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Risks in Foreign Trade - Role of ECGC
Risks in International Trade
Foreign trade risk may be defined as Uncertainty or Unplanned events with financial consequences resulting into loss. Types of Risks are as under:
Buyers’ Risk: Non-Acceptance or non-payment
Sellers’ Risk: Non- shipping or Shipping of poor quality goods or delay.
Shipping Risk: Mishandling, Goods siphoned off, Strike by potters or wrong delivery.
Other Risks:
Credit Risk
Legal Risk
Country Risk
Operational Risk
Exchange Risk
Country Risk
Provision of risk is made if Exposure to one country is 1% or more of total assets. ECGC has the list of Country Risk Ratings which can be referred to by the Banks and the banks can make their own country risk policy.
Risk Classification of Countries
Export Credit and Guarantee Corporation provides guarantee cover for risks which can be availed by the banks after making payment of Premium. ECGC adopts 7 fold classification covering 204 countries. The list is updated and published on quarterly basis. The latest classification is as under:
Insignificant Risks A1
Low Risk A2
Moderately Low Risk B1
Moderate Risk B2
Moderately High Risk C1
High Risk C2
Very High Risk D
Besides above, 20 countries have been placed in “Restricted Cover Group-1” where revolving limits are approved by ECGC and these are valid for 1 year.
The other 13 countries are placed in “Restricted Cover Group-2” where specific approval is given on case to case basis by ECGC.
ECGC ECGC was established in 1964. Export Credit and Guarantee Corporation provides guarantee cover for risks which can be availed by the banks after making payment of Premium. Its activities are governed by IRDA. The functions of ECGC are 3 fold:
It rates the different countries.
It issues Insurance Policies.
It guarantees proceeds of Exports.
Types of Policies:
Standard Policies
It provides cover for exporters for short term exports. These cover Commercial and Political Risks.
The different types of Policies are:
Shipment (Comprehensive Risk) Policy – to cover commercial and political risks from date of shipment. Default of 4 months.
Shipment (Political Risks) Policy.
Contracts (Comprehensive Risk) Policy for both commercial and Political risks.
Contracts (Political Risks) Policy
Small Exporters’ policy
A small exporter is defined whose anticipated total export turnover for the period of 12 M is not more than 50 lac. The policy is issued to cover shipments 24 M ahead.
The policy provides cover against Commercial risks and Political risks covering insolvency of the buyer, failure of the borrower to make payment due within 2 months from due date, borrower’s failure to accept the goods due to no fault of exporter.
Specific Shipment Policy
Commercial risks – Failure to pay within 4M. It covers short term credit not exceeding 180 days Exports Specific Buyer Policy
Commercial risks – Failure to pay within 4M and Political Risks
The other Policies are Exports (specific buyers’ Policy), Buyers’ Exposure Policy, Export Turnover Policy (exporters who pay minimum 10 lac premium to ECGC are eligible) and Consignment export Policy.
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