Export Marketing-Credit Risk

In the context of growing competition in international markets no exporter can manage without selling goods on credit. Giving credit poses two problems to an exporter: (i) he should find enough money to offer credit to his overseas buyers, and (ii) he should be prepared to take the credit risks.

Exporting on credit is not without risk. The overseas buyer may default; he may go bankrupt; there may be an earthquake or typhoon, a war or coup in his country which may wreck his fortunes. There may be sudden import or exchange restrictions, there may be moratorium. The Export Credit Guarantee Corporation (ECGC) covers the exporter against these risks. The ECGC also provides guarantees to the financing banks to enable them to provide adequate finance to the exporters.

Covers Issued by ECGC:
The covers issued by ECGC could be divided broadly into four groups:
(i) Standard policies issued to exporters to protect them against the risk of not receiving payments while trading with overseas buyers on short-term credit.
(ii) Specific policies designed to protect Indian firms against the risk of not receiving payments in respect of (a) exports on deferred payment terms, (b) services rendered to foreign parties, and (c) construction works undertaken abroad;
(iii) Financial guarantees issued to banks against the risks involved providing credit to exporters; and
(iv) Special Schemes, viz., Transfer Guarantee, Insurance Cover for Buyer’s Credit, Line of Credit, Joint Ventures and Overseas Investment.

Risks Covered under Standard Policies:

Under its policies intended to protect the exporters against overseas credit risks, ECGC bears the main brunt of the risk and pays the exporter 90% of his loss on account of ‘commercial’ and ‘political’ risks.

Commercial Risk:

(i) The insolvency of the buyer;
(ii) the buyer’s protracted default to pay (within 4 months of due date for goods accepted by him); and
(iii) in some special circumstances specified in the policy, buyer’s failure to accept the goods, when such non-acceptance is not due to the exporter’s actions.

Political Risks:

(i) Restriction on remittances in the buyer’s country or any government action which may block or delay payment to the exporter;
(ii) war, revolution or civil disturbances in the buyer’s country;
(iii) new import licensing restrictions or cancellation of a valid import license in the buyer’s country;
(iv) cancellation of export license or imposition of new export licensing restrictions in India (under contracts policy);
(v) additional handling, transport or insurance charges due to interruption or diversion of voyage which cannot be recovered from the buyer, and
(vi) any other cause of loss occurring outside India, not normally insured by commercial insurer, and beyond the control of both the exporter and the buyer.

Risks not covered:

ECGC, however, does not cover risks of loss due to (i) commercial disputes including quality disputes raised by the buyers unless an exporter obtains a decree from a competent court of law in the buyer’s country in his favor. (ii) causes inherent in the nature of goods, (iii) a buyer’s failure to obtain import or exchange authorization from the appropriate authority, (iv) insolvency or default of any agent of the exporter or of the collecting bank, (v) loss or damage to goods which can be covered by general insurer, (vi) fluctuations in exchange rates and (vii) failure of the exporter to fulfill the terms of the export contract or negligence on his part.