The small & medium enterprises (SMEs) in India contribute 40% to the total exports directly and a significant amount of exports indirectly through large trading houses or third parties. However, in spite of their sizeable contribution to exports, less than 0.5% of SMEs are actually engaged in exports. Why do majority of SMEs shy away from exports?
There are several internal and external reasons. One of the major external barriers is the payment risk. The issue was studied in detail under the project ‘Strategies and Preparedness for Trade and Globalisation in India’, a ministry of commerce, Unctad and DFID initiative. The study suggested that SMEs may take the following steps to manage their payment risks and take remedial measures if bad debt does occur.
The first step in the management of export payment risk is to get a credit assessment report for the buyer. There are many agencies in India that provide credit worthiness reports on companies internationally. There are also companies which specialise on specific countries. Further, an SME can also approach its bank to secure a report on the buyer through its banking channels. Similarly, insurance companies help their customers getting credit reports. However, the information provided by these agencies only acts as an added comfort; it cannot be taken as guarantee against payment default later by the buyer.
Most credit assessment reports on international buyers are available for Rs 4,000-7,000 per report. The time taken for reports ranges from three to ten working days. The fees depends on the speed at which the report is required.
The next step is getting insurance for exports. In simple terms, the purpose of export credit insurance is to insure against the payment default. ‘Trade credit insurance’ or ‘credit insurance’ is an insurance policy and a risk management product offered by export credit agencies (ECAs) to business entities wishing to protect their balance sheet asset accounts receivable from loss due to credit risks such as protracted default, insolvency andbankruptcy. The export credit insurance market in India is dominated by Export Credit Guarantee Corporation (ECGC). Having been a monopoly until recently, it is believed to have 80-90% marketshare. After deregulation of the insurance sector, all three biggest global credit insurance companies—Euler Hermes, Atradius and Coface—have consolidated their presence in India as re-insurers. Major players in the credit insurance market in India include ECGC, Bajaj Allianz ICICI Lombard, Iffco-Tokio, New India Assurance and Tata AIG. The insurance cost varies from policy to policy and tend to cost between 0.3% and 1.0% of annual turnover, depending on previous bad debt history and current debt management practices.
Indian SMEs should take a note that most of the credit insuring companies in India do not cover risks such as commercial disputes; causes inherent in the nature of goods; buyer’s failure to obtain import licence; insolvency/default of agents like banks (other than the stock holding agent); risks covered by other general insurers like transit loss; exchange rate fluctuations for short term; failure of exporter to fulfil terms of contract, etc.
In spite of precautions, bad debt is an eventuality for which businesses need to prepare for. In such situations, professional assistance from debt collection agencies (DCAs) could be considered. Most collection agencies operate as agents of creditors and collect debts for a fee or percentage of the total amount owed. Some agencies, often referred to as ‘debt buyers’, purchase debts from creditors for a fraction of the debt’s value and pursue the debtor for the full balance.
Debt collection agencies in India have struck alliances across the world. When an SME approaches an agency for debt collection and provides details of bad debts, the agency quotes its success commission against recovery. The collection agency makes money only if it is collected from the debtor (often known as a ‘no collection, no fee’ basis). The agency takes a percentage of the debt that is successfully collected, sometimes known in the industry as the ‘pot fee’, or potential fee, upon successful collection. This does not necessarily have to be upon collection of the full balance and very often this fee is paid by the creditor if they cancel collection efforts before the debt is collected.
A contingent fee structure (‘no collection, no fee’) is pretty much the standard for collections around the world. Depending on the type of debt, the fee ranges from 10% to 50% (though more typically. the fee is 15-35%) plus the advanced upfront cost that is adjusted towards success fee. In case of litigation, the fee would go higher. Some agencies offer a flat fee, called ‘pre-collection’ or ‘soft collection’ service. Historically, fee is based on the size of the account, the amount collected and the type of handling (whether in-house or through
Source : Financial Express