Despite the government auditor insisting Export Credit Guarantee Corp of India Ltd (ECGC) mandate banks to check the creditworthiness of foreign buyers of Indian goods, the latter says it is not in a position to do so due to the structure of the credit insurance products it sells.
In a recent report tabled in Parliament, the Comptroller and Auditor General of India (CAG) had said ECGC, which provides credit insurance support to exporters and banks, should insist on obtaining from banks a certificate that due diligence had been carried out on the creditworthiness of the buyers.
“When we give a policy to the exporter, for each shipment, we provide cover. But here, the cover is only when an account becomes a non-performing loan account. So, if one particular default occurs, a bank cannot come and lodge a claim,” said N Shankar, chairman and managing director of ECGC.
Adding, “The product is slightly different. We have given our reply to the ministry. It’s more of the conceptual thing rather than operational, but the product is defined that way. In areas like pre-shipment, there are running accounts. Even before getting an order, RBI (Reserve Bank of India) has allowed banks to extend pre-shipment credit. They will not know who is the buyer. We also offer pre-shipment covers in these cases. So even if the buyer is not acceptable, we cannot remain on that risk.”
ECGC is ready to give further explanations if required, he said.
The CAG report had also said of 29 banks to whom the whole turnover post-shipment (WTPS) cover was issued, the claim-premium ratio of 13 banks was more than 200 per cent and resulted in a loss of Rs 309 crore during 2008-09 and 2010-11.
It recommended that ECGC introduce an effective system of incentivising the banks with lesser claim ratio and dis-incentivise banks with higher claim ratio in WTPS.
The WTPS scheme provides protection to banks against non-realisation of export proceeds and the resultant failure of the exporter to repay the advances availed. It offers cover against losses that might be incurred in extending post-shipment advances due to protracted default or insolvency of the exporter-client.
The percentage of cover varies from 90 per cent to 95 per cent in respect of exporters who are policyholders of ECGC and 50 per cent to 75 per cent for non-policyholders, depending upon the claim-premium ratio of the bank.
Responding to this, Shankar said the state-owned company already had an in-built mechanism of “disincentivising banks with high claims. Normally, if a claim paid to a particular bank is high in a particular year, next year when they come for renewal, there is an increase in premium”, he explained.