Role Of Credit Insurance In International Trade Finance Essay

The sale of goods and services are exposed to important figure of hazards, many of which are non within the control of the provider. The highest of these hazards are the 1 that can hold a ruinous impact on the viability of the provider, i.e. , is the failure of the purchaser to pay for the goods or services he has purchased.

In today ‘s challenged domestic and planetary economic clime, acknowledging and pull offing the hereafter hazards have become a precedence for concerns. Losingss attributed to non-payment of a trade debt or bankruptcy can make happen on a regular basis. Default rates vary from industry-to-industry and from country-to-country in a twelvemonth, and no industry or company is immune from trade recognition hazard.

To get the better of the hazard of trade recognition, Trade Credit Risk Insurance was introduced which is an insurance policy and a hazard direction merchandise offered by insurance companies and governmental export recognition bureaus to concern entities wishing to protect their history receivables from loss due to recognition hazards, such as drawn-out default, insolvency, bankruptcy, etc.

Trade recognition insurance is a utile tool for houses to see themselves against the hazard of non-payment by the importers, particularly in the fortunes of cross-border minutess where it becomes more expensive to supervise the hazard and more hard to implement the payment from the importers shacking in the other state.

Export Credit Guarantee Corporation ( ECGC ) :

The Export Credit Guarantee Corporation of India Limited ( ECGC ) , is a company entirely 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 ab initio 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:

Recognition Insurance provides screen to the exporters against Credit Risk losingss in export of goods & A ; services, both under Short-term and Medium and Long-term exports.

It besides provides screen to the Bankss so as to protect them against the hazards of non-payment by exporters, both under Short-term and Medium and Long-term exports.

It besides provides Domestic Credit Insurance screen to the Exporters and Banks in regard of their local gross revenues and working capital finance, severally.

ECGC besides provides Overseas Investment Insurance screen to protect the Indian Entrepreneurs those who are puting in Abroad Ventures ( Equity/Loans ) against expropriation hazards.

It besides provides for Exchange Fluctuation Cover to exporters to protect them in regard of their exchange losingss under Medium and Long-term exports.

Functions Of Export Credit Guarantee Corporation:

Provides recognition hazard screen to the Exporters against non-payment hazards of the abroad purchaser / purchaser ‘s state in regard of the exports made.

Provides Credit Insurance screen to the Bankss against imparting hazards of exporters.

Appraisal of purchasers for the intent of underwriting.

Preparation of state studies.

International experience to heighten Indian capablenesss.

An ISO organisation stand outing in recognition insurance services.

Rated “ AAA ” by CRISIL for claim paying ability.

Hazards Covered By Export Credit Guarantee Corporation:

Commercial Hazard

Insolvency of purchaser / LC opening bank

Protracted Default of Buyer

Repudiation by Buyer

Political Hazard

War / civil war / revolutions

Import limitations

Exchange transportation hold / trade stoppage

Any other cause attributable to importing state

Merchandises Offered To Exporters By ECGC:

Standard Policy:

Cargos ( Comprehensive Risks ) Policy, normally known as the Standard Policy, is the one which is ideally suited to cover the hazards in regard of goods exported on short-run recognition, i.e. , recognition non transcending 180 yearss. This policy covers both, commercial and political hazards from the day of the month of cargo. It is issued to the exporters whose awaited export turnover for the following 12 months is more than Rs.50 hundred thousand.

Small Exporters Policy:

The Small Exporter ‘s Policy is fundamentally the Standard Policy, integrating certain betterments in footings of screen, in order to promote the little exporters to obtain and run the policy. It is issued to the exporters whose awaited export turnover for the period of one twelvemonth does non transcend Rs.50 hundred thousand.

Period of Policy: Small Exporter ‘s Policy is issued for a period of 12 months and non for 24 months as in the instance of Standard Policy.

Minimal premium: Premium payable will be determined on the footing of projected exports on an one-year footing topic to a minimal premium of Rs. 2000/- for the policy period.

Declaration of cargos: Cargos need to be declared quarterly ( alternatively of monthly as in the instance of Standard Policy ) .

Declaration of delinquent payments: Small exporters are required to subject monthly declarations of all payments staying delinquent by more than 60 yearss from the due day of the month, as against 30 yearss in the instance of exporters keeping the Standard Policy.

Percentage of screen: For cargos covered under the Small Exporter ‘s Policy, ECGC will pay claims to the extent of 95 % where the loss is due to commercial hazards and 100 % if the loss is caused by any of the political hazards ( Under the Standard Policy, the extent of screen is 90 % for both commercial and political hazards ) .

Waiting period for claims: The normal waiting period of 4 months under the Standard Policy has been reduced to 2 months in the instance of claims originating under the Small Exporter ‘s Policy.

Specific Cargo Policy ( Short-term ) :

Specific Shipment Policy provide screen to the Indian exporters against commercial and political hazards involved in export of goods on short-run recognition non transcending more than 180 yearss. Exporters can take the screen under this policy for either one individual cargo or for few cargos to a purchaser under the contract.

Export Employee turnover Policy:

Employee turnover policy is a fluctuation of the criterion policy for the benefit of big exporters who contribute non less than Rs.10 lakhs per annum towards the premium. Therefore all the exporters who will pay a premium of Rs. 10 hundred thousand in a twelvemonth are entitled to avail this policy.

Specific Buyer-wise Policy:

Specific Buyer-wise Policy provides screen to Indian exporters against commercial and political hazards involved in export of goods on short-run recognition to a peculiar purchaser. All cargos to the purchaser in regard of whom the policy is issued will hold to be covered ( with a proviso to allow exclusion of cargos under LC ) .

Consignment Export ( Stock Holding Agent & A ; Global Entity ) Policy:

Economic liberalisation and gradual remotion of international barriers for trade and commercialism bit by bit opened up assorted new avenues of export chances for the Indian exporters for supplying quality goods. One of the method which is being progressively adopted by Indian exporters is that of cargo exports where the goods are shipped and held in stock ready for sale to abroad purchasers, as and when orders are received.

Therefore, to protect the Indian Exporters from the possible losingss while selling of goods to the ultimate purchasers, it was decided to present Consignment Policy Cover.

Buyer Exposure Policy ( Single Buyer & A ; Multi Buyer ) :

Soon, in the policies offered to the exporters, the premium is charged on the export turnover, though the Corporation ‘s exposure on each purchaser is controlled through the system of blessing of recognition bounds of the purchaser for covering the commercial hazards. While this is suited for the little and average exporters, many big exporters holding big figure of cargos have been kicking about the volume of returns to be filed under the policy asking the deployment of their resources for this intent and it besides consequences into possible unwilled skips and committees in such coverage, which have an impact on the colony of the claims. There has been a demand for simplification of the process every bit good as for rationalisation of the premium construction. Sing the demands of such exporters, the Corporation has decided to present policies on which premium will be charged on the footing of the expected degree of exposure.

There are two type of Exposure Policies which are being offered for the intent, viz. :

Single Buyer Exposure Policy: – For covering the hazard of a specified purchaser

Multi Buyer Exposure Policy: – For covering the hazards of multiple purchasers

Software Project Export Policy:

The Services Policies of the Corporation which have been in being for some clip were offered to supply protection to exporters of services including package and related services. However it was found that the general services policy did non run into with the exact demands of package exporters. It was hence decided to present a new recognition insurance policy screen to run into the demands of the package exporters, viz. , package undertakings policy, where the payments will be received in footings of foreign exchange. The general services policies will go on to be offered for the export of services other than package and related services.

The package service exports that will be eligible for screen under the Software Project Policyaˆ¦ .

The following package services will be eligible for screen under the Software Project Policy:

Software undertaking services, either on one time/turnkey footing or progressive footing, affecting the followers: –

Development of package off-shore ( i.e. at the exporters location in India ) to be delivered and implemented in the purchaser ‘s ( client ) location ; or

Development of package on-site of the client and supply and execution ; or

Both off-shore and on-site development.

Need OF THE STUDY

The principle of my survey is to make consciousness of Credit Insurance among the exporters and besides to cognize the grounds for low consciousness of Credit Insurance in International Trade. And while interacting with the exporters I will seek to happen out the grounds for low consciousness of Credit Insurance among them.

Aim OF THE STUDY

To make consciousness of Credit Insurance among the exporters.

Why is Credit Insurance required by the exporters.

What is the consequence of Credit Insurance on international Trade.

Scope OF THE STUDY

My research survey is confined to Delhi and NCR merely. My clip of carry oning the study is from 28th Dec 2012 to 28th Jan 2013.

LIMITATIONS OF THE STUDY

There are certain restrictions in regard of my research survey which needs to be acknowledged and taken attention of for the future research work.

They are listed below:

The clip for this research work was concentrated for about approximately 2 months, so there was the clip restriction for the intent of roll uping Primary Data from the market.

The targeted sample were really stiff and conservative for supplying the information in regard of the research study.

There were restraints of finance.

LITERATURE REVIEW

[ 1 ] Rise Of Credit Insurance ; since the early 1990s, trade recognition insurance has registered strong growing and now dominates the short-run market wherein more than 95 per centum of the short-run concern is now being underwritten by both, private and public sector. The demand for Trade Credit Insurance has grown for houses because of the hazard of non-payment by the purchaser particularly in cross-border minutess where it is more dearly-won to supervise hazards and more hard to implement the payment. The trade-promoting consequence of recognition insurance is described in a formal theoretical account which shows that insurance screen of trade recognition will ensue in a higher end product degree as compared to the instance without insurance.Empirically, the grounds of a trade-promoting consequence of recognition insurance is limited to the instance of public warrants.

[ 2 ] Role Of Credit Insurance ; the demand for trade recognition insurance arises from the common pattern of selling on recognition and the demand by purchasers to merchandise on unfastened history, where they merely pay for the goods and services after holding on-sold them and are non willing to supply any signifier of security, for illustration by manner of full or partial progress payment, bank warrant or missive of recognition. It is deserving to be noted that trade receivables can stand for 30 % to 40 % of the provider ‘s balance sheet and companies hence face a significant hazard of enduring fiscal troubles due to the impact of late or non-payment. Trade recognition insurance is an of import hazard direction tool for pull offing the hazards of late payment or a complete failure to pay and besides offers the insured providers with several of import benefits: ( I ) It transfers the payment hazard to the trade recognition insurance companies, whose recognition expertness, variegation of hazard and fiscal strength enable them to presume these hazards ; ( two ) It provides insured providers with entree to professional recognition hazard expertness and related advice ; ( three ) It can assist forestall insured providers from enduring liquidness deficit or insolvency due to detain or non-payments ; ( four ) It reduces gaining volatility of insured providers by protecting a important part of their assets against the hazard of loss ; ( V ) It facilitates the entree by the insured providers to receivable funding and improved recognition footings from loaning establishments, some of which will take a firm stand on trade recognition insurance before supplying funding ; ( six ) It enables insured providers to widen the recognition to the clients instead than necessitating payment in progress or on bringing, or necessitating security such as missive of recognition, therefore leting the provider to efficaciously vie in the planetary market topographic point where many purchasers merely buy on recognition ; ( seven ) Allows insured providers to travel up the value concatenation and accept direct purchaser hazard, therefore cutting out the jobber house.

RESEARCH METHODOLOGY

Purpose of the Research Study:

The cardinal purpose of this undertaking is to make consciousness for Credit Insurance among the Exporters and why is Credit Insurance required by the exporters. The survey is besides conducted to cognize the consequence of Credit Insurance on International Trade.

Research Type:

We had foremost used Exploratory Research. Exploratory research is a type of research conducted for a job that has non been clearly defined. Exploratory research helps find the best research design, informations aggregation method and choice of topics. It should pull unequivocal decisions merely with utmost cautiousness. Given its cardinal nature, explorative research frequently concludes that a perceived job does non really exist.

Exploratory research frequently relies on secondary research such as reexamining available literature and/or informations, or qualitative attacks.

The working of the research was started with the questionnaire. In this we have used testing standard to place mark group of our research. Screening of certain inquiries has been done.

The survey went through the consciousness of the mark group about the function of recognition insurance in the International Trade.

Then we used Descriptive Research. Descriptive research is used to obtain information refering the current position of the phenomena to depict “ what exists ” with regard to variables or conditions in a state of affairs. The methods involved scope from the study which describes the position quo, the correlativity survey which investigates the relationship between variables, to developmental surveies which seek to find alterations over clip. To accurately portrait the features of individual of state of affairs or group we used Descriptive Research Design.

Sampling:

Target Population – Exporters of Delhi & A ; NCR

Sampling Frame – Export Houses Of Delhi & A ; NCR

Sampling Unit – Export Organizations

Sample Size – 200

Sampling Method – In this research attempt “ Convenience Sampling ” has been used. This method is used to do research process faster by obtaining a big figure of complete questionnaires quickly and expeditiously. The sample for carry oning the study contains Exporters of Delhi & A ; 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

Jewelry

27

Car 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 Calendar month

34

Once IN 3 MONTHS

10

3 MONTHS & A ; ABOVE

13

Table 4:

Footing OF SALE/CONTRACT

Option

NUMBER OF RESPONSES

CIF

71

Fob

68

C & A ; 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:

Footing OF PAYMENT

Option

NUMBER OF RESPONSES

LETTER OF CREDIT

182

Recognition

18

OTHERS

0

Table 7:

IN CASE OF CREDIT SALES, PEOPLE AVAILING CREDIT INSURANCE

Option

NUMBER OF RESPONSES

Yes

5

NO

13

Table 8:

HAS THERE BEEN ANY CLAIM UNDER YOUR CREDIT INSURANCE POLICY

Option

NUMBER OF RESPONSES

Yes

1

NO

4

Table 9:

ARE YOU SATISFIED WITH THE COVERAGE UNDER THE POLICY

Option

NUMBER OF RESPONSES

SATISFIED

5

NOT SATISFIED

0

Table 10:

ARE YOU SATISFIED WITH THE CLAIM EXPERIENCE

Option

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 Old ages

Name OF THE COMPANY

NO. OF CLAIMS REPORTED

ICICI LOMBARD GENERAL INSURANCE CO. LTD.

100

IFFCO TOKIO GENERAL INSURANCE CO. LTD.

10

Findingss

The thesis study titled “ Role Of Credit Insurance In International Trade ” has been conducted with the aid of research study for 200 Exporters holding their concern and export houses in Delhi and NCR ( Gurgaon & A ; Noida ) and besides for Insurance Companies who are subventioning the Credit Insurance Business.

The consequences and findings so brought out with the undertaking in regard of INDIAN EXPORTERS are listed below:

The nature of the goods, i.e. , the goods and trade goods with which the Exporters are covering in the international market consisted chiefly of Handicraft Goods lending to 120 % followed by Jewellery Exports, both Metal and Ethnic lending 27 % and so 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 chiefly concentrated in the states like Europe, United Kingdom, South America and North America. To be more specific the Indian Exporters trade with the metropoliss like England. Scotland, Spain, Germany, Italy, France, Mexico and Rome.

The frequence of exports, i.e. , with which the exports repeatedly take topographic point can be classified as Weekly, Fortnightly, Monthly, Once in a one-fourth and so on and so forth.

The footings of sale and contract on which the Indian Exporters decide to transport on their export concern in the foreign market is really a mix of all the three footings of sale comprising of CIF footing, FOB footing every bit good as C & A ; F footing. But the bulk of exporters are willing to go on their export operations on the footing of CIF.

The one-year turnover of the exporters is changing and runing from Rs.1 – 30 crores which includes every possible figure which can be expected from them looking at the graduated table of operations they are runing at.

The footings of payment for which the exporters are willing to transport out the export operations relies chiefly on Letter Of Credit and less on Credit Insurance. More than 94 % of the exporters conduct their concern on the pillars of Letter Of Credit.

There are few exporters in the Indian market who carry their export concern on the recognition gross revenues but merely smattering of them are choosing for Credit Insurance about approximately 2 % to 3 % .

The exporters who are availing Credit Insurance have experienced claims as good and those who have claimed for the compensation with their insurance companies are satisfied with the claim colony every bit good.

The findings brought out with the undertaking work in regard of INDIAN INSURANCE COMPANIES are listed below:

The underwriting considerations for this concern by different Insurance Companies are given below:

ICICI Lombard General Insurance Company Ltd.

Size of turnover of the Exporters

State of export

Profile of purchaser

Past history of losingss booked by the Exporter

Iffco Tokio General Insurance Company Ltd.

Merchandise being traded in

Cover district – Domestic or Exports

Previous company public presentation

Buyers Limits being sought

Other underwriting considerations being taken into history by the Insurance Companies are given below:

Fiscal strength of the purchaser

Experience of the insured with the purchaser if any

Number of old ages of being of the purchaser in the market

The per centum of the Credit Insurance in the entire Gross Direct Premium collected by the companies is runing between 0.5 % to 2 % .

Insurance companies are supplying coverage for all types of goods except for Jewellery and Diamonds, peculiarly excluded in the list of screen for ICICI Lombard General Insurance Co. Ltd.

ICICI Lombard General Insurance Co. Ltd. provides coverage in all the states across the Earth and major exports being covered are for USA, UK and other European Countries. Whereas, Iffco Tokio General Insurance Co. Ltd. provides coverage to the states except under UN countenance.

The lone policy which can be issued by the Insurance Companies is Whole Employee turnover Policy as per IRDA guidelines.

Suggestion

From the research work conducted by me I have few suggestions for the Insurance Companies as to how they can provide the demands of the Indian Exporters and how they can include them in their insuring concern with the alteration in their coverage demands and how can the consciousness for the Credit Insurance be spread amongst the Exporters so that they can accommodate and trust on the Credit Insurance for their International Business.

Some of the suggestions are given below:

Apart from ECGC, the Insurance Companies can follow new schemes and policies to get the better of the competition in the market and to distribute consciousness for Credit Insurance among the Indian Exporters.

Insurance Company and their Agents should travel for aggressive selling schemes with the Exporters and should seek to explicate them the advantages and benefits of Credit Insurance over and above the Letter Of Credit.

Besides the Insurance Companies should travel for Information Technology Revolution with which they can hold entree to the database of the Indian Exporters at big and can consequently construct their policies and schemes as to how to catch a large concern ball from them.

The Insurance Companies should maintain themselves flexible plenty so that they can set themselves into the places of Exporters and can cognize what sort of policy do they necessitate and what type of coverage are they looking for.

It is besides recommended that the Insurance Companies should concentrate on Product Innovation which will assist them to get the better of the new challenges of this peculiar concern section and will besides assist them to run into the ever-changing consumer demands and demands.

The Insurance Companies should besides work on Customer Education & A ; Services. In the present competitory scenario, a cardinal discriminator for any organisation, is the professional client service in footings of quality of advice on merchandise pick along with policy service.

It is besides suggested that the companies should work on Modern Marketing Approach, i.e. , MR ( Marketing Research ) , STP ( Segmentation, Targeting & A ; Positioning ) and MM ( Marketing Mix ) .

Decision

Recognition insurance is known as a hazard extenuation tool.A It covers the purchaser ‘s failure to run into its debt obligationA including the drawn-out default or insolvency.

In other words, Trade Credit Insurance is a fiscal tool which manages both, the Commercial and Political hazards that are beyond the company ‘s control. It besides provides Balance Sheet strength, Cash Flows are protected, Loan Servicing Cost and Asset Valuation are besides enhanced with the same.

A Trade Credit Insurance Policy besides allows concerns to experience secure in widening more recognition to current clients, or to prosecute new and larger clients that would hold otherwise seemed excessively hazardous. It significantly reduces the hazard of come ining into new markets.

Export Houses should take a measure frontward towards Credit Insurance and should trust on Insurance Companies that they will indemnify their losingss good in instance they book the loss for one or the other grounds.

The Export Houses should besides put in the Credit Insurance because of the following given grounds:

Gross saless Expansion

Expansion Into New International Markets

Reduce Bad – Debt Militias

Damages From Customer ‘s Non – Payment

Protection Of The Organisation From An Unexpected Catastrophic Event

Bibliography

Indian Journal Of Economics & A ; Business

Indian Journal Of Industrial Relations

Recognition Insurance Journal

Export Credit Guarantee Corporation Website

www.google.co.in