Hyderabad:
In a bid to to promote sustainable and healthy development of domestic trade credit insurance business, the regulator IRDA,on Thursday, has issued revamped norms to enable general insurance companies to offer trade credit insurance covers to suppliers as well as licensed banks and other financial institutions.
The new trade cover will help businesses to manage country risk, open up access to new markets and to manage non-payment risk associated with trade financing portfolio.
Trade credit insurance protects businesses against the risk of non-payment for goods and services by buyers. It usually covers a portfolio of buyers and indemnifies an agreed percentage of an invoice or invoices that remain unpaid as a result of protracted default, insolvency / bankruptcy. It contributes to the economic growth of a country by facilitating trade and helps in improving economic stability by addressing the trade losses due to payment risks, said IRDAI.
The norm will also to enable general insurance companies to offer trade credit insurance with customised covers to improve businesses for the SMEs and MSMEs, considering the evolving insurance risk needs of these sectors.
A Trade Credit Policy may be issued for covering trade related transactions other than loan default of seller
The scope of cover under trade credit insurance policy will be the credit risk that has a direct link with an underlying trade transaction, i.e. the delivery of goods or services. If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy, clarified the IRDAI.
Some of new kind of covers that will now available in India are:
“Project Cover”- insurance of receivables, against non-payment by the principal or buyer, provided to a contractor engaged in but not limited to long term infrastructure, civil and industrial projects and services. The project period should be more than six months.
“Protracted Default”- failure by a buyer to pay the contractual debt within a predefined period calculated from the due date of the debt.
"Reverse Factoring arrangement" where any arrangement in whatever name or form, between a borrower and a financer, wherein a borrower receives or is supposed to receive finance, either directly or indirectly, for borrower's purchase of trade receivables, goods or services
Political Risks: Political risk cover is available only in case of buyers outside India and in respect of those countries agreed upon. Political risks include- Operation of a law or of an order, decree or regulation having the force of law which, in circumstances outside the control of the insured and/or the buyer, prevents, restricts or controls the transfer of payment from the buyer’s country to India,b. Occurrence of war between the buyer’s country and India; Occurrence of war, hostilities, civil war, rebellion, revolution, insurrection or other disturbances in the buyer’s country;
Commercial Risks that can be covered under new trade policies are :Insolvency or Protracted Default of (i) the buyer;(ii) bank/`s responsible for payment in case of Letter of Credit transactions;(iii) stock holding agent in case of consignment transactions.
Also in case of rejection by (i) the buyer after delivery subject to conditions of contract;(ii) the buyer before shipment, where the goods are manufactured or being manufactured exclusively as per the requirements of the buyer and cannot be sold elsewhere;c. Non-receipt of payment on account of collecting bank`s failure;
A panel constituted by the insurance regulator IRDAI under leadership of Atul Sahai,CMD, New India Assurance, to overhaul the existing guidelines on Trade Credit Insurance(TCI),had proposed several changes in the existing guidelines in order to improve the credit insurance market and at the same time meet the requirements of various stakeholders involved in trade related transactions.