IGNOU : M.COM : IBO 4 : UNIT 9 : Q - 2. Describe the different kinds of policies and financial guarantees issued by the ECGC.

 

Ans. TYPES OF COVER ISSUED BY ECGC

The covers issued by ECGC can be broadly divided into four groups:

i) Standard policies issued to exporters to protect them against payment risks involved in exports on short- term credit;

ii) Specific Policies designed to protect Indian firm against payment risk involved in (a) exports on deferred terms of payment (b) services rendered to foreign parties and (c) construction works and turnkey projects undertaken abroad;

iii) Financial Guarantees issued to banks in India to protect them from risks of loss involved in their extending financial support to exporters at the pre-shipment as well as post-shipment stages; and

iv) Special Schemes, viz., Transfer Guarantee meant to protect banks which add confirmation to Letters of Credit opened by foreign banks, Insurance cover for Buyer's Credit, Line of Credit, Overseas Investment Insurance and Exchange Fluctuation Risk Insurance.

Standard Policies

The ECGC has designed four types of Standard policies to provide cover for shipment made on short-term credit.

i) Shipments (Comprehensive Risks) Policy - to cover both commercial and political risks from the date of shipment.

 ii) Shipments (Political risks) policy -to cover only political risks from the data of shipment.

 iii) Contracts (Comprehensive Risks) Policy - to cover both commercial and political risks from the date of contract.

 iv) Contracts (Political Risks) Policy - to cover only political risks from the date of contract.

The shipments (Comprehensive Risks) Policy is the one ideally suited to cover risks in respect of goods exported on short-term credit. This policy covers both commercial and political risks from the date of shipment. Risk of pre-shipment losses due to frustration of export contracts is nil or very low since goods exported on short- term credit are raw materials, primary goods, consumer goods or consumer durables which can be resold easily. Contract policies, which cover risk from the date of contract, are issued only in special cases when goods to be exported are manufactured to non-standard specifications of a buyer.

Specific Policies

Contracts for export of capital goods or projects for construction works and for rendering services abroad are insured by ECGC on a case to case basis under specific policies. Special mention may be made of the services policy to protect Indian firms against payment for their services. At the same time, the construction works policy aims to cover all payments that fall due to a contractor under a composite contract for execution of civil engineering works which may involve provision of services as well as supply of materials.

Specific Policy for Supply Contracts : This policy may take any of the following four forms-

i) Specific shipments (Comprehensive Risks) policy to cover both commercial and political risks at the post- shipment stage.

ii) Specific Shipments (Political Risks) Policy to cover only political risks at the post-shipment stage in cases where the buyer is an overseas Government or payments are guaranteed by a government or by banks, or are made to associates.

 iii) Specific Contracts (Comprehensive Risks) Policy.

 iv) Specific Contracts (Political Risks) Policy.

Services Policy

When Indian firms render services to foreign parties, they would be exposed to payment risks similar to those involved in export of goods. Services policy offer protection to Indian firms against such payment risks. The policy has been designed broadly on the lines of ECGC insurance policies covering export of goods, and is issued to cover specific transactions.

Four types of policies are available:

i) Specific Services Contract (Comprehensive Risks) policy to cover commercial as well as political risks;

ii) Specific Services Contract (Political Risks) policy to cover political risks only.

iii) Whole turnover Services (Comprehensive Policy) and

iv) Whole Turnover Services (Political Risks) Policy

Construction Works Policy

Construction Works Policy has been designed to Indian contractor who executes a civil construction Job abroad. This policy protects the contractor from 85% of the losses that may be sustained by him due to various risks.

FINANCIAL GUARANTEES

Exporters require adequate financial support from banks to carry out their export contracts. ECGC's guarantees protect the banks from losses on account of their landings to exporters. These guarantees have been designed to encourage banks to give adequate credit and other facilities for exports, both at pre- shipment and post-shipment stages on a liberal basis.

Six guarantees have been evolved for the purpose:

1) Packing Credit Guarantee

2) Export Production Finance Guarantee

3) Post-Shipment Export Credit Guarantee

4) Export Finance Guarantee

5) Export Performance Guarantee

6) Export Finance (Overseas Lending) Guarantee

These guarantees give protection to banks against losses due to non-payment by exporters on account of their insolvency or default. ECGC pays three- fourths of the loss in the case of Post-Shipment Export Credit Guarantee, Export Finance Guarantee, Export Performance Guarantee and Export Finance (Overseas Lending) Guarantee and two-thirds of the loss in others

The Corporation agrees to pay higher percentage of loss to banks which offer to cover all their pre- shipment advances under a whole turnover Packing Credit Guarantee. Similarly, a higher percentage of cover is offered under post-shipment export credit guarantee if the bank agrees to cover all its post-shipment advances on whole turnover basis.

In the case of export performance Guarantee and export finance (Overseas Lending) Guarantee, ECGC provides higher cover of 90 per cent of the loss on payment of proportionately higher premium.