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Unit 5: Methods of Financing Exporters and Business Risk Management

5.5.4 Insurance Cover for Buyer’s Credit and Line of Credit Notes

Buyer’s Credit refers to credit extended by a bank in India to a foreign buyer enabling him to
pay for machinery and equipment that he may be importing from India for a specific project. A
Line of Credit is a credit extended by a bank in India to an overseas bank, institution or
government, for the purpose of facilitating import of a variety of listed goods from India into
the foreign country. A number of importers in the overseas country may be importing the
goods under one Line of Credit.
ECGC has come out with schemes to protect lending banks from certain risks of non-payment.
These covers take the form of an agreement between the lending bank and ECGC and are issued
on a case-to-case basis. Credit terms and the length of the credit period should be in conformity
with what is appropriate for the export of the relevant items. There should be adequate security
for repayments to be made by the borrower. Cover can be granted either for political risks or for
comprehensive risks. The premium rates applicable to comprehensive risk cover will naturally
be higher than that for political risks cover. Normally, ECGC covers up to 85% of the loss.
The premium rates depend on the country to which exports are made and the period of repayment.
At least 20% of the total amount of premium should be paid in advance. The balance amount of
premium may be paid on a quarterly basis in proportion to the amount of credit disbursed.
The various guarantees given to banks are presented below:

Packing Credit Guarantee to enable banks to provide pre-shipment advances to exporters
for manufacturing, processing, purchasing or packing of goods meant for exports against
a firm export order.

Export Production Finance Guarantee to enable banks sanction advances at the pre-
shipment stage to the full extent of cost of production when it exceeds the FOB value of the
contract/order, the difference representing incentives receivable.
Post Shipment Credit Guarantee to enable banks to extend post-shipment finance to
exporters through purchase, negotiation or discounting of export bills or advances against
such bills.
Export Finance Guarantee covers post-shipment advances granted by banks to exporters
against export incentives receivables like duty drawback.

Export Performance Guarantee a counter-guarantee to protect a bank against losses that it
may suffer on account of guarantee given by it on behalf of the exporters.

Export Finance (Overseas Lending) Guarantee to protect a bank financing an overseas
project, by providing a foreign currency loan to the contractor from the risk of non-
performance.
5.5.5 Special Schemes

Presented below is a brief description of the different special schemes offered by ECGC:

Transfer Guarantee to safeguard banks in India against losses on account failure of a
foreign bank to reimburse it with the amount paid to an exporter, when an Indian bank
has added a confirmation to a letter of credit opened by the foreign bank.
Overseas Investment Insurance to cover the risks on account of war, expropriation or
restriction on remittances to Indian investments made by way of equity capital or untied
loan for the purpose of setting up or expansion of overseas projects.

Exchange Fluctuations Risk Cover to provide protection from exchange rate fluctuations
to exporters of capital equipment, civil engineering contractors, and consultants who

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