MBA (IB) PART-TIME 2015-18

FINANCING OF INTERNATIONAL TRADE

ASSIGNMENT – I

Submitted by: Poulomi Mukherjee (#10)

Rinki Saha (#13)
Amit Kumar Hazra (#2)

SUBMITTED

TO
PROF (Dr.) Ashok Kapoor

INDIAN INSTITUTE OF FOREIGN TRADE

KOLKATA CAMPUS
Export Credit Guarantee Corporation of India

The ECGC Limited (Formerly Export Credit Guarantee Corporation of India

Ltd) is a company wholly owned by the Government of India based inMumbai,
Maharashtra. It provides export credit insurance support to Indian exporters and
is controlled by the Ministry of Commerce. GoI had initially set up Export Risks
Insurance Corporation (ERIC) in July 1957. It was transformed into Export Credit
and Guarantee Corporation Limited (ECGC) in 1964 and to Export Credit
Guarantee Corporation of India in 1983.

Functions of ECGC:

 Provides a range of credit risk insurance covers to exporters against loss

in export of goods and services as well.
 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 and advances.

Facilities by ECGC:

 Offers insurance protection to exporters against payment risks

 Provides guidance in export-related activities
 Makes available information on different countries with its own credit
ratings
 Makes it easy to obtain export finance from banks/financial institutions
 Assists exporters in recovering bad debt
 Provides information on credit-worthiness of overseas buyers
 Export Factoring facility for MSME sector which is a package of financial
products consisting of working capital financing, credit risk protection,
maintenance of sales ledger and collection of export receivables from the
buyer located in overseas country.

Need for export credit insurance:

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 THE 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.
Cooperation agreement with MIGA (Multilateral Investment Guarantee Agency)
an arm of World Bank. MIGA provides:
• Political insurance for foreign investment in developing countries.
• Technical assistance to improve investment climate.
• Dispute mediation service.
• It helps the exporter

PRODUCTS & SERVICES OFFERED BY ECGC:

ECIE Short-term: Turnover based
Shipments Comprehensive Risks Policy – (SCR)

An exporter whose annual export turnover is more than Rs.500 lakhs is eligible
for this Policy. This is a Standard whole turnover Policy wherein all shipments are
required to be covered under the policy.

Period of Policy: 12 Months

Exclusions Permitted:

• Exports to Associates
• Shipments backed by Letters of Credit

Risks Covered:

• Commercial Risk / Buyer Risk

• Political Risk
• L/C Opening Bank Risk

Percentage of Cover: 90%

Minimum Premium: Rs. 10,000/- shall be adjusted towards premiums

falling due on the shipments effected under the policy and is non-
refundable.

Important Obligations of the Exporter:

• Obtaining valid credit limit on buyers and banks from ECGC.

• Premium is payable in advance before commencement of risks and
sufficient premium deposit is also to be maintained in advance based on
the turnover projection at all times during the policy.
• Submission of Monthly declaration of shipments by 15th of the subsequent
 month.
• Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the subsequent
month.
• Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
• Initiating recovery steps including legal action.
• Sharing of recovery.

The risks covered under the Standard Policy:

Under the Standard Policy, ECGC covers, from the date of shipment, the following
risks:

a. Commercial Risks

I. Risks covered on the overseas buyers:

• Insolvency of the buyer.
• Failure of the buyer to make the payment due within a specified period,
normally four months from the due date.
• Buyer’s failure to accept the goods, subject to certain conditions.
II. Risks covered on the L/c opening Bank:
• Insolvency of the L/c Opening bank.
• Failure of the L/C opening bank to make the payment due within a specified
period normally four months from the due date.
• Insolvency of the L/c Opening bank.


b. Political Risks

• Imposition of restriction 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. 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.

Any other cause of loss occurring outside India not normally insured by general
insurers, and beyond the control of both the exporter and the buyer.

Small Exporters Policy – (SEP)

The Small Exporter’s Policy is basically the Standard Policy, incorporating certain
improvements in terms of cover, in order to encourage small exporters to obtain and
operate the policy. It is issued to exporters whose anticipated export turnover for the
period of one year does not exceed Rs. 5 crores . The Maximum Liability under the SEP
shall be fixed as per laid down guidelines, but shall not exceed Rs. 2 crores. The nature
of commercial risks and political risks cover is similar to that of the Shipment
Comprehensive Risk (SCR) or Standard policy.
The Small Exporter’s Policy is basically the Standard Policy, incorporating certain
improvements in terms of cover, in order to encourage small exporters to obtain and
operate the policy. It is issued to exporters whose anticipated export turnover for the
period of one year does not exceed Rs. 5 crores . The Maximum Liability under the SEP
shall be fixed as per laid down guidelines, but shall not exceed Rs. 2 crores. The nature
of commercial risks and political risks cover is similar to that of the Shipment
Comprehensive Risk (SCR) or Standard policy.

The salient features of Small Exporters Policy:

Period of Policy:
Small Exporter’s Policy is issued for a period of 12 months.

Minimum premium:
Premium payable will be determined on the basis of projected exports on an annual
basis subject to a minimum premium of Rs. 5000/- for the policy period. No claim
bonus in the premium rate is granted every year at the rate of 5%.

Declaration of shipments:
Shipments need to be declared monthly.

Declaration of overdue payments:

Small exporters are required to submit monthly declarations of all payments
remaining overdue by more than 60 days from the due date, as against 30 days in the
case of exporters holding the Standard Policy.

Change in terms of payment of extension in credit period:

In order to enable small exporters to deal with their buyers in a flexible manner, the
following facilities are allowed:
 A small exporter may, without prior approval of ECGC convert a D/P bill into
DA bill, provided that he has already obtained suitable credit limit on the buyer
on D/A terms.
 Where the value of this bill is not more than Rs.3 lacs, conversion of D/P bill
into D/A bill is permitted even if credit limit on the buyer has been obtained
on D/P terms only, but only one claim can be considered during the policy
period on account of losses arising from such conversions.
 A small exporter may, without the prior approval of ECGC extend the due date
of payment of a D/A bill provided that a credit limit on the buyer on D/A terms
is in force at the time of such extension.

Resale of unaccepted goods:

If, upon non-acceptance of goods by a buyer, the exporter sells the goods to an
alternate buyer without obtaining prior approval of ECGC even when the loss exceeds
25% of the gross invoice value, ECGC may consider payment of claims up to an amount
considered reasonable, provided that ECGC is satisfied that the exporter did his best
under the circumstances to minimize the loss. In all other respects, the Small
Exporter’s Policy has the same features as the Standard Policy.

Export Turnover Policy – (ETP)

Turnover Policy is for the benefit of large exporters who contribute not less than
Rs.10 lakhs per annum towards premium based on projection of the export
turnover of the policy holder for a year.This is a Wholeturnover declaration based
Policy wherein all shipments are required to be covered under the Policy.

Period of Policy: 12 Months

Exclusions Permitted:

• Exports to Associates
• Shipments backed by Letters of Credit

Risks Covered:

• Commercial Risk / Buyer Risk

• Political Risk
• L/C Opening Bank Risk

Percentage of Cover: 90%

Important Obligations of the Exporter:

• Obtaining valid credit limit on buyers and banks from ECGC.

• Premium is payable in four equal quarterly installments in advance before
commencement of risks and sufficient premium deposit is also to be
maintained in advance based on the turnover projection at all times during
the policy.
• Submission of Monthly declaration of shipments by 15th of the subsequent
month.
• Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the subsequent
month
• Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
• Initiating recovery steps including legal action.
• Sharing of recovery.

Highlights:

• Higher percentage of cover.

• Competitive premium rate.
 • No Claim Bonus (NCB) of 5% subject to no claim, upto a maximum of 50%.
• A turnover discount in the standard premium rate is offered subject to the
total discount including NCB being not less than 20% to those exporters
whose net annual premium payable exceeds Rs. 20 lacs.
• Additional discount in standard premium rate is offered if the actual
premium exceeds beyond 10% of the projected premium.
• Discrepancy cover for L/C transactions subject to certain conditions.
• Automatic cover for resale/reshipment up to 25% of Gross Invoice Value
(GIV).
• Availability of Discretionary Limits on buyers on conditions.
• Cover for Merchanting trade with prior approval by making necessary
endorsement.

Consignment Exports Policy (Stockholding Agent) – (CSA)

A method increasingly adopted by Indian exporters is to have an agency

agreement with independent and separate entities which receive and hold stocks
ready for sale to overseas buyers as and when orders are received, finds buyers
and sells to them in consideration of a commission on such sales. Thus, a separate
credit insurance policy as CSA is introduced to cover exclusively shipments made
by exporters on consignment basis to their agent.

Period of Policy: 12 Months


Risks Covered:

• Commercial Risk on Stockholding Agent and/or ultimate buyers

• Political Risk

Percentage of Cover: 90% for Standard Policyholder and 80% for others.

Important Obligations of the Exporter:

• Processing fee of Rs.4000/- (non-refundable) is payable.

• Premium is payable on quarterly or monthly basis in advance before
commencement of risks and sufficient premium deposit is also to be
maintained in advance based on the turnover projection at all times during
the policy.
• Obtaining credit limit on ultimate buyers beyond the discretionary limit.
• Submission of Monthly declaration of shipments by 15th of the subsequent
month along with statement of the stock with the agent and details of sales
effected to the ultimate buyers.

Highlights:

• Covers only the exports effected under consignment sale.

• Extended period for realization up to 360 days.
• Automatic cover on ultimate buyers up to discretionary limits subject to
buyers being in a country placed in Open Cover category and not in the list
of buyers on whom the Corporation has adverse information referred to as
Buyer Specific Approval List (BSAL)
 • Commercial risks on agents covered.
• No Claim Bonus (NCB) of 5% subject to no claim, upto a maximum of 50%.

Specific Shipment Policy – (SSP)

These policies can be availed of by exporters who do not hold any of the Standard
Policy/Wholeturnover Policy or by an exporter having a Standard Policy, wherein
shipments have been excluded from the purview of cover. Exporter can pick and
choose the contract/shipment to be covered and indicate the type of risk cover
required.

Period of Policy :

The policy would be valid for shipment(s) made from the date of issue of the policy
and upto the last date for shipment under the relevant contract.

Risks Covered:

• Commercial Risk / Buyer Risk

• Political Risk
• L/C Opening Bank Risk

Percentage of Cover: 80%

Important Obligations of the Exporter:

• Processing fee of Rs.2000/- (non-refundable) is payable.

• Upfront premium payment in full.
• Submission of Monthly declaration of shipments by 15th of the subsequent
month.
• Submission of Payment Advice Slip (PAS).
• Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the subsequent
month.
• Submission of Payment Advice Slip (PAS).
• Notifying/Declaration of payments for bills that have remained unpaid
beyond 30 days from its due date of payment, by the 15th of the subsequent
month.
• Filing of claim within 360 days from the due date of the export bill or 540
days from expiry date of the Policy Cover whichever is earlier.
• Initiating recovery steps including legal action.
• Sharing of recovery.

Highlights:

• Selection of Insurance cover.

 • All other exports, if any, not to be declared.
• Cover for merchant trade with prior approval by making necessary
endorsement.

ECIE Short-term: Exposure based

Buyer Exposure Policy (SBEP)

The Buyer Exposure Policy is to insure exporters having a large number of shipments
to a particular buyer with simplified procedure and rationalized premium. An exporter
can choose to obtain exposure based cover on a selected buyer. The cover would be
against commercial and political risks. The option to exclude L/C shipment is available.
If L/C shipment has been opted for commercial and political risks cover, failure of L/C
opening bank with World Rank upto 25000 as per latest Banker’s Almanac is available.
If exporter opts for only political risks, premium at lesser rate is offered.

Period of Policy: 12 months

Risks Covered:
• Commercial Risk / Buyer Risk
• Political Risk
• L/C Opening Bank Risk

Percentage of Cover: 90% for Standard Policyholders and 80% for others.

Important Obligations of the Exporter:

 Processing fee of Rs.2000/- (non-refundable) is payable.
 Upfront premium payment in full on the Loss Limit.
 Obtaining prior approval for extending the due date of payment of the export
bill where the total credit period of realization exceeds180 days.
 Notifying/Declaration of payments for bills that have remained unpaid beyond
30 days from its due date of payment, by the 15th of the subsequent month.
 Filing of claim within 360 days from the due date of the export bill or 540 days
from expiry date of the Policy Cover whichever is earlier.
 Initiating recovery steps including legal action.
 Sharing of recovery

Highlights:
 Protection is available upto the Loss Limit approved on the buyer under the
Policy.
 Premium is payable only on the Loss Limit approved on the buyer, irrespective
of the shipments effected to the buyer.
 No Claim Bonus (NCB) of 5% subject to non claim, upto a maximum of 50%.
 Declaration procedure waived.
 Separate Policy per buyer.
  Selective buyer can be insured.

IT-Enabled Services Policy-Single Customer (SITES)

IT-enabled Services (Single Customer) Policy would be given in respect of contracts for
rendering service during a defined period with billing on the basis of service rendered
during a period say, a week, a month or a quarter. One policy for one buyer shall be
issued.

Period of Policy: 12 Months

Risks Covered:

• Commercial Risk / Buyer Risk

• Political Risk
• L/C Opening Bank Risk

Percentage of Cover: 80%

Distinct Characteristics OF ITES Contracts:

 Contract is for providing certain service during a defined period.

 Billing for the service rendered at a pre-determined interval.
 Where there is a non-payment problem, there can be certain services invoiced
and accepted, certain services invoiced but not accepted and certain services
rendered but yet to be invoiced.
 No requirement of physical documentation as the process is carried out
through electronic media.
 Provision for correction in case of errors and omissions.
 Filing of claim within 360 days from the due date of the export bill or 600 days
from expiry date of the Policy Cover whichever is earlier.
 The policy will be offered for contracts, which contain standard terms and
conditions as per the norms and practices of the IT-enabled Services export
industry.
 Right to verify documents by the Corporation or by an authorized agency.

ECIE Medium & Long Term

Construction Works Policy – (CWP)

Construction Works Policy 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:
(a) the contractor keeps raising bills periodically throughout the contract period for
the value of work done between one billing period and another.
(b) to be eligible for payment, the bills have to be certified by a consultant or
supervisor engaged by the employer for the purpose and
(c) that, unlike bills of exchange raised by suppliers of goods. The bills raised by the
contractor do not represent conclusive evidence of debt but are subject to payment
in terms of the contract which may provide, among other things, for penalties or
adjustments on various counts.

The scope for disputes is very large. Besides, the contract value itself may only be an
estimate of the work to be done, since the contract may provide for cost escalation,
variation contracts, additional contracts, etc. It is, therefore, important that the
contractor ensures that the contract is well drafted to provide clarity of the obligations
of the two parties and for resolution of disputes that may arise in the course of
execution of the contract. Contractors are well advised to use the Standard Conditions
of Contract (International) prepared by the Federation International Des Ingenieurs
Conseils (FIDIC) jointly with the Federation International du Batiment et des Travaux
Publics (FIBTP).

What are the risks covered by Construction Works Policy?

The Construction Works Policy of ECGC is designed to protect the Contractor from that
may be sustained by him due to the following risks:
 Insolvency of the employer (when he is a non-Government entity);
 Failure of the employer to pay the amounts that become payable to the
contractor in terms of the contract, including any amount payable under an
arbitration award;
 Restrictions on transfer of payments from the employer’s country to India
after the employer has made the payments in local currency;
 Restrictions on transfer of payments from the employer’s country to India
after the employer has made the payments in local currency;
 Failure of the contractor to receive any sum due and payable under the
contract by reason of war, civil war, rebellion, etc;
 The failure of the contractor to receive any sum that is payable to him on
termination or frustration of the contract if such failure is due to its having
become impossible to ascertain the amount or its due date because of war,
civil war, rebellion etc;
 Imposition of restrictions on import of goods or materials (not being the
contractor’s plant or equipment) or cancellation of authority to import such
goods or cancellation of export license in India, for reasons beyond his control;
and
 Interruption or diversion of voyage outside India, resulting in his incurring in
respect of goods or materials exported from India, of additional handling,
transport or insurance charges, which cannot be recovered from the employer.

Loss coverage: 85%

Important Obligations:
• Obtain indicative premium rate at bid stage
• Seek post awarded approval from AD/WG on award of contract
• Obtain in-principle approval
• Seek cover after payment of premium
• Advise progress of project in accordance with PEM guidelines
• Declaration of overdue payments
• Filing of claim within 12 months from due date
• Sharing of recovery

Highlights:

• Cover can be either for political or comprehensive risks

• Cover for full insurable value including retention portion
• Cover for third country exports as well
• Premium can be paid in installments
• Reduced loss coverage with proportionate reduction in premium.
• Reduced premium for projects funded by Multi-lateral agencies.

Letter of Credit confirmation Cover

Transfer Cover
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
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.

This may happen due to the insolvency or default of the opening bank or due to certain
political risks such as war, transfer delays or moratorium, which may delay or prevent
the transfer of funds to the bank in India. The Transfer Cover seeks to safeguard banks
in India against losses arising out of such risks.

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

What are the applicable premium rates?

The premium rates depend on the country of export and the tenor of L/C.