The working group has suggested that single buyer risk covers should be allowed only for micro and small enterprises.
A working group constituted by the Insurance Regulatory and Development Authority of India (IRDAI) has recommended that banks and financial institutions should not be permitted to cover loan defaults of sellers under trade credit insurance.
IRDAI had set up a working group in 2019 to look into revising the trade credit insurance guidelines. This working group has now submitted its report where it has suggested that the regulator must create a buyer default database with the Insurance Information Bureau of India to keep a check on the defaulters and for better risk mitigation process.
Trade credit risk insurance is an insurance policy and a risk management product offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks, such as protracted default, insolvency, bankruptcy.
Currently, ECGC is the largest player in this segment followed by a few other general insurers like New India Assurance, SBI General Insurance, ICICI Lombard, HDFC ERGO among others.
The working group has suggested that single buyer risk covers should be allowed only for micro and small enterprises. It has said that insurance must be enabled to offer a wider range of credit insurance products with enhanced covers at affordable premiums to boost the SME and MSME sectors.
Trade credit is offered by suppliers to their customers as an alternative to prepayment or cash on delivery terms, or the need for expensive bank letters of credit, providing time for the customer to generate income from sales before paying for the product or service.
For example, an SME garment manufacturer sells garments on credit to domestic and international clients. Because of a previous bad experience with buyers not paying, and the need to borrow against its international receivables in order to grow its business, it seeks protection against payment delays and non-payment by its buyers. A ‘whole turnover’ trade credit insurance policy, which covers all of the garment manufacturer’s buyers could be the solution.
In exchange for a premium, which is based on the annual turnover and credit risk of its buyers, the garment manufacturer receives protection up to an agreed percentage of any losses incurred against late payment or the failure to pay by its buyers. It can then use this trade credit insurance policy to borrow from its commercial bank against the insured receivables.
In FY19, a total of Rs 1,525.21 crore of premium under this product was received by general insurance companies.
The report said that apart from the government support to MSMEs, it is also imperative to relax the trade credit insurance guidelines to support the business environment. It added that trade credit insurance must also be made available to banks, financial institutions which provide finances, liquidity to MSMEs.
In India, the total addressable demand for external credit is estimated to be Rs 37 lakh crore while the overall supply of finance from formal sources is estimated to be about Rs 14.5 lakh crore. The report pointed that therefore, the overall credit gap in the MSME sector is estimated to be Rs 2-.25 lakh crore.
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