-promoting effect of credit insurance is limited to the case of public guarantees.
[2] Role Of Credit Insurance ; the need for trade credit insurance arises from the common practice of selling on credit and the demand by buyers to trade on open account, where they only pay for the goods and services after having on-sold them and are not willing to provide any form of security, for example by way of full or partial advance payment, bank guarantee or letter of credit. It is worth to be noted that trade receivables can represent 30% to 40% of the supplier's balance sheet and companies therefore face a substantial risk of suffering financial difficulties due to the impact of late or non-payment. Trade credit insurance is an important risk management tool for managing the risks of late payment or a complete failure to pay and also offers the insured suppliers with several important benefits: (i) It transfers the payment risk to the trade credit insurers, whose credit expertise, diversification of risk and financial strength enable them to assume these risks ; (ii) It provides insured suppliers with access to professional credit risk expertise and related advice ; (iii) It can help prevent insured suppliers from suffering liquidity shortage or insolvency due to delayed or non-payments ; (iv) It reduces earning volatility of insured suppliers by protecting a significant portion of their assets against the risk of loss ; (v) It facilitates the access by the insured suppliers to receivable financing and improved credit terms from lending institutions, some of which will insist on trade credit insurance before providing financing ; (vi) It enables insured suppliers to extend the credit to the customers rather than requiring payment in advance or on delivery, or requiring security such as letter of credit, thus allowing the supplier to effectively compete in the global market place where many buyers only buy on credit ; (vii) Allows insured suppliers to move up the value chain and accept direct buyer risk, thus cutting out the wholesaler house.
RESEARCH METHODOLOGY
Purpose of the Research Study:
The key intention of this project is to create awareness for Credit Insurance among the Exporters and why is Credit Insurance required by the exporters. The study is also conducted to know the effect of Credit Insurance on International Trade.
Research Type:
We had first used Exploratory Research. Exploratory research is a type of research conducted for a problem that has not been clearly defined. Exploratory research helps determine the best research design, data collection method and selection of subjects. It should draw definitive conclusions only with extreme caution. Given its fundamental nature, exploratory research often concludes that a perceived problem does not actually exist.
Exploratory research often relies on secondary research such as reviewing available literature and/or data, or qualitative approaches.
The working of the research was started with the questionnaire. In this we have used screening criterion to identify target group of our research. Screening of certain questions has been done.
The study went through the awareness of the target group about the role of credit insurance in the International Trade.
Then we used Descriptive Research. Descriptive research is used to obtain information concerning the current status of the phenomena to describe "what exists" with respect to variables or conditions in a situation. The methods involved range from the survey which describes the status quo, the correlation study which investigates the relationship between variables, to developmental studies which seek to determine changes over time. To accurately portrait the characteristics of person of situation or group we used Descriptive Research Design.
Sampling:
Target Population - Exporters of Delhi & NCR
Sampling Frame - Export Houses Of Delhi & NCR
Sampling Unit - Export Organizations
Sample Size - 200
Sampling Method - In this research effort "Convenience Sampling" has been used. This method is used to make research procedure faster by obtaining a large number of accomplished questionnaires rapidly and efficiently. The sample for conducting the survey contains Exporters of Delhi & NCR.
Data Collection:
Method - Survey
Tools for Data Collection:
Primary Data - Structured Questionnaire
Secondary Data - Online Database, Journals, Surveys
Tools for Data Analysis
MS Excel
DATA ANALYSIS AND INTERPRETATION
EXPORTERS :
TABLE 1 :
NATURE OF GOODS BEING EXPORTED
PARTICULARS
NUMBER OF RESPONSES
HANDICRAFT GOODS
120
RICE, PULSES, OIL
8
JEWELLERY
27
AUTOMOBILE PARTS
4
TEXTILE (GARMENTS)
11
MEDICAL EQUIPMENTS
10
OTHERS
20
TABLE 2 :
COUNTRIES WHERE THE GOODS ARE EXPORTED
NAME OF THE COUNTRIES
NO. OF EXPORTERS EXPORTING
EUROPE
60
UNITED KINGDOM
30
SOUTH AMERICA
20
NORTH AMERICA
80
OTHERS
10
TABLE 3 :
FREQUENCY OF EXPORTS
PARTICULARS
NUMBER OF RESPONSES
WEEKLY
24
FORTNIGHTLY/15 DAYS
49
MONTHLY
70
ONCE IN 2 - 3 MONTHS
34
ONCE IN 3 MONTHS
10
3 MONTHS & ABOVE
13
TABLE 4 :
TERMS OF SALE/CONTRACT
OPTIONS
NUMBER OF RESPONSES
CIF
71
FOB
68
C&F
61
TABLE 5 :
ANNUAL TURNOVER
RANGE OF TURNOVER
NUMBER OF RESPONSES
0 - 5 CRORES
40
6 - 10 CRORES
57
11 - 15 CRORES
38
16 - 20 CRORES
53
21 - 25 CRORES
7
26 - 30 CRORES
5
TABLE 6 :
TERMS OF PAYMENT
OPTIONS
NUMBER OF RESPONSES
LETTER OF CREDIT
182
CREDIT
18
OTHERS
0
TABLE 7 :
IN CASE OF CREDIT SALES, PEOPLE AVAILING CREDIT INSURANCE
OPTIONS
NUMBER OF RESPONSES
YES
5
NO
13
TABLE 8 :
HAS THERE BEEN ANY CLAIM UNDER YOUR CREDIT INSURANCE POLICY
OPTIONS
NUMBER OF RESPONSES
YES
1
NO
4
TABLE 9 :
ARE YOU SATISFIED WITH THE COVERAGE UNDER THE POLICY
OPTIONS
NUMBER OF RESPONSES
SATISFIED
5
NOT SATISFIED
0
TABLE 10 :
ARE YOU SATISFIED WITH THE CLAIM EXPERIENCE
OPTIONS
NUMBER OF RESPONSES
SATISFIED
1
NOT SATISFIED
0
INSURANCE COMPANIES :
TABLE 1 :
ON AN AVERAGE NO. OF CREDIT INSURANCE POLICIES ISSUED BY THE COMPANY
NAME OF THE COMPANY
NO. OF POLICIES ISSUED
ICICI LOMBARD GENERAL INSURANCE CO. LTD.
65
IFFCO TOKIO GENERAL INSURANCE CO. LTD.
30
TABLE 2 :
NO. OF CLAIMS REPORTED IN LAST 3 YEARS
NAME OF THE COMPANY
NO. OF CLAIMS REPORTED
ICICI LOMBARD GENERAL INSURANCE CO. LTD.
100
IFFCO TOKIO GENERAL INSURANCE CO. LTD.
10
FINDINGS
The dissertation report titled "Role Of Credit Insurance In International Trade" has been conducted with the help of research survey for 200 Exporters having their business and export houses in Delhi and NCR (Gurgaon & Noida) and also for Insurance Companies who are underwriting the Credit Insurance Business.
The results and findings so brought out with the project in respect of INDIAN EXPORTERS are listed below :
The nature of the goods, i.e., the goods and commodities with which the Exporters are dealing in the international market consisted mainly of Handicraft Goods contributing to 120% followed by Jewellery Exports, both Metal and Ethnic contributing 27% and then followed by Textile Exports summing upto 11%. The other exports consisted of Medical Equipments, Automobile Parts, Rice and Pulses and etc.
The Indian Exports are mainly concentrated in the countries like Europe, United Kingdom, South America and North America. To be more specific the Indian Exporters deal with the cities like England. Scotland, Spain, Germany, Italy, France, Mexico and Rome.
The frequency of exports, i.e., with which the exports repeatedly take place can be classified as Weekly, Fortnightly, Monthly, Once in a quarter and so on and so forth.
The terms of sale and contract on which the Indian Exporters decide to carry on their export business in the foreign market is actually a mix of all the three terms of sale comprising of CIF basis, FOB basis as well as C&F basis. But the majority of exporters are willing to continue their export operations on the basis of CIF.
The annual turnover of the exporters is varying and ranging from Rs.1 - 30 crores which includes every possible figure which can be expected from them looking at the scale of operations they are operating at.
The terms of payment for which the exporters are willing to carry out the export operations relies mainly on Letter Of Credit and less on Credit Insurance. More than 94% of the exporters conduct their business on the pillars of Letter Of Credit.
There are few exporters in the Indian market who carry their export business on the credit sales but only handful of them are opting for Credit Insurance nearly about 2% to 3%.
The exporters who are availing Credit Insurance have experienced claims as well and those who have claimed for the compensation with their insurers are satisfied with the claim settlement as well.
The findings brought out with the project work in respect of INDIAN INSURANCE COMPANIES are listed below :
The underwriting considerations for this business by different Insurance Companies are given below:
ICICI Lombard General Insurance Company Ltd.
Size of turnover of the Exporters
Country of export
Profile of buyer
Past history of losses booked by the Exporter
Iffco Tokio General Insurance Company Ltd.
Product being traded in
Cover territory - Domestic or Exports
Previous company performance
Buyers Limits being sought
Other underwriting considerations being taken into account by the Insurance Companies are given below:
Financial strength of the buyer
Experience of the insured with the buyer if any
Number of years of existence of the buyer in the market
The percentage of the Credit Insurance in the total Gross Direct Premium collected by the companies is ranging between 0.5% to 2%.
Insurance companies are providing coverage for all types of goods except for Jewellery and Diamonds, particularly excluded in the list of cover for ICICI Lombard General Insurance Co. Ltd.
ICICI Lombard General Insurance Co. Ltd. provides coverage in all the countries across the globe and major exports being covered are for USA, UK and other European Countries. Whereas, Iffco Tokio General Insurance Co. Ltd. provides coverage to the countries except under UN sanction.
The only policy which can be issued by the Insurance Companies is Whole Turnover Policy as per IRDA guidelines.
SUGGESTIONS
From the research work conducted by me I have few suggestions for the Insurance Companies as to how they can cater the needs of the Indian Exporters and how they can include them in their insuring business with the change in their coverage requirements and how can the awareness for the Credit Insurance be spread amongst the Exporters so that they can adapt and rely on the Credit Insurance for their International Business.
Some of the suggestions are given below :
Apart from ECGC, the Insurance Companies can adopt new strategies and policies to overcome the competition in the market and to spread awareness for Credit Insurance among the Indian Exporters.
Insurance Company and their Agents should go for aggressive marketing strategies with the Exporters and should try to explain them the advantages and benefits of Credit Insurance over and above the Letter Of Credit.
Also the Insurance Companies should go for Information Technology Revolution with which they can have access to the database of the Indian Exporters at large and can accordingly build their policies and strategies as to how to grab a big business chunk from them.
The Insurance Companies should keep themselves flexible enough so that they can put themselves into the shoes of Exporters and can know what kind of policy do they need and what type of coverage are they looking for.
It is also recommended that the Insurance Companies should focus on Product Innovation which will help them to overcome the new challenges of this particular business segment and will also help them to meet the ever-changing consumer needs and demands.
The Insurance Companies should also work on Customer Education & Services. In the present competitive scenario, a key differentiator for any organization, is the professional customer service in terms of quality of advice on product choice along with policy servicing.
It is also suggested that the companies should work on Modern Marketing Approach, i.e., MR(Marketing Research), STP(Segmentation, Targeting & Positioning) and MM(Marketing Mix).
CONCLUSION
Credit insurance is known as a risk mitigation tool. It covers the buyer's failure to meet its debt obligation including the protracted default or insolvency.
In other words, Trade Credit Insurance is a financial tool which manages both, the Commercial and Political risks that are beyond the company's control. It also provides Balance Sheet strength, Cash Flows are protected, Loan Servicing Cost and Asset Valuation are also enhanced with the same.
A Trade Credit Insurance Policy also allows businesses to feel secure in extending more credit to current customers, or to pursue new and larger customers that would have otherwise seemed too risky. It significantly reduces the risk of entering into new markets.
Export Houses should take a step forward towards Credit Insurance and should rely on Insurance Companies that they will indemnify their losses good in case they book the loss for one or the other reasons.
The Export Houses should also invest in the Credit Insurance because of the following given reasons :
Sales Expansion
Expansion Into New International Markets
Reduce Bad - Debt Reserves
Indemnification From Customer's Non - Payment
Protection Of The Organisation From An Unexpected Catastrophic Event
BIBLIOGRAPHY
Indian Journal Of Economics & Business
Indian Journal Of Industrial Relations
Credit Insurance Journal
Export Credit Guarantee Corporation Website
www.google.co.in
