Risks in Foreign Trade (Risk in Foreign Trade & Role of ECGC)
What is Risk : ¨Risk stands for probability of loss arising out of uncertainty about an event. ¨The risk in a currency/commodity transaction arises due to exposure undertaken.
Various Risk involved in International trade : ¨Buyer Risk ¨Seller Risk ¨Shipping Risk ¨Credit Risk ¨Legal Risk ¨Country Risk ¨Operational Risk
Role of ECGC
Known as Export Credit & Guarantee Corporation Ltd. The primary goal of ECGC is to support and strengthen the export promotion drive in India. ¨Activities of ECGC :
i) Provide credit risk insurance covers to exporters against loss in export..
Ii) Offer guarantees to banks and financial institutions against export credit
iii) Provide overseas investment insurance to Indian companies investing in joint venture abroad.
iv) Provide guidance in export related activities and information on credit worthiness of oversea buyers.
v) Makes available information on different countries with its own credit rating agencies. ¨
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Standard Policies : ¨ ¨The standard policies provide cover to exporters for short term credit i.e. credit not exceeding 180 days. These policies covers both commercial and political risk from the date of shipment depending upon type of policy. ¨ECGC normally pays 90% of losses on account of commercial or political risk. ¨Commercial risk covered by ECGC are subject to the condition that credit limit is approved by ECGC on each buyer. ¨Premium rates vary according to the risk involved and the country for which the goods are exported.
Small Exporters Policy
Period of policy : 12 Months
Minimum premium : Rs.2000/-. No claim bonus in premium rate is granted every year @ 5% ¨
Declaration of shipment : Quarterly ¨
Declaration of overdue payment : payment overdue for more than 60 days ¨
Percentage of cover : 95% in commercial risk, 100% in political risk ¨
Waiting period for claims : 2 months ¨
Change in terms of payment : Convert D/P bill into D/A where the value of bill is not more than Rs.3 lac. May also extend the due date of D/A bill ¨
Release of unaccepted goods : ¨The exporter sells the goods to an alternate buyer and when the loss exceed 25% of the gross invoice value, ECGC may consider payment of claims upto an amount reasonable.
Risk in Foreign Trade & Role of ECGC
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¨Contracts for export of capital goods or turnkey projects or construction works or rendering services abroad are insured by ECGC on a case to case basis. The type of specific policies issued by ECGC for this purpose are :
Specific shipments (comprehensive risk) :
Specific shipment (political risk) :
Specific contracts (comprehensive risk) :
Specific contract (political risk) : ¨The risk involved in rendering services by Indian firms abroad are covered by ECGC :
Specific service contract(political risk) :
Specific service contract (comprehensive risk) :
Financial Guarantees of ECGC
¨Export Credit Insurance Packing Credit (Party-wise & Whole Turnover) ¨ ¨
Eligibility : A bank or financial institution ¨
Period of cover : 12 months ¨
Eligible advance : All packing credit advances as per RBI guidelines ¨
Protection offered : Against losses incurred due to default or insolvency of exporter ¨
Percentage of cover : 66-2/3% ( party-wise) and 75% ( whole turnover) ¨
Maximum liability : 66-2/3% and 75% of packing credit limit ¨
Premium : as per applicable rate,- paisa per Rs.100 p.m. on the highest amount outstanding on any day during month
Important obligation of the bank : ¨Monthly declaration of advances ¨Premium before 10th of succeeding month ¨Approval of corporation for extending due date beyond 360 days from due date ¨Default to be reported with 4 months from due date, and if not recovered, claim within 6 months of the report of default. ¨Recovery action and sharing of recovery
Exchange Fluctuation risk Cover Schemes
The scheme is intended to provide a measure of protection to exporter of capital goods, civil engineering contracts, consultants where the payments are over a period of years. Where such payments are received in foreign currency, they are open to exchange fluctuation risk.
The exchange risk cover is available for payment scheduled over a period of 12 months or more upto a maximum of 15 years. ¨Cover can be obtained from the date of bidding right upto final instalment.
The basis of cover will be a ‘reference rate’. ¨Losses upto 2% and beyond 35% of the reference rate will be to the exporter’s account. ¨If there is gain in excess of 2% of the reference rate, the portion beyond 2% and upto 35% will be turned over to ECGC. ¨Premium as per current rates.