Why do we require a flexible insurance policy?

Credit insurance policy provides protection and safety

With an increase in quantum of exports in the recent past, managing credit exposures has become increasingly challenging. Most overseas and domestic trade is often carried out on credit terms. Such credit policies and terms often make them quite vulnerable to potential delays in payments or even non payments.

While a large number of overseas trades are now being facilitated through letters of credit, a majority of exports from India is still carried on open account sales. According to experts, a flexible credit insurance plan can go a long way in enhancing the competitive index of the Indian SME sector.

Understanding Credit Insurance:

Credit insurance policies provide any business entity a genuine protection cover against the failure of its customers to pay the trade credit debts as desired. Credit insurance policies cover both commercial and political risks which may prevent or delay the payments. While political risks include any payment issues due to war or political uncertainty, commercial reasons include non-payment of dues to buyer insolvency, non acceptance of goods and unnecessary delays beyond the agreed credit period.  

Advantages of Refined Credit Insurance Polices:

Receivable are an important but uninsured asset for many companies. Keeping worries away for this could lead to potential business expansion of many SMEs as they can work without being worried about credit losses or delayed payments. A well defined and flexible credit insurance policy can allow SMEs the freedom to bypass any restriction by the buyer's government resulting in delay payments including defaults due to insolvency. Credit insurance policies would also allow SMEs a protective cover against non acceptance of goods post shipping by any overseas buyer.

India's Existing Credit Insurance Policy:

As of now, India's export credit insurance policy is driven by the Export Credit Guarantee Corp (ECGC) which provides for more than 80 per cent of the credit insurance coverage to SMEs and other business entities. Private insurance companies cover a minuscule 20 per cent of the market. It is no surprise then that India has a poor trade covered by credit insurance to GDP hovering around the five per cent mark compared to 10 per cent achieved by China and nearly 20 per cent managed by most European nation states.

With the quantum of exports on the rise, the figures of short-term trade credit insurance paid last financial year is a nominal $90 million. Industry experts believe that should India revisit its credit insurance policy, there is no reason the country cannot reach the market potential in the sector reaching around 0.03 per cent of the overall GDP or about $1 billion in premium in the next decade.

According to a study conducted by WTO as well as the centre for European policy studies, trade credit insurance has proved to be an enabler of trade. India's large pool of export-oriented SMEs needs the backing of strong credit insurance schemes from their home base as businesses expand. With a pro- business government in the centre, credit insurance experts are hopeful that India would relook its position on imposed restrictions on credit insurance.

Expert Speak and the Road Ahead:

With a possible refinement of pro trade policies, more and more foreign investors are likely to give top priority in venturing into the Indian market. An open insurance sector offering a level playing field for private insurance companies to compete in the credit insurance market is likely to offer a win-win situation for both SMEs and insurance companies. The increase in the number of credit insurance service providers is also likely to ease the financial burden on banks offering them capital relief.

What kind of challenges have you faced while looking for a flexible credit insurance policy? Do share your views.