Indian entrepreneurs while investing abroad may face various
commercial and political risks. The commercial risks may arise due to
insolvency of the buyer; failure of the buyer to make the payment due
within the specified period; or buyer's failure to accept the goods, subject
to the given conditions. While, the political risks may be due to imposition
of restrictions by the Government of the buyer's country or any Government
action which may block or delay the transfer of payment made by the buyer;
war, civil war, revolution or civil disturbances in the buyer's country.
Other unforeseen incidents like new import restrictions
or cancellation of a valid import license in the buyer's country; interruption
or diversion of voyage outside India resulting in payment of additional
freight or insurance charges which cannot be recovered from the buyer;
and any other cause of loss occurring outside India not normally insured
by general insurers.
Hence, in order to ensure safe and successful overseas
expansion plans it is necessary to provide a comprehensive insurance cover
against all such risks faced by an entrepreneur. Such a insurance facility
seeks to create a favourable climate in which investors including exporters
can get timely and liberal credit facilities from banks at home.
Credit Guarantee Corporation of India Limited (ECGC) was established
by the Government of India under the administrative control of the Ministry
of Commerce & Industry in order to strengthen the export promotion
drive by covering the risk of exporting on credit. It provides a range
of credit risk insurance covers to exporters against loss in export of
goods and services as well as offers guarantees to banks and financial
institutions to enable exporters to obtain better facilities from them.
Its objectives are to provide insurance cover to:- (i) exporters against
political and commercial risks; (ii) exporters against the risk of exchange
rate fluctuations; (iii) banks against export credit and guarantees extended
by them; (iv) Indian investors abroad against political risks.
The insurance cover issued by it may be broadly divided
into the following four groups:-
policies or SCR
issued to exporters to protect them against payment
risks involved in exports on short-term credit, i.e. credit not exceeding
180 days. It is also known as shipments (comprehensive risks)policy.
It is issued to exporters whose anticipated export turnover for the
next 12 months is more than Rs.
50 lacs. It covers both commercial and
political risks from the date of shipment. However,the policy does not
cover losses due to the following risks:-
- Commercial disputes including quality disputes raised
by the buyer, unless the exporter obtains a decree from a competent
court of law in the buyer's country in his favour.
- Causes inherent in the nature of the goods.
- Buyer's failure to obtain necessary import or exchange
authorization from authorities in his country.
- Insolvency or default of any agent of the exporter
or of the collecting bank.
- Loss or damage to goods which can be covered by general
- Exchange rate fluctuation.
- Failure or negligence on the part of the exporter
to fulfill the terms of the export contract.
- Specific policies designed to protect Indian firms
against payment of risks involved in exports on deferred terms of payment,
services rendered to foreign parties construction works and turnkey
projects undertaken abroad.
- Specific Shipment Policy-Short Term(SSP-ST):- It
provides cover to Indian exporters against commercial and political
risks involved in export of goods on short-term credit not exceeding
180 days. Exporters can take cover under these policies for either
a shipment or a few shipments to a buyer under a contract. These
policies can be availed of by:-(i) exporters who do not hold SCR
Policy and(ii) by exporters having SCR Policy, in respect of shipments
permitted to be excluded from the preview of the SCR Policy.
- Construction Works Policy:- It is designed to provide
cover to an Indian contractor who executes a civil construction
job abroad. The distinguishing features of a construction contract
are that:- (i) the contractor keeps raising bills periodically throughout
the contract period for the value of work done between one billing
period and another; (ii) to be eligible for payment, the bills have
to be certified by a consultant or supervisor engaged by the employer
for the purpose.
- Specific Policy for Supply Contract:- Contracts
for export of capital goods or turnkey projects or construction
works or rendering services abroad involve medium/long-term credits.
Such transactions are, therefore, insured by ECGC on a case-to-case
basis under specific policies.
- Financial guarantees
issued to banks in India to protect them from risks of loss involved
in their extending financial support to exporters at the pre-shipment
as well as post-shipment stages.
- Packing Credit Guarantee:- Timely and adequate credit
facilities at the pre-shipment stage are essential for exporters to
realize their full export potential. The Packing Credit Guarantee
of ECGC helps the exporter to obtain better and adequate facilities
from their bankers. The Guarantees assure the banks that, in the event
of an exporter failing to discharge his liabilities to the bank, ECGC
would make good a major portion of the bank's loss.
- Export Production Finance Guarantee:- The purpose
of this Guarantee is to enable banks to sanction advances at the pre-shipment
stage to the full extent of cost of production when it exceeds the
Free On Board (f.o.b) value of the contract/order, the differences representing incentive/duty
- Post-Shipment Export Credit Guarantee:- If the exporter
intends to continue the credit facilities till the value of shipment
is realised from the foreign buyer, he has to avail of post-shipment
credit. It provides protection to banks against non-realisation of
export proceeds and the resultant failure of the exporter to repay
the advances availed.
- Export Finance Guarantee:- This guarantee covers post-shipment
advances granted by banks to exporters against export incentives receivable
in the form of cash assistance, duty drawback, etc.
- Export Performance Guarantee:- An exporter who desires
to quote for a foreign tender may have to furnish a bank guarantee
in the form of a bid bond. If he wins the contract, he may have to
furnish bank guarantees to foreign buyers to ensure due performance
or against advance payment or in lieu of retention money or to a foreign
bank in case he has to raise overseas finance for his contract. Further,
for obtaining import licenses for raw materials or capital goods,
exporters may have to execute an undertaking to export goods of a
specified value within a stipulated time, duly supported by bank guarantee.
- Export Finance (Overseas Lending) Guarantee :- If
a bank financing an overseas project provides a foreign currency loan
to the contractor, it can protect itself from the risk of non-payment
by the contractor by obtaining Export Finance (Overseas Lending) Guarantee.
- Exchange Fluctuation Risk Cover:- It is intended
to provide a measure of protection to exporters of capital goods,
civil engineering contractors and consultants who have often to receive
payments over a period of years for their exports, construction works
or services. Under it cover is available for payments scheduled over
a period of 12 months or more, upto a maximum of 15 years.
- Transfer Guarantee:- When a bank in India adds its
confirmation to a foreign Letter of Credit, it binds itself to honour
the drafts drawn by the beneficiary of the Letter of Credit without
any recourse to him provided such drafts are drawn strictly in accordance
with the terms of the Letter of Credit. The confirming bank will suffer
a loss if the foreign bank fails to reimburse it with the amount paid
to the exporter. The Transfer Guarantee seeks to safeguard banks in
India against losses arising out of such risks.
- Overseas Investment Guarantee:- Export Credit
Guarantee Corporation of India Limited has evolved a scheme known
as the 'Overseas Investment Guarantee' or 'Overseas Investment Insurance'
scheme in order to provide protection for Indian investments abroad.
It provides insurance cover for the investments made by Indian corporates
in Government of India approved joint ventures (JVs) or their wholly
owned subsidiaries (WOSs) abroad either in the form of equity or loan.