Risk is an inherent part of any business be it domestic or international. In international trade, risks arise majorly due to parties not knowing each other, invoicing in different currencies, exchange rate losses, default or insolvency of the buyer or the bank etc. There are more uncertainties and risks in international logistics as a result of the globalization of the supply chain, changing product life cycles, multi-variety, and low-volume production, as well as the quick changes in the market environment and technical level. As India moves towards increasing its share in global trade around the world, the number of MSMEs exporting and importing has been increasing at an exponential rate. It is important for MSMEs to understand all risks associated with global trade and how the Indian authorities have created safeguards and insurance products that can help MSMEs cover 90% of their losses. In this blog, we explain some of the key risks related to international trade and how export credit agencies such as ECGC play a crucial role in mitigating losses. In FY22, ECGC had extended support to exports worth Rs 6.18 lakh crore and over 6,700 exporters benefitted through the direct cover issued to exporters of which around 96% of these are small exporters.
Keys Risks
1) Credit Risks- The utmost worry for any exporter is the realization of payments from the importer. In today’s competitive scenario, it is rare for exporters to get advance payments and hence opt to sign up for riskier payment options. Non-payment might arise due to the following cases:
a. Insolvency of importer
b. Wilful default by importer (common from least developed nations)
c. Non-payment due to country sanctions or shortage of forex reserves
d. Insolvency of importers’ bank
2) Force Majeure- Also known as ‘Act of God’, force majeure is a key risk that may result in obstruction in logistics, cancellation of contracts and non-payment arising due to earthquakes, cyclones, hurricanes, tsunami, acts of terrorism etc.
3) Shipping risks- Issues such as contamination, seizure, accident, vandalism, theft, loss, and breakage are a huge risk for the importer and exporter. Sufficient insurance covers should be opted by both parties to safeguard themselves from these risks
4) Intellectual Property risks- IPR risks have the tendency to increase multifolds when operating business internationally. This risk involves unauthorized third parties using a company’s strategic knowledge or property in a way that has an impact on the value of the services or goods the exporter offers
5) Country risks- These risks are macroeconomic in nature and include risks like disturbed economic stability, worsened political stability, time-consuming and lengthy legal system, language barriers, foreign exchange risks, high external debts on the country etc. All these risks hinder the ability of the importer and exporter to comply with the clauses in the contracts which might lead to loss for the business owner
ECGC & the role of Export credit agencies
Export credit agencies such as Export Credit Guarantee Corporate of India play a critical role in mitigating the loss related to above listed risks. Export credit agencies such as the ECGC offer loans, loan guarantees and insurance to help domestic companies limit the risk of selling goods and services in overseas markets and promote exports of the country. It underwrites the risks proportion of various countries and advises exporters regarding payment risks from certain countries and importers. It provides insurance for a premium for any transaction with foreign countries which varies according to the risk associated with the country.
In recent years, export growth for MSMEs has been a point of focus for the Indian government. In June 2023, ECGC increased the insurance cover from from 60% to 90% for all exporters with a credit limit of Rs. 20 crores which was earlier limited to exporters with a credit limit of Rs. 50 crores. This will enable small exporters to explore new markets & buyers and diversify their existing product portfolio. The process of availing the scheme will be fully digitised and is set to support export of Rs 10 Lakh crore in FY24.
Some other ways in which The Export Credit Guarantee Corporation of India helps the exporters of the country are:
1) Providing credit ratings and information on various countries and the risks associated with doing business with these countries.
2) Sharing data on the credit situation of foreign importers
3) Assisting exporters in recovering their bad debts
4) Offering several types of insurance covers such as
a. Standard policies that protect against foreign credit risks
b. Construction works and services policies
c. Finance-based guarantees
d. Special types of guarantees such as post-shipment export credit and packing credit
Contact experts at Trigon Synergies and let us handle your ECGC cover process for you. Call us today and protect your business from any risks.
