The Export Credit Guarantee Corporation of India (ECGC) has imposed liability cap on credit risk insurance for the US market to contain losses.
The Chairman and Managing Director of ECGC, Mr A.V. Muralidharan, said, “We have imposed the cap as a matter of prudence as losses from the region have been mounting.”
Cap Exemption
The corporation’s liability cap on credit risk insurance on exports to the US market is Rs 50 lakh. ECGC is a specialised credit risk insurance agency that guarantees export credits against payment risks by importers.
Mr Muralidharan clarified that the cap would not apply to wholesale cover or supplies to multiple importers. This is because wholesale risks are diversified and the insurers’ losses would be considerably lower.
According to Mr Muralidharan, the cap would also not apply to exposures to non-US destinations – Africa, Latin America and Europe.
The imposition of the cap on credit risk insurance comes less than a year after ECGC froze exposures to the US auto majors – General Motors, Chrysler and Ford Motors.
ECGC officials said the decision was triggered by the mounting claims from exporters on US imports. The officials said there was a 40 per cent increase in claims from exporters to the US, though no absolute figures were revealed.
Mr Muralidharan said the corporation already faced negative underwriting margins for the first time on exporters to US destinations. He said ECGC premiums collected from exporters to the US are about 22 per cent of its gross premium collections. “Claims are more than 100 per cent on this region,” he added.
Despite the liability cap and negative underwriting margins on US exposures, the guarantor is not contemplating any hike in premiums.
The corporation last reduced premiums in 2007. The premium is about 0.06 per cent.
Bankruptcy protection
ECGC officials estimated that at least 25 per cent of the claims were on account of US importer payment delinquencies.
The cap was also partly on account of provisions of the US bankruptcy code under Chapter 11 that imposed an automatic stay on creditors. With such bankruptcy-related stays, delinquencies have been mounting. Banks were therefore unwilling to purchase foreign bills and were insisting on redemptions.
According to the Reserve Bank of India data, foreign bills purchased this financial year was a negative Rs 2,352 crore. For the corresponding period of last financial year, banks had purchased export bills worth Rs 2,197 crore.
Besides, rollover of export credit is also not being permitted on a non-recourse basis unlike in the past. A top bank official said, “Letters of credit are not enough. We are also insisting on physical asset cover and personal guarantees.”
Further, international foreign banks are also cautious about rediscounting US importer bills, despite improved dollar liquidity in the global markets.
Source : Business Line