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ECGC: Export Credit & Guarantee Corporation Limited

Understanding Export Credit Guarantee Corporation (ECGC) and Other Risk Mitigation in International Trade

This document outlines the role of the Export Credit Guarantee Corporation (ECGC) in India and how it helps exporters mitigate risks, along with other forms of risk management in international trade.

Role of Public Sector Organizations in Covering Credit Risk

  • Global Presence: Most countries have public sector organizations designed to cover credit risks for exporters, fostering international trade.
  • Support for Exporters: These entities provide essential financial backing to encourage businesses to engage in export activities.

Export Credit Guarantee Corporation of India Limited (ECGC)

History and Evolution

  • 1957: Established as Export Risks Insurance Corporation (ERIC).
  • 1964: Renamed as Export Credit & Guarantee Corporation Limited (ECGC).
  • 1983: Renamed again to its current name: Export Credit Guarantee Corporation of India Limited.
  • Government Affiliation: Operates under the Ministry of Commerce, Government of India.
  • Board of Directors: Governed by a board with representation from the government, banking, insurance, and exporter communities.

Core Function

ECGC’s primary role is to provide export credit insurance support to Indian exporters, protecting them against various payment risks associated with international trade.

Types of Cover Issued by ECGC

ECGC offers two main types of policies:

  1. Standard Policies
    • Designed for short-term credit shipments.
    • Four Key Policies:
      • (a) Shipments (Comprehensive risks) policy: Covers both commercial and political risks.
      • (b) Shipments (Political risks) policy: Covers only political risks.
      • (c) Contracts (Comprehensive risks) policy: Covers both commercial and political risks related to contracts.
      • (d) Contracts (Political risks) policy: Covers only political risks related to contracts.
    • Risks Covered:
      • Commercial Risks:
        • Insolvency of the buyer (e.g., bankruptcy).
        • Protracted default in payment (extended delay).
        • Buyer’s failure to accept goods (without fault by exporter), under special policy conditions.
      • Political Risks:
        • Restrictions imposed by the buyer’s government on remittance of sales proceeds.
        • War, revolution, civil unrest in the buyer's country.
        • New import restrictions in the buyer’s country.
        • Cancellation of valid export license or new licensing restrictions post-contract.
  2. Specific Policies
    • Tailored for specific situations:
      • Exports on deferred payment contracts (e.g., where payments are spread over time).
      • Services rendered to foreign parties.
      • Construction works and turnkey projects abroad.

Financial Guarantee

  • ECGC also issues financial guarantees to banks covering risks related to extending credit at pre-shipment and post-shipment stages.

What ECGC Doesn't Cover

  • ECGC policies do not cover risks arising from:
    • Contractual disputes between exporter and buyer.
    • Causes inherent to the nature of the goods themselves (e.g., poor quality, natural spoilage).

Foreign Exchange Risk

Definition

  • Occurs when invoices are prepared in a foreign currency, with the potential for fluctuations impacting the value when converted back to the home currency (in this case, Indian rupees).

Impact of Currency Fluctuations

  • Depreciation: If the foreign currency depreciates against the rupee, the exporter will receive a lesser amount in rupees.
  • Appreciation: If the foreign currency appreciates against the rupee, the exporter will receive a greater amount in rupees.

Responsibility for Risk

  • LC Transactions: If the export bill is purchased or negotiated under a Letter of Credit (LC), the bank will typically bear the foreign exchange risk.
  • Collection Basis: If there’s a time gap between submitting the bill for collection and its actual realization, the exporter bears the risk of exchange rate fluctuations.

Hedging Foreign Exchange Risk

  • Forward Contracts: Lock in a specific exchange rate for future transactions, removing the risk of exchange fluctuations.
  • Invoicing in Home Currency: Invoice in Indian rupees, which avoids the need for currency exchange and associated risk.

Transferring Risks to Third Parties

Insurance Agencies

  • Exporters can transfer risks to third-party entities, including:
    • ECGC: For credit risk (as discussed above).
    • General Insurance Companies: For physical risk (damage to goods in transit) and product liability risk.
    • Banks: For foreign exchange risk through forward or option contracts.

Table of Risks and Responsible Agencies

Category of Risk Agency
Credit Risk ECGC
Physical Risk General Insurance Company
Product Liability Risk General Insurance Company
Foreign Exchange Risk Banks (via hedging instruments)

Types of Insurance in International Trade

Insuring Goods in Transit

  • Definition: "Goods in transit" are merchandise shipped by the exporter but not yet received by the importer.
  • Purpose: "Goods-in-transit" insurance offers financial protection against loss of or damage to goods during transportation.

Cargo Insurance

  • Coverage: Provides "goods-in-transit" insurance, covering loss or damage while goods are in transit by land, sea, or air.
  • Policy Variations:
    • Basic policies cover accidental damage.
    • Comprehensive all-risk policies provide broader protection including damage during loading, theft, and negligence.
  • Cost Factors: The cost of insurance depends on:
    • Value of the goods.
    • Whether the journey is domestic or international.
    • The scope of the cover.
  • Limited Liability: Without insurance, goods receive minimal protection due to the limited liability of freight forwarders and carriers.
  • Types of Cover:
    • Open Cover: Available for all journeys.
    • Specific (Voyage) Policy: Covers one-off shipments.
    • Seller’s Interest Contingency: Back-up for physical loss or damage when other parties haven’t arranged coverage.

Export Credit Insurance (ECI)

  • Purpose: Protects exporters against the risk of non-payment by foreign buyers.
  • Coverage: Covers situations where foreign buyers cannot pay due to various reasons.
    • Commercial Risks: Insolvency, bankruptcy, protracted defaults/slow payment.
    • Political Risks: War, terrorism, riots, revolution, currency inconvertibility, expropriation, changes in import/export rules.

Product Liability Insurance

  • Definition: Protects the exporting firm from claims related to the manufacture or sale of products that cause damage to a third party (person or property).
  • Coverage: Covers the manufacturer's or seller's liability for losses or injuries caused by a defect, malfunction, defective design, or failure to warn.
  • Why Exporters Need This:
    • Safety claims
    • Manufacturing defects
    • Spoilage costs
    • Legal/defense costs
    • Medical costs

In conclusion, the ECGC, along with cargo insurance and product liability insurance, plays a vital role in protecting exporters from risks in international trade. These risk management solutions help companies engage more confidently in global commerce.

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