Bangalore, Feb. 17 The Export Credit Guarantee Corporation (ECGC) of India has decided to maintain its credit risk rating on European countries that are on the brink of sovereign defaults.
Top officials of the ECGC said, “We are monitoring the situation, but as of now there is no change in the underwriting risks of the Euro- zone countries faced with distress.”
The countries facing sovereign debt stress include Portugal, Italy, Greece and Spain.
With ECGC holding on to its current risk rating, the implication is that the credit risk insurance premiums for these countries would remain unchanged at the current level.
These four countries together lift about $3.5 billion worth of Indian exports, mostly commodities, engineering goods and textiles.
ECGC is a public sector specialised credit risk insurance provider that guarantees export credits against payment risks by importers. ECGC premium on CRI is about 0.06 per cent of the sum assured.
Some private sector general insurers have, however, begun tightening risk premiums to these regions.
The largest private sector providers of credit risk insurance are ICICI Lombard General Insurance Company Ltd and Bajaj Allianz General Insurance Company Ltd.
Hike in Premiums
The ICICI Lombard Chief Executive Officer and Managing Director, Mr Bhargav Dasgupta, was categorical while talking about the possibility of a hike in premiums. “If risks escalate, underwriting premiums will have to obviously increase.”
But an ECGC official said, “At the moment, we have no plans to raise underwriting premiums as it will have a direct impact on exporters.”
ECGC's stance has also been endorsed by some public sector banks. Few banks have faced dishonour or delinquency on the letter of credits (LC) issued by the importers' banks.
Since 2008, though exporters have begun taking precautions after experiencing delayed payments from US-based auto component importers.
A top official of a public sector bank said, “As of now there are no problems. Exporters are receiving payments and there are no complaints of LCs being dishonoured.”
An LC is a communication from the bank of the buyer or the importer that the payments would be honoured and in the event of shortfalls, the bank would cover the payment obligations.
Moreover, domestic bankers here remained optimistic that sovereign defaults in these countries would not be allowed to happen.
Bankers said that they were advising all their export customers to take CRI covers from the ECGC to avoid risks. Besides, some banks were also insisting on ECGC CRI cover as a condition for discounting of export bills.
Despite the optimism, the bankers said, they were also unwilling to discount foreign bills or LCs on a without recourse basis.
Discounting export bills or LCs without recourse implies that the credit risk devolved on the banks. Instead, most banks discounted export bills or LCs only on full recourse basis, implying that in the event of defaults, the credit risk would devolve on the exporters.
Source : Business Line