A Presentation on ECGC Export credit guarantee corporation of

India ltdPresented by:-

Bhupendra Bhavsar

Apoorva Barjatya

Vaishali

Manish Kadamb

ECGC (Export Credit Guarantee Corporation)

of India Ltd.

Introduction

The Govt. of India set up the Export Risks Insurance Corporation(ERIC)in July 1957 in order to provide export credit insurance support to Indian exporters.It was transformed into Export Credit & Guarantee Corporation Ltd(ECGC)in 1964.To bring the Indian identity into sharper focus,the Corporation’s name was once again changed to the present Export Credit Guarantee Corporation of India Ltd in 1983.ECGC is a company wholly owned by the Govt.of India.Being essentially an export promotion organisation,it functions under the administrative control of the Ministry of Commerce,Govt.of India.It is managed by a Board of Directors comprising representatives of the Govt,RBI,Banking,Insurance and Exporting community.

ECGC is the fifth largest credit insurer of the world in terms of coverage of national exports. The present paid-up capital of the company is Rs.800 crores and authorized capital Rs.1000 crores.

Objectives of ECGC

The primary objective of setting up this corporation is to provide export credit insurance and trade related services to exporters. The corporation provides guarantee to financial institutions for the benefit of the exporters. To invest in joint ventures overseas, ECGC offers Overseas Investment Insurance (OII) to Indian companies; the investment here is done in the form of loan or equity. ECGC provides various credit risk insurance covers to exporters against loss in exports; the corporation also offers guarantees to banks and financial institutions to enable exporters to obtain better results

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

Why is ECGC needed?

Export credit insurance is essential for exporters to avoid the various risk factors. It offers insurance protection to exporters against risk of payment, and gives guidance in all import export related activities. Besides this, ECGC makes information available on various countries with its own credit ratings, makes the process of obtaining export finance from banks/financial institutions easy, provides information on credit-worthiness of the overseas buyer and helps exporters in recovering bad debts.

What does ECGC do? Provides risk cover to the exporters against the risk associated in world

market, viz. political risks and commercial risks. Provides exporters information regarding credit-worthiness of overseas

buyers. Provides information on approx.180 countries with its own credit

ratings. Offers guarantees to banks and financial institutions to enable

exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian companies

investing in joint ventures abroad in the form of equity or loan

Assists exporters in recovering bad debts.

What is Risk? Uncertainty about the future outcome

Lack of knowledge Imperfection in knowledge

Possibility of Loss

Exports Goods Services

Credit Extending supplier credit: DP, DA, OA

Risk Possibility of non-payment of accounts receivables

Export Credit Risks

Types of Export Credit Risks

Credit Risk

Legal Risk

Political Risk

Exchange Risk

TransferRisk

Export Credit Risk

Political Risk

Some countries may experience major political instability

defaults on payments exchange transfer blockages nationalization confiscation of property

Credit Risk

The risk of Insolvency Default Fraud Unwillingness to accept the goods

on the part of the buyer

Exchange Risk

The possibility of variability in the exchange rate on account of the time lag between the date of contract and actual payment is referred to as 'Exchange Risk'

Transfer Risk..

Exchange or trade controls introduced in

Buyer's country

Weakness in economy of

Buyer's country, viz. low

reserves, BOP problemsFailure of

Buyer's Bank affecting

payment of outstandings

…arising from all/any of the above

Legal Risk Differences in law can be expected in

overseas countries These may have an impact in such areas

as:

import procedures taxation employment practices currency dealings property rights the protection of intellectual property agency/distributorship arrangements

Export Credit Insurance Export Credit insurance is cover offered by insurance

companies which encompasses the risk of non-payment within export operations

Risks covered by export credit insurers:

Commercial Risk

Political Risk

Factors Leading to Commercial Risks

Buyer’s willingness to pay:

Behavior of the debtor

Buyers ability to pay:Debtors financial condition

Commercial Risks

Insolvency/ Bankruptcy Breach of Contract

Payment Default Refuse to take delivery of goods

Ability or behavior?

Political Risks

Political risks cover events that occur abroad other than commercial risks such as:

The general political The general political riskrisk

The natural The natural catastrophe riskcatastrophe risk

The non-transfer riskThe non-transfer risk

Methods of Political Risk Control by Credit Insurers

Country Risk Classification:

The arrangement on Guidelines for Officially Supported Export Credits is a

"Gentlemen's Agreement" among OECD Participants. The Arrangement, including the Knaepen Package, gives a seven

fold classification of countries, which is used by many export credit insurers

Methods of Political Risk Control by Credit Insurers

The Country Risk Classification Method measures the country credit risk, i.e. the likelihood that a country will

service its external debt

It uses an econometric It uses an econometric model based on model based on

quantitative indicators, quantitative indicators, e.g. the financial & e.g. the financial &

economic situation & economic situation & the payment experience the payment experience

of the countriesof the countries

It takes account of It takes account of possible qualitative possible qualitative

factors, e.g. political & factors, e.g. political & other economic & other economic &

financial factors not incl. financial factors not incl. in the quantitative in the quantitative

Econometric ModelEconometric Model

Methods of Political Risk Control by Credit Insurers

The final classification, based only on valid country risk elements, is a consensus decision of the sub-Group of Country Risk Experts that involves the country risk experts of the participating Export Credit Agencies

Role of ECGC as an Export Credit Insurer

Providing Providing credit insurance coverscredit insurance covers to exporters to exporters against loss in export of goods & servicesagainst loss in export of goods & services

Providing Providing export creditexport credit guaranteesguarantees to banks & to banks & FI’s to enable exporters obtain better facilities from FI’s to enable exporters obtain better facilities from themthem

Providing Providing Overseas Investment InsuranceOverseas Investment Insurance to to Exporters - Indian Entrepreneurs in Overseas Exporters - Indian Entrepreneurs in Overseas Ventures (Equity/Loans)Ventures (Equity/Loans)

Maturity FactoringMaturity Factoring

Financial Guarantees Issued by ECGC to Banks:

In order to provide financial assistance to the exporters through commercial banks and other financial institutions,ECGC guarantees various loans provided by these financial intermediaries to the exporters.Due to the guarantees given by the ECGC,commercial banks can liberally lend money to the exporters.the nature of the guarantees provided by the ECGC depends upon the purposed of finance.The main types of guarantees offered are:

1. Packing Credit Guarantee.

2. Post Shipment Export Credit Guarantee.

3. Export Production Finance Guarantee.

4. Export Finance Guarantee.

5. Export Performance Guarantee.

6. Export Finance(Overseas Lending)Guarantee.

Special Schemes of ECGC:

Special schemes consist of bundle of covers addressing the needs of banks and investors in foreign ventures.These schemes are targeted at specific audiences such as banks,investors in foreign countries and exporters taking up long term projects abroad,covering distinct risks faced by them.

Salient Features of the Scheme:

ECGC offers three types of special schemes:-

1. Transfer guarantee.2. Overseas investment insurance.3. Exchange fluctuation risk cover.

Transfer Guarantee: When a bank in India adds its confirmation to a foreign

Letter of Credit,it binds itself to honor the drafts drawn by the beneficiary of the Letter of Credit without any resource 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.Transfer Guarantee seeks to safeguard banks in India against losses arising of such risks.

Transfer Guarantee is issued,at the option of the bank to cover either political risks alone or both political and commercial risks. Loss due to political risk is covered up to 90% and loss due to commercial risk is covered up to 75%.

Overseas Investment Insurance: This scheme provides protection for Indian Investments

abroad.The features of this schemes are: Any investment made by way of equity capital or untied

loan for the purpose of setting up or expansion of overseas projects will be eligible for cove under investment insurance.

The investment may be either in cash or in the form of Indian capital goods and services.

The cover would be available for the original investment together with annual dividends or interest receivable.

As the investor would be having a hand in management of the joint venture, no cover for commercial risks would be provided under the scheme.

For investment in any country to qualify for investment insurance,there should preferably be a bilateral agreement protecting investment of one country in the other.ECGC may consider providing cover in the absence of any such agreement provided it is satisfied that the general laws of the country afford adequate protection to the Indian investments.

The period of insurance cover will not normally exceed 15 years in case of projects involving long construction period.The cover can be extended for a period of 15 years from the date of completion of the project subject to a maximum of 20 years from the date of commencement of investment.Amount insured shall be reduced progressively in the last 5 years of the insurance period.

Exchange Fluctuation Risk:

It covers exchange fluctuation risk of exporters of capital goods,civil engineering contractors and consultants who may have to receive foreign currency payments over a period of years for their exports, construction works or services. The features of this cover are:-

Exchange Fluctuation Risk Cover is available for payments 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 up to the final installment.

At the stage of bidding,an exporter/contractor can obtain Exchange Fluctuation Risk(Bid)Cover.The basis for cover will be a reference rate prevailing on the date of bid or rate approximating it.

The cover will be provided initially for a period of 12 months and can be extended if necessary.

If the bid is successful, the exporter/contractor is required to obtain Exchange Fluctuation (contract) cover for all payments due under the contract.The reference rate for the Bid Cover or the rate prevailing on the date of contract, at the option of the exporter/contractor.

If the bid is unsuccessful 75% of the premium paid by the exporter /contractor is refunded to him.

Cover will be available for all amounts receivable under the contract,whether it is payment for goods or services or interest or any other payment.Contracts coming under Buyer’s credit and Line of Credit are also eligible for cover under the schemes.

Cover under the schemes is available for payments specified in US Dollar,Pound Sterling,Deustche Mark,Japanese Yen,French Franc,Swiss Franc,UAE Dirham and Australian Dollar.However,cover can be extended for payment specified in other convertible currencies at the discretion of ECGC.

Exchange Fluctuation Risk Cover will normally be provided along with suitable credit insurance cover.However,cover can be granted independently also, in which case premium will be loaded by 20%.