A working group of insurance regulator IRDAI that revisited guidelines on Trade Credit Insurance (TCI) has recommended an increase in the indemnity provided to the policyholders from existing 85% of the trade receivables from each buyer to 90%.
While this will be for all the policyholders, for micro and small enterprises (MSEs) alone it has proposed a 95% cover for losses resulting from political risk.
“90% cover is in line with global standards. 95% indemnity is proposed for political risk only for MSEs to provide relief in the event of loss which is beyond their control,” said the report of the nine-member working group headed by New India Assurance Company CMD Atul Sahai.
Another key recommendation of the group was to permit issue of trade credit insurance policy to banks, financiers, lenders for trade-related transactions, except for covering loan default of seller. At present, they cannot avail the policy. Elaborating on the recommendation, the report said “a credit insurance policy only covers default by a buyer. It does not cover default by the seller/exporter.”
Broadly the report, which IRDAI has opened for comments till June 3, has recommended modifications in certain definitions for improved clarity and understanding, while also suggesting inclusion of new options in the policy, including a provision of single-buyer risk covers only for MSEs.
Besides benefiting such enterprises, this is expected to result in insurance companies offering a wider range of credit insurance products with enhanced covers at affordable premiums to boost the SME and MSME sectors.
The working group has also recommended for creation of a Buyer Default Database with Insurance Information Bureau (IIB) as a measure to keep a check on defaulters and better risk mitigation process. Simultaneously, it wanted the Reserve Bank of India (RBI) to recognise credit insurance products as risk mitigation tools for banks to make them eligible for capital relief.
The report said TCI is an effective risk management tool for the suppliers of goods and services and other financial institutions, to mitigate non-payment risks and insolvency/default of the buyers for both domestic and global scenarios. It enables suppliers in exploring new markets and expanding their businesses. TCI also helps in supporting banks, factoring companies and other financial institutions, which provide finance to suppliers by way of discounting/purchase of bills.
The existing guidelines on TCI were issued in 2016 and do not allow the insurance companies to offer full fledged benefits that provides much needed protection to suppliers and restricts TCI covers to banks and financial institutions. The credit insurance market in India is dominated by ECGC Ltd, which provides only export credit insurance facilities to banks and exporters. Domestic credit insurance on the other hand is being provided by all insurance companies, except ECGC, the report said.