Transcript Export Credit Risks and ECGC’s Schemes for Banks

Country Risk Analysis
A presentation by ECGC
What is Risk?


Uncertainty about
the future
outcome
 Lack of
knowledge
 Imperfection in
knowledge
Possibility of Loss
Export Credit Risk



Exports
 Goods
 Services
Credit
 Extending supplier credit:
DP, DA, OA
Risk
 Possibility of nonpayment of accounts
receivables
Types of Export Credit Risks
Credit
Risk
Political
Risk
Legal
Risk
Export
Credit
Risk
Transfer
Risk
Exchange
Risk
Political Risk

Some countries may experience major
political instability
defaults on payments leading to…
 exchange transfer blockages
 nationalization
 confiscation of property

Credit Risk

The risk of
 Insolvency
 Default
 Fraud
 Unwillingness to accept the goods on
the part of the buyer
All resulting in…..
Credit risk
Exchange Risk

The possibility of variability
in the exchange rate on
account of the time lag
between the date of
contract and actual
payment is referred to as
'Exchange Risk'
Transfer Risk..
Weakness in economy
of Buyer's country,
viz. low reserves,
BOP problems
Failure of Buyer's
Bank affecting
payment of
outstandings
Exchange or trade
controls introduced
in Buyer's country
…arising from all/any of the above
Legal Risk


Differences in law can be expected in
overseas countries
These may have an impact in such areas as:
•
•
•
•
•
•
•
import procedures
taxation
employment practices
currency dealings
property rights
the protection of intellectual property
agency/distributorship arrangements
Export Credit Insurance

Export Credit insurance is cover offered
by insurance companies which
encompasses the risk of non-payment
within export operations
Risks covered by export credit insurers:
Commercial Risk
Political Risk
Factors Leading to Commercial
Risks
Buyer’s willingness
to pay:
Behavior of the
debtor
Buyers ability to
pay:
Debtors financial
condition
Commercial Risks


Insolvency/ Bankruptcy
Breach of Contract


Payment Default
Refuse to take delivery of goods
Ability or behavior?
Political Risks

Political risks cover events that occur
abroad other than commercial risks such
as:
The general political risk
The natural catastrophe risk
The non-transfer risk
Methods of Political Risk Control
by Credit Insurers

Country Risk Classification:
The arrangement on Guidelines for
Officially Supported Export Credits is a
"Gentlemen's Agreement" among OECD
Participants. The Arrangement, including
the Knaepen Package, gives a seven
fold classification of countries, which is
used by many export credit insurers
Methods of Political Risk Control
by Credit Insurers
The Country Risk Classification Method measures
the country credit risk, i.e. the likelihood that a
country will service its external debt
It uses an econometric
It takes account of
model based on
possible qualitative
quantitative indicators,
factors, e.g. political &
e.g. the financial &
other economic &
economic situation &
financial factors not incl.
the payment experience
in the quantitative
of the countries
Econometric Model
Methods of Political Risk Control
by Credit Insurers
The final classification, based only
on valid country risk elements, is a
consensus decision of the subGroup of Country Risk Experts
that involves the country risk
experts of the participating Export
Credit Agencies
Role of ECGC as an Export
Credit Insurer
Providing credit insurance covers to exporters
against loss in export of goods & services
Providing export credit guarantees to banks &
FI’s to enable exporters obtain better facilities from
them
Providing Overseas Investment Insurance to
Exporters - Indian Entrepreneurs in Overseas
Ventures (Equity/Loans)
Maturity Factoring
Policy
INSURER
ECGC
INSURED
EXPORTER
RISKS BUYER/
COUNTRY
Risks Covered by ECGC under
ST Policies
POLITICAL RISK
(Open Cover &
Restricted cover
COMMERCIAL RISK
COUNTRY
BUYER
BANK
NON – LC
LC
TRANSACTION
Risks Covered Under ST
Policies
COMMERCIAL
RISKS
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Insolvency of
buyer/LC opening
bank
Default of buyer
Repudiation by
buyer
POLITICAL RISKS

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War/civil
war/revolutions
Import restrictions
Exchange transfer
delay/embargo
Diversion of
Voyage Risk
Buyer & Country Underwriting

The 2 pillars of Export Credit Insurance :
Buyer
Underwriting
that assesses
buyer risks

and
Country
Underwriting
that assesses
country risks
With the help of these two, ECGC controls
the commercial and political risks
Country Underwriting
Evaluating a
Country
Reviewing a
Country
Assessment and evaluation
of political risks associated
with countries for the
purpose of premium
calculation, determining
types of cover and terms of
cover
Country reviews are taken
up on a regular basis for
up/down grading
Evaluating a Country


Country Underwriting involves
assessment of a country’s ability
and likelihood to honour its
commitments undertaken both, as
part of trade as well as sovereign
debt
The country risk is evaluated on
the basis of the politico-economic
situation prevailing in a country
Reviewing a Country
Political
stability/
instability
International
Relations:
relation with
neighbours, IMF,
WB, Trade
Bodies
Eco. Structure:
GDP, inflation,
exchange rates,
BOP, import cover,
external sector, debt,
reserves, FDI
Policy Trends:
fiscal, monetary
policy, structural
reforms
Reviewing a Country
Late Payment
Experience
ECGC
Experience
Experience with
other credit
insurers
International
Rankings
Trade Relations
with India
Country Evaluation: ECGC’s
Objective Scoring Methodology


ECGC classifies the countries with the help of an
objective scoring methodology
Under the rating system followed, the weighted
averages of scores on economic risk rating,
political risk rating, past experience of ECGC,
trade relations with India and experience with
other credit insurers are calculated to arrive at
the Country Risk Indicator
Country Evaluation: ECGC’s
Objective Scoring Methodology
Economic Risk
Rating
Political Risk
Rating
Country
Risk
Indicator
Eco-Pol
Relations with
India
ECGC
Experience
Exp of Credit
Insurers
Objective Scoring Methodology

The individual scores are added up as
per pre-determined weights
 Weightage scores are summed up
to obtain a total final score on a
base of 100
 This score is used to derive an
overall rating for classifying the
countries
Seven Fold Country
Classification
Risk Category
Insignificant
Low
Moderately Low
Moderate
Moderately High
High
Very High
ECGC Classification
A1 (1/7)
A2 (2/7)
B1 (3/7)
B2 (4/7)
C1 (5/7)
C2 (6/7)
D (7/7)
Types of Cover

While underwriting the country risk, ECGC
places the country either in
Open Cover

OR
Restricted Cover
The basis for deciding on the type of cover and
terms of cover is a host of economic and
political factors
Open Cover Countries



Cover with No Restrictions
Cover is offered usually on normal
terms and conditions i.e. 90% cover, 4
months waiting period for
ascertainment of loss and settlement of
claims, etc.
Currently ECGC places 195 countries
under Open Cover
Restricted Cover Countries


Usually those countries where the
political and/or economic conditions
are relatively deteriorating or have
deteriorated and likelihood of
payment delays or non-payment are
imminent or have occurred
Permits selection of risks ECGC
wishes to underwrite
Restricted Cover Countries

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Divided into 2 Categories
Category 1: Countries for which revolving limits are
approved normally valid for one year
 Basis of cover:



ILCs opened or confirmed by banks listed in
Banker’s almanac or by local banks whose reports
are satisfactory. Cover will be 90%
Normal cover of 90% on DP/DA terms subject to
satisfactory report on the buyer
20 countries under this category
Restricted Cover Countries

Category 2: Countries where Specific
Approval will be given on case to case
basis on merits
 Valid for six months
 Normal waiting Period of 4 months
 Only 7 countries under this category:
Afghanistan, Argentina, Cuba, East
Timor, Iraq, North Korea, Somalia
Restricted Cover Countries
Underwriting Options for
Restricted Cover Countries

Options exercised to control risk in Restricted Cover
countries:
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Reduce percentage of cover
Increase waiting period for the settlement of claim
Provide cover against availability of government
guarantee/confirmed ILCs
Payment in convertible currency
Fix country exposure limit
Fix transaction limit per exporter per buyer
Fix bank exposure limit
Liberalization of ECGC’s
Underwriting Policy
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222 countries placed in 7fold classification
195 placed in Open Cover
20 countries – Restricted
Cover and Revolving
credit limit basis
7 countries in Restricted
Cover
– case to case basis
Restricted Cover (case by case)
Restricted Cover (revolving credit)
Open Cover
Country Classification
as on 1st April 2004
Country
Classification
Open
Cover
Restricted Cover
(revolving
limit facility)
Restricted
Cover
(case by
case)
Total
A1 (1/7)
26
0
0
26
A2 (2/7)
59
0
0
59
B1 (3/7)
28
0
1
29
B2 (4/7)
30
1
0
31
C1 (5/7)
25
5
0
30
C2 (6/7)
17
7
1
25
D (7/7)
10
7
5
22
Total
195
20
7
222
Distribution of Country Risk
Ratings
D
High Risk
C2
Moderately High Risk
22
25
C1
30
Moderate Risk
B2
31
29
Moderately Low Risk
B1
59
Low Risk
A2
Insignificant Risk
A1
26
Risk
Very High Risk
Case Study of Selected
Countries
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A1: USA (Open Cover)
A2: China (Open Cover)
B1: Russia (Open Cover)
B2: Kenya (Open Cover)
C1: Serbia & Montenegro (Open Cover)
C2: Uganda (Open Cover)
D : Iraq (Restricted Cover)
Comparison: Economic
Indicators
Country
GDP (US bn)
CAD/GDP
Debt Service
Ratio (%)
Import Cover
(in months)
USA
10987.9
0.05
-
0.7
China
1446.9
CA Surplus
4.8
12.45
Russia
433.5
CA Surplus
9.4
11.64
Kenya
13.2
0.17
10.6
4.8
Serbia & Montenegro
19.8
1.1
15.3
5.67
Uganda
6
0.67
11.6
10.96
Iraq
19.9
CA Surplus
0
NA
Comparison: Other Indicators
Country
ECGC
RV
(2003-04)
in Rs.mn
Transfer
Delay
Claims
Paid
(Rs.mn)
Political
Situation
India Trade
Balance
(2002-03)
in Rs. Mn
Euro
money
Score
Forex
Delays
USA
59124.06
Nil
Stable
311571
96.64/100
0-1 m
China
5549.67
Nil
Stable
-99751.53
61.52/100
1-3 m
Russia
970.45
Nil
Relatively
Stable
31549.48
49.02/100
1-2 m
Kenya
1550.86
Nil
Relatively
Unstable
8237.8
36.11/100
2-3 m
Serbia & Montenegro
22.13
Nil
Relatively
Unstable
1663.5
31.5/100
1-2 m
Uganda
414.31
607.2
Relatively
Unstable
3097.38
37.8/100
2-3 m
Iraq
1355.56
4025.97
Unstable
10343.39
4.28/100
3-4 m
ECGC Initiatives for MoC
Focus Regions

Focus LAC

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Review of all countries carried out in June 2003.
Mexico, Panama and Venezuela upgraded by 1
step, Brazil by 2 steps
ECGC continues to closely monitor the situation in
these countries and reviews the gradings as and
when the opportunity arises
Argentina is the only country placed in the RC; the
Corporation is constantly monitoring the ecopolitical situation in the country
ECGC Initiatives for MoC
Focus Regions

Focus Africa
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South Africa, Tanzania, Botswana & Mauritius
upgraded. All countries under 1st phase of Focus
Africa Programme placed in Open Cover
Revised and lower premium rates introduced from
April 2003
ECGC ratings at par or better than OECD gradings
and also grading given by other Berne Union
members
ECGC continues to closely monitor the situation in
these countries and reviews the gradings as and
when the opportunity arises
ECGC Initiatives for MoC
Focus Regions

Focus CIS
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Underwriting policy liberalized. Azerbaijan,
Kazakhastan, Russia, Ukraine placed in Open
Cover from Restricted Cover
Georgia and Moldova upgraded
Corporation is considering upgradation of Armenia
and Belarus and placing them in the Open cover
from Restricted Cover
ECGC Initiatives for MoC
Focus Regions

Focus East Asia

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All countries in ASEAN as well as Australia &
New Zealand placed in Open Cover
Revised and lower premium rates introduced
from April 2003
ECGC ratings at par or better than OECD
gradings and also grading given by other Berne
Union members
ECGC Schemes

Schemes for Exporters
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Maturity Factoring

Schemes for Banks/ Financial Instns

Special Schemes
Schemes for Exporters –
Short Term Cover: Payment within 180
days

SCR or Standard Policy: To cover risks
in respect of all shipments on short term credit
by exporters with anticipated annual turnover
of more than Rs.50 lacs

Turnover Policy: A variation of SCR policy
with additional discounts and incentives
available to exporters who pay a premium of
not less than Rs. 10 lacs per year.
Schemes for Exporters –
Short Term Cover: Payment within 180
days


Small Exporters Policy
Similar to SCR Policy, but for exporters with
anticipated annual turnover of Rs.50 lacs or
less
Specific Shipment Policy (Short term)
To cover risks in respect of a specific shipment
or shipments against a specific contract



Commercial & Political
Political Only
LC Commercial and Political
Schemes for Exporters –
Short Term Cover: Payment within 180
days



Exports (Specific Buyer Policy)
To cover risks in respect of all shipment to one or a
few buyers
 Commercial & Political
 Political Only
 LC Commercial & Political
Exports of Services Policy
 To cover the risks of insolvency and default and
political risks for services rendered
Without Recourse Export maturity Factoring
 Undertaking to pay the amount due for a
shipment on the maturity of the credit period.
Products in the offing

Consignment policy :
to cover consignment exports where goods are
shipped and held in stocks overseas ready for sale to
overseas buyers , as and when orders are received


stockholding agent policy
global entity policy
Products in the offing

Exposure policy
where premium would be
charged on the basis of the expected level of
exposure


single buyer policy: covering the risks on a
specific buyer
multi buyer policy : covering the risks on all
buyers
Bancassurance




ECGC has signed Corporate Agency Agreements
with a number of banks so as to use the Banks
network of branches to market its policies
Under this arrangement, exporters can buy their
policies and pay premium through various branches
of these banks
ECGC offers commission to the banks for the policies
and premium secured
ECGC has currently signed corporate agency
agreements with 10 Banks
E-Connectivity



Re-designed portal www.ecgcindia.com
Explanation of our schemes and Q&A by e-mail
Online facilities to our exporters :
- premium calculator,
- online status of applications,
- online premium adjustment status,
- List of defaulted buyers,
- downloading application forms
- online submission of applications and decls.
- payment of premium, fees through payment gateway
It is so easy with ECGC
For more details
Please visit
www.ecgcindia.com