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What is Credit Insurance? How is it Beneficial to Exporters?

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Insurance is a sum which compensates an insured business or company for the loss directly caused by the failure of its customer to pay all or part of its debt within the waiting period.

 

This may arise due to a buyer risk, while it can be foreign government problem, which can be beyond the insured's control. Any delay in payments due to political turmoil can hamper the growth of the company.

 
What is Credit Insurance? How is it Beneficial to Exporters?

Let us understand better with example, a fast growing clothing company was jolted when their largest customer, a retail giant, declared insolvency. The unexpected failure caused crores of rupees in receivable losses nationwide. In such cases, credit insurance can help the company depending on the amount and valuation they have insured.

ECGC (Export Credit Guarantee Corporation) is permitted to sell all kinds of credit policies, which is owned by Govt. of India.

There are two types of coverage offered based on commercial risk and political risk

Commercial Risk, which covers the following points:

1) Non-payment due to buyer insolvency

2) Delay in payment (Protracted Default)

3) Non-acceptance of goods

4) Contract Repudiation

Political Risks - only for exports

1) Inconvertibility

2) Contract Frustration due to war, civil war, rebellion etc.

3) Contract Cancellation by Govt. of Insured Buyer

4) Export/ Import restrictions

5) Shipment Diversion

How credit insurance is beneficial to exporters?

1) Credit insurance covers, exporters against credit risk losses in export of goods & services.

2) It also covers to banks to protect them against risks of non payment by exporters both under Short term and Medium and LT

3) To protect Indian Entrepreneurs investing in Overseas Ventures (Equity/Loans) against expropriation risks

4) It protects exporters in respect of their exchange losses under Medium and LT exports

5) It protect against trade credit risk losses

6) Releases bad debt provisions

7) It can be used as hedges against financial misfortune.

8) It improves the cash flow, improves financial health

9) Safer business expansion

10) Protecting the Company balance sheet

What it does not cover?

Credit Insurance does not cover any loans, leasing, guarantees, any disputes, and any risk on private person.

GoodReturns.in

Read more about: credit insurance credit risk
Story first published: Monday, December 15, 2014, 10:18 [IST]
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