Export Finance And Risk

Insurance

Prof. Sita Ramakrishnan

Risks in Export Marketing

1.

Commercial risks:
Some risks can be insured with ECGC
while others cannot.
- Lack of market knowledge
- Lack of product adaptability
- Delay in shipment
- Unforeseen situations

2.

Political risks:
- Most are covered under ECGC policy.
- Restrictions on remittance by govt in
buyers country.
- Cancellation of import license of the
buyer.
- Cancellation of export license of the
exporter.
- Additional handling, transport or
insurance charges due to diversion
which cannot be charged to buyer.

3.

4.

Legal risks:
- Due to different laws in exporters and
importers countries.
- Can be avoided by appointing an
arbitrator in case of dispute.
Cargo risks:
- Due to storms, thefts, leakage,
spoilage, fire, etc.
- Marine insurance covers cargo risks.

5.

6.

Credit risks:
- Risks arising in realising sales
proceeds once goods are sold on credit.
- Includes commercial and political risks
which can be covered by ECGC.
Exchange rate risks:
- Due to fluctuating forex rates.
- Can be covered by entering into
Forward Exchange Rate contracts.

7.

Natural calamities risks:

- Risks due to natural calamities like
floods, earthquakes and so on.

Role of Commercial Banks

Major part of export finance is

provided by CBs.
Also provide other facilities and
services to exporters.
Two types of role:
- Fund Based Assistance
- Non-fund Based Assistance

Fund Based Facilities:

- Funds provides at Pre and Post
Shipment stage.
- Pre-shipment:
- Short term finance for 180 days at
concessional rate of interest.
- Forms of finance are: Cash, Advance
against hypothecation, Advance against
pledge, etc

- Post-shipment:
- Period of 90 days at lower rates of
interest.
- Forms are: Negotiation of bills drawn
under LC, Purchase/discounting of bills,
overdraft against bills under collection,
etc.

Non-Fund based facilities:

- Bank guarantees:
- Guarantee for foreign currency loans
sanctioned by a FI abroad
- Performance guarantee: In case of capital
goods, turnkey projects
- Guarantee for payment of retention
money by overseas party
- Advance payment guarantee to overseas
buyer
- Bid bonds to help exporters in global
tenders

Other services:
- Collect proceeds from importer and
credit to exporters account.
- Help exporter to collect info about
credit worthiness of foreign buyer.
- Send duplicate copy of GR form to RBI
after realisation of export proceeds.
- Issue bank certificates for export sales
value which is useful for claiming
incentives.

Role of EXIM Bank

Came into existence in 1982.

HQ in Mumbai with branches all over
India and abroad.
Purpose is to provide medium and
long term finance to exporters
thereby promoting foreign trade in
India.

Main objectives are:

- To provide financial assistance to
importers and exporters.
- To promote foreign trade of India.
- To function as principal financial
institution which coordinates the
working of all institutions engaged in
providing export finance.

Functions of EXIM Bank

1.

Fund Based Assistance:

Indian Exporters:
- Financial assistance to Deferred credit
exports.
- Credit facilities to deemed exports.
- Finance Indian JVs abroad.
- Finance units in SEZ and 100% EOUs.
- Pre-shipment finance to exporters.
- Finances import/export of machinery
and equipment on lease basis.

- Provides Computer Software Exporters

Forex loan on RBI clearance.
- Finance against deferred credit to
exporters of consultancy, technology and
other services.
- Finances Indian exporters who
undertake export marketing activities in
India and abroad thru EMF.
- Operates EDF to finance research for
development of Indian exports.

2.

3.

Indian Commercial Banks:

- Refinance facilities
- Rediscounting facility
Overseas banks:
- Long term finance to FIs abroad that
provide finance to importers of their
country to buy Indian capital goods.
- Relending facility to make available
term finance to overseas clients for
import of Indian goods.

4.

Overseas buyers:
- Overseas buyers credit facility to
foreign importers for import of Indian
capital goods with repayment spread
over some years.

Role of SIDBI

Small Industries Development Bank

of India.
Set up in 1990.
Principle FI for promotion, financing
and development of micro, small and
medium enterprises.
Head office in Lucknow, UP and 15
regional offices and 31 branch offices
across India.

Functions of SIDBI

Refinance assistance:
- Seed capital scheme
- Equipment refinance scheme
- Tourism related finance scheme
Direct assistance:
- Project finance scheme
- ISO 9000 scheme
- Equipment finance scheme

Bills schemes:
- Direct discounting scheme
- DDS (equipment): bills are normally
of 5 yrs and min transaction value of Rs.
1 lakh
- DDS (components): unexpired
period is not more than 90 days

- Bills rediscounting scheme:

- BRS (equipment): period of bill is
normally 5 yrs
- BRS (components): unexpired
period is not more than 90 days

Marine Insurance Procedure

Governed by Marine Insurance Act, 1963.

Covers transportation by sea, air or land,
inland water voyages, rail/road transport,
registered post.
Covers the following risks:
- fire or explosion
- sinking of vessel
- derailment of land transport
- collision of vessel
- theft, pilferage
- total loss of any package while loading or
unloading

Procedure

Selection of insurance firm

Type of policy
- Time policy
- Voyage policy
Proposal form
Verification of proposal form
Payment of premium

Issuance of insurance policy

-

Name and address of insurance company

Name and address of the insured
Risks covered
Goods insured
Amount insured
Date of issue and period of policy
Places where claims are payable

Filing of claim
Claim amount

Role of ECGC

Set up in July 1957 by GOI.

Initially known as Export Risks
Insurance Corp.
Under Ministry of Commerce.
Objects:
- To protect exporters against export
risks.
- To protect banks against losses due to
non-repayment of loans by exporters.

Covers Issued by ECGC

1.

Standard policies:
- To protect exporters against risks
involved in exports on short term
credit.
- In case of consumer goods sold on
credit, not exceeding 180 days.
- Whole turnover policy i.e all
shipments are covered under one
policy.

4 types of standard policies:

- Shipment (Comprehensive risks)
policy: to cover both political and
commercial risks from date of shipment.
- Shipment (Political risks) policy
- Contracts (Comprehensive risks)
policy: to cover both political and
commercial risks from date of contract.
- Contracts (Political risks) policy

Risks covered under standard policies:

- Commercial risks
- Insolvency of buyer
- Failure by buyer to make payment
by due date
- Buyers failure to accept goods

- Political risks:
- Restrictions on remittance by govt in
buyers country.
- Cancellation of import license of the
buyer.
- Cancellation of export license of the
exporter.
- Additional handling, transport or
insurance charges due to diversion
which cannot be charged to buyer.

2.

Specific policies:
- Contracts that are not repetitive in
nature are insured thru specific policies
like export of capital goods, turnkey
projects, rendering services abroad, etc.
- Issued for Supply contracts, Services
abroad and Construction works abroad.

Specific policies for supply contracts:

- In case of export of capital goods sold on
deferred credit.
- 4 types:
Specific shipments (comprehensive risks)
policy
Specific shipments (political risks) policy
Specific contracts (comprehensive risks)
policy
Specific contracts (political risks) policy

Service policy
- Covers a wide range of services.
- If contract is with overseas govt, then
Specific Services (Political risks) policy
and if contract is with overseas private
parties then Specific Services
(comprehensive risks) policy.
- Covers 90% of loss suffered.

Construction works policy:

- Civil construction and turnkey projects
involving supply and services.
- Both with private and foreign govt.
- 85% of loss in case of govt and 75%
in case of private parties.

3.

Financial guarantees:
- Protects the banks from losses due to
non-repayment of loans by exporters.
- Charges a premium depending upon
the type of guarantee.
Packing credit guarantee:
- Covers any loan given to exporter for
manufacture, processing, purchasing or
packing of export goods against LC.
- Pays 2/3rd of the loss.

Export production finance guarantee:

- Given to banks to provide finance at
pre-shipment stage to full extent of cost
of production.
- 2/3rd of loss is covered.
- Given for specific products like textiles,
ready made garments, woollen carpets,
etc.

Export finance guarantee:

- Covers post-shipment advances given
by banks to exporters against incentives.
- Loss covered is 75% or 3/4th.
Post shipment export credit guarantee:
- Covers post-shipment finance given by
banks to exporters thru purchase or
discounting of bills.
- Loss covered is 75%.
- Exporter should have taken shipment
or contract risk policy.

Export performance guarantee:

- Covers bank guarantees given to
execute bid bonds to exporters.
- Covers 75% of losses.
Export finance (overseas lending)
guarantee:
- Covers a bank financing an overseas
project thru foreign currency loan.
- Loss covered is 75-90% depending on
premium.

4.

Special schemes:
Transfer guarantee:
- To safeguard Indian banks against
losses arising out of risks of
confirmation of LC.
- Risks can political or commercial or
both.
- Loss covered in political 90% and
commercial 75%.

Overseas investment insurance:

- To protect Indian investors having
capital participation in projects abroad.
- Period 15 yrs
Exchange fluctuation risk cover:
- Gives protection to exporters of capital
goods, contractors and consultants who
receive payment for their services on
deferred payment basis.
- Any exchange rate fluctuations are
covered as forward exchange market
does not.

Insurance cover for buyers credit:

- To protect FIs in India which extend
export credit to overseas buyers or FIs.