IGNOU : M.COM : IBO 4 : UNIT 9 : Q - 3. "Credit is a major weapon of international competition but it involves risk." Discuss.

 

Ans. Competition in foreign markets is more keen than in the domestic market. Overseas customers are sought after by exporters from many countries. Competition is getting keener still due to an all round effort on the part of all countries to increase their exports', Indian exporters have to compete with exporters from other countries not only in respect of quality, price, delivery schedules, etc., but also in respect of payment terms. Their success would depend upon the ability to offer competitive terms of credit to the foreign buyer's terms of credit on par with Export Credit on par with those offered by exporters from competing countries. Risks are inherent in all credit transactions but more in export transactions. The fact that the buyer may not pay either due to insolvency or for any other reason exposes the exporter to the credit risk. Credit risk may arise even in cases where the buyer's credit standing has been thoroughly investigated. Too cautious an attitude in evaluating buyers may result in loss of hand to get business opportunities. Hence, credit risk is unavoidable specially in export business.

Credit risk is greater in export transactions because reliable information about foreign buyers is difficult to obtain and hence, it is difficult to evaluate their credit worthiness. Credit risk has assumed large proportions today not only because the volume of export transactions has become larger but also because far-reaching political and economic changes that are sweeping the world. An outbreak of war, civil war, coup or an insurrection may block or delay the payment for goods exported. Balance of payment difficulties may lead to transfer delays. And all this is possible even when the buyer is fully in a position to pay. In addition, one has to contend will1 the possibilities of the insolvency or protected default of the buyers. In recent years there has been a significant increase in insolvencies and business failures even in many developed countries. In such a high risk situation export credit insurance can be of immense help to (i) exporters and (ii) the banks who provide finance for the export transactions.