IMT Nagpur

PGDM 2009-2011
Banking

Export Finance – Role of ECGC

Interim Report

Submitted to
Prof. DN Panigrahi

Submitted on
15 Aug. 2010

Submitted by

Section ABC1
Aniket Daryapurkar 2009045
Umar Mansuri 2009075
Manish Yadav 2009092
Bhupendra Gurbani 2009101
Rachit Singhal 2009140
Table of Contents
Introduction...........................................................................................................................................3
Export Finance.......................................................................................................................................3
Need for Export Finance....................................................................................................................4
Risks with International Trade...........................................................................................................4
Objectives of Export Finance.............................................................................................................4
Types of Export Finance.........................................................................................................................4
Pre-Shipment Finance.......................................................................................................................5
Post-Shipment Finance......................................................................................................................6
Letter of Credit......................................................................................................................................8
Import Operations under L/C............................................................................................................8
Export Operations under L/C...........................................................................................................10
The Export Credit Guarantee Corporation of India Limited (ECGC).....................................................12
Role of ECGC....................................................................................................................................13
Benefits of ECGC..............................................................................................................................13
Need for export credit insurance.....................................................................................................13
Credit Insurance Policies of ECGC....................................................................................................13
References...........................................................................................................................................19
Introduction

Understanding Exports

Export simply means selling goods in other country (selling goods abroad). International
market being a very wide market, huge quantity of goods can be sold in the form of exports.
Export refers to outflow of goods and services and inflow of foreign exchange.

Export occupies a very prominent place in the list of priorities of the economic set up of
developing countries because they contribute largely to foreign exchange pool.

Exports play a crucial role in the economy of the country. In order to maintain healthy
balance of trade and foreign exchange reserve it is necessary to have a sustained and high rate
of growth of exports.

Exports are a vehicle of growth and development. They not only help in procuring the latest
machinery, equipment and technology but also the goods and services, which are not
available indigenously. Exports leads to national self-reliance and reduces dependence on
external assistance which howsoever liberal, may not be available without strings.

Though India’s export compared to other countries is very small, but one of the most
important aspects of our export is the strong linkages it is forging with the world economy
which is a great boon for a developing nation like India.

Export Finance

Credit and finance is the life and blood of any business whether domestic or international. It
is more important in the case of export transactions due to the prevalence of novel non-price
competitive techniques encountered by exporters in various nations to enlarge their share of
world markets.

The selling techniques are no longer confined to mere quality; price or delivery schedules of
the products but are extended to payment terms offered by exporters. Liberal payment terms
usually score over the competitors not only of capital equipment but also of consumer goods.

The payment terms however depend upon the availability of finance to exporters in relation
to its quantum, cost and the period at pre-shipment and post-shipment stage.

Production and manufacturing for substantial supplies for exports take time, in case finance is
not available to exporter for production. They will not be in a position to book large export
order if they don’t have sufficient financial funds. Even merchandise exporters require
finance for obtaining products from their suppliers.

This project is an attempt to throw light on the various sources of export finance available to
exporters.
Need for Export Finance

The exporter may require short term, medium term or long term finance depending upon the
types of goods to be exported and the terms of statement offered to overseas buyer.
The short-term finance is required to meet “working capital” needs. The working capital is
used to meet regular and recurring needs of a business firm. The regular and recurring needs
of a business firm refer to purchase of raw material, payment of wages and salaries, expenses
like payment of rent, advertising etc.
The exporter may also require “term finance”. The term finance or term loans, which is
required for medium and long term financial needs such as purchase of fixed assets and long
term working capital.
Export finance is short-term working capital finance allowed to an exporter. Finance and
credit are available not only to help export production but also to sell to overseas customers
on credit.

Risks with International Trade

 Credit RISK- Credit risk is one wherein the second party may refuse to pay or the
party may default, also known as default risk

 Currency Risk- It is the risk associated with the exchange rates which are subject to
change due to their volatile nature.

 Country Risk- Political turmoil in one country with which you are trading may lead
country risk; the changes in trade policies will have a direct impact on exports.

 Settlement Risk- The risk associated with the completion of the contract i.e all the
aspects of trade are completed, transfer of goods, funds and documents have been
successfully completed.

Objectives of Export Finance

 To cover credit & currency or political risks attendant on granting credit to a foreign
buyer.
 To cover natural risks like an earthquake, floods etc.

Types of Export Finance

The export finance is being classified into two types viz.
 Pre-shipment finance.
 Post-shipment finance.
Pre-Shipment Finance

Pre-shipment is also referred as “packing credit”. It is working capital finance provided by

commercial banks to the exporter prior to shipment of goods. The finance required to meet
various expenses before shipment of goods is called pre-shipment finance or packing credit.
Financial assistance extended to the exporter from the date of receipt of the export order till
the date of shipment is known as pre-shipment credit. Such finance is extended to an exporter
for the purpose of procuring raw materials, processing, packing, transporting, warehousing of
goods meant for exports.

Importance of Finance at Pre-Shipment Stage

 To purchase raw material, and other inputs to manufacture goods.

 To assemble the goods in the case of merchant exporters.
 To store the goods in suitable warehouses till the goods are shipped.
 To pay for packing, marking and labelling of goods.
 To pay for pre-shipment inspection charges.
 To import or purchase from the domestic market heavy machinery and other capital
goods to produce export goods.
 To pay for consultancy services.
 To pay for export documentation expenses.

Methods of Pre-Shipment Finance

1. Cash Packing Credit Loan:

In this type of credit, the bank normally grants packing credit advantage initially on
unsecured basis. Subsequently, the bank may ask for security.

2. Advance Against Hypothecation:

Packing credit is given to process the goods for export. The advance is given against security
and the security remains in the possession of the exporter. The exporter is required to execute
the hypothecation deed in favour of the bank.

3. Advance Against Pledge:

The bank provides packing credit against security. The security remains in the possession of
the bank. On collection of export proceeds, the bank makes necessary entries in the packing
credit account of the exporter.

4. Advance Against Red L/C:

The Red L/C received from the importer authorizes the local bank to grant advances to
exporter to meet working capital requirements relating to processing of goods for exports.
The issuing bank stands as a guarantor for packing credit.
5. Advance Against Back-To-Back L/C:
The merchant exporter who is in possession of the original L/C may request his bankers to
issue Back-To-Back L/C against the security of original L/C in favour of the sub-supplier.
The sub-supplier thus gets the Back-To-Bank L/C on the basis of which he can obtain
packing credit.

6. Advance Against Exports Through Export Houses:

Manufacturer, who exports through export houses or other agencies can obtain packing
credit, provided such manufacturer submits an undertaking from the export houses that they
have not or will not avail of packing credit against the same transaction.

7. Advance Against Duty Draw Back (DBK):

DBK means refund of customs duties paid on the import of raw materials, components, parts
and packing materials used in the export production. It also includes a refund of central
excise duties paid on indigenous materials. Banks offer pre-shipment as well as post-
shipment advance against claims for DBK.

8. Special Pre-Shipment Finance Schemes:

 Exim-Bank’s scheme for grant for Foreign Currency Pre-Shipment Credit (FCPC)
to exporters.
 Packing credit for Deemed exports.

Post-Shipment Finance

Post shipment finance is provided to meet working capital requirements after the actual
shipment of goods. It bridges the financial gap between the date of shipment and actual
receipt of payment from overseas buyer thereof. Whereas the finance provided after shipment
of goods is called post-shipment finance.
Credit facility extended to an exporter from the date of shipment of goods till the realization
of the export proceeds is called Post-shipment Credit.

Importance of Finance at Post-Shipment Stage

 To pay to agents/distributors and others for their services.

 To pay for publicity and advertising in the overseas markets.
 To pay for port authorities, customs and shipping agents charges.
 To pay towards export duty or tax, if any.
 To pay towards ECGC premium.
 To pay for freight and other shipping expenses.
 To pay towards marine insurance premium, under CIF contracts.
 To meet expenses in respect of after sale service.
 To pay towards such expenses regarding participation in exhibitions and trade fairs in
India and abroad.
 To pay for representatives abroad in connection with their stay board.

Methods of Post-Shipment Finance

1. Export bills negotiated under L/C: The exporter can claim post-shipment finance by
drawing bills or drafts under L/C. The bank insists on necessary documents as stated in
the L/C. if all documents are in order, the bank negotiates the bill and advance is granted
to the exporter.

2. Purchase of export bills drawn under confirmed contracts: The banks may sanction
advance against purchase or discount of export bills drawn under confirmed contracts. If
the L/C is not available as security, the bank is totally dependent upon the credit
worthiness of the exporter.

3. Advance against bills under collection: In this case, the advance is granted against bills
drawn under confirmed export order L/C and which are sent for collection. They are not
purchased or discounted by the bank. However, this form is not as popular as compared to
advance purchase or discounting of bills.

4. Advance against claims of Duty Drawback (DBK): DBK means refund of customs
duties paid on the import of raw materials, components, parts and packing materials used
in the export production. It also includes a refund of central excise duties paid on
indigenous materials. Banks offer pre-shipment as well as post-shipment advance against
claims for DBK.

5. Advance against goods sent on Consignment basis: The bank may grant post-shipment
finance against goods sent on consignment basis.

6. Advance against Undrawn Balance of Bills: There are cases where bills are not drawn
to the full invoice value of gods. Certain amount is undrawn balance which is due for
payment after adjustments due to difference in rates, weight, quality etc. banks offer
advance against such undrawn balances subject to a maximum of 5% of the value of
export and an undertaking is obtained to surrender balance proceeds to the bank.

7. Advance against Deemed Exports: Specified sales or supplies in India are considered as
exports and termed as “deemed exports”. It includes sales to foreign tourists during their
stay in India and supplies made in India to IBRD/ IDA/ ADB aided projects. Credit is
offered for a maximum of 30 days.

8. Advance against Retention Money: In respect of certain export capital goods and
project exports, the importer retains a part of cost goods/ services towards guarantee of
performance or completion of project. Banks advance against retention money, which is
payable within one year from date of shipment.

9. Advance against Deferred payments: In case of capital goods exports, the exporter
receives the amount from the importer in installments spread over a period of time. The
 commercial bank together with EXIM bank do offer advances at concessional rate of
interest for 180 days.

Letter of Credit

Letter of Credit also known as Documentary Credit is a widely used term to make payment
secure in domestic and international trade. The document is issued by a financial organization
at the buyer request. Buyer also provides the necessary instructions in preparing the
document.

The International Chamber of Commerce (ICC) in the Uniform Custom and Practice for
Documentary Credit (UCPDC) defines L/C as: 

An arrangement, however named or described, whereby a bank (the Issuing bank) acting at
the request and on the instructions of a customer (the Applicant) or on its own behalf:

1. Is to make a payment to or to the order third party (the beneficiary) or is to accept

bills of exchange (drafts) drawn by the beneficiary.
2. Authorised another bank to effect such payments or to accept and pay such bills of
exchange (draft).
3. Authorised another bank to negotiate against stipulated documents provided that the
terms are complied with.

A key principle underlying letter of credit (L/C) is that banks deal only in documents and not
in goods. The decision to pay under a letter of credit will be based entirely on whether the
documents presented to the bank appear on their face to be in accordance with the terms and
conditions of the letter of credit.

Import Operations under L/C

The Letters of Credit give importers the most extensively used and conventional international
trade payment means and finance instrument. By making Letter of Credit terms to permit
Deferred Payment or Trade Acceptance, a Letter of Credit facilitates financing to the
importer. It promises payment, provided the seller complies with the terms and conditions
inside the Letter of Credit. The Irrevocable letter of credit can’t be cancelled or varied
without the approval of all parties.
A bank issues an import letter of credit (L/C) on the behalf of buyer or importer under the
following conditions:
a) When an importer is importing items within its own nation
b) Any act of merchandise where products from the nation are sold to another commercially.
c) When exporter from India who is executing a contract outside his own nation needs
importing items from a third nation to the nation where he is performing the deal.
Charges/fees payable under import L/C

The issuing bank charges the applicant fees for opening the letter of credit. The fee charged
depends on the credit of the applicant, and primarily comprises of :

(a) Opening Charges:

This would comprise commitment charges and usance charged to be charged upfront for the
period of the Letter of credit.

 The fee charged by the L/C opening bank during the commitment period is referred to as
commitment fees. Commitment period is the period from the opening of the letter of credit
until the last date of negotiation of documents under the L/C or the expiry of the L/C,
whichever is later. Usance is the credit period agreed between the buyer and the seller under
the letter of credit. This may vary from 7 days usance (sight) to 90/180 days. The fee charged
by bank for the usance period is referred to as usance charges.

(b)Retirement Charges

This would be payable at the time of retirement of LCs. LC opening bank scrutinizes the
bills under the LCs according to UCPDC guidelines , and levies charges based on value of
goods.

The advising bank charges an advising fee to the beneficiary unless stated otherwise. The
fees could vary depending on the country of the beneficiary. The advising bank charges may
be eventually borne by the issuing bank or reimbursed from the applicant. The applicant is
bounded and liable to indemnify banks against all obligations and responsibilities imposed by
foreign laws and usage.

The confirming bank's fee depends on the credit of the issuing bank and would be borne by
the beneficiary or the issuing bank (applicant eventually) depending on the terms of contract.
The reimbursing bank charges are to the account of the issuing bank.

Regulatory Requirements

Opening of imports LCs in India involve compliance of the following main regulation:

 Trade Control Requirements

The movement of good in India is guided by a predefined se of rules and regulation. So, the
banker needs to assure that make certain is whether the goods concerned can be physically
brought in to India or not as per the current EXIM policy.

 Exchange Control Requirements

The main objective of a bank to open an Import LC is to effect settlement of payment due by
the Indian importer to the overseas supplier, so opening of LC automatically comes under the
policies of exchange control regulations.
  UCPDC Guidelines

Uniform Customs and Practice for Documentary Credit (UCPDC) is a set of predefined rules
established by the International Chamber of Commerce (ICC) on Letters of Credit. The
UCPDC is used by bankers and commercial parties in more than 200 countries including
India to facilitate trade and payment through LC.

Export Operations under L/C

Export Letter of Credit is issued in for a trader for his native country for the purchase of
goods and services. Such letters of credit may be received for following purpose:

1. For physical export of goods and services from India to a Foreign Country.
2. For execution of projects outside India by Indian exporters by supply of goods and
services from Indian or partly from India and partly from outside India.
3. Towards deemed exports where there is no physical movements of goods from
outside India But the supplies are being made to a project financed in foreign
exchange by multilateral agencies, organization or project being executed in India
with the aid of external agencies.
4. For sale of goods by Indian exporters with total procurement and supply from outside
India. In all the above cases there would be earning of Foreign Exchange or
conservation of Foreign Exchange.

Capacities of Banks in India

Banks in India associated themselves with the export letters of credit in various capacities
such as advising bank, confirming bank, transferring bank and reimbursing bank.

In every case the bank will be rendering services not only to the Issuing Bank as its agent
correspondent bank but also to the exporter in advising and financing his export activity.

 Advising an Export L/C

The basic responsibility of an advising bank is to advise the credit received from its
overseas branch after checking the apparent genuineness of the credit recognized by
the issuing bank. 

It is also necessary for the advising bank to go through the letter of credit, try to
understand the underlying transaction, terms and conditions of the credit and advice
the beneficiary in the matter.

The main features of advising export LCs are:

1. There are no credit risks as the bank receives a onetime commission for the
advising service. 

2. There are no capital adequacy needs for the advising function.

 Advising of Amendments to L/Cs

Amendment of LCs is done for various reasons and it is necessary to fallow all the
necessary the procedures outlined for advising. In the process of advising the
amendments the Issuing bank serializes the amendment number and also ensures that
no previous amendment is missing from the list. Only on receipt of satisfactory
information/ clarification the amendment may be advised.

 Confirmation of Export Letters of Credit

It constitutes a definite undertaking of the confirming bank, in addition to that of the

issuing bank, which undertakes the sight payment, deferred payment, acceptance or
negotiation.

Banks in India have the facility of covering the credit confirmation risks with ECGC
under their “Transfer Guarantee” scheme and include both the commercial and
political risk involved.

 Discounting/Negotiation of Export LCs

When the exporter requires funds before due date then he can discount or negotiate
the LCs with the negotiating bank. Once the issuing bank nominates the negotiating
bank, it can take the credit risk on the issuing bank or confirming bank.

However, in such a situation, the negotiating bank bears the risk associated with the
document that sometimes arises when the issuing bank discover discrepancies in the
documents and refuses to honour its commitment on the due date. 

 Reimbursement of Export LCs

Sometimes reimbursing bank, on the recommendation of issuing bank allows the

negotiating bank to collect the money from the reimbursing bank once the goods have
been shipped. It is quite similar to a cheque facility provided by a bank.

In return, the reimbursement bank earns a commission per transaction and enjoys float
income without getting involve in the checking the transaction documents. 

Reimbursement bank play an important role in payment on the due date (for usance
LCs) or the days on which the negotiating bank demands the same (for sight LCs)

ADVANTAGES TO THE EXPORTER:

 No blocking of funds.
 Clearance of import regulations.
 Free from liability.
 Pre- shipment finance.
 Non-refusal by importer.
 Reduction in bad-debts.
ADVANTAGES TO THE IMPORTER:

 Better terms of trade.

 Assurance of shipment of goods.
 Overdraft facility.
 No blocking of funds.
 Delivery on time.
 Better relations.

DISADVANTAGES OF LETTER OF CREDIT:

 Lacks flexibility.
 Complex method
 Expensive for importer
 Problem of revocable L/C

The Export Credit Guarantee Corporation of India Limited (ECGC)

 ECGC is a company wholly owned by the Government of India. It provides export credit
insurance support to Indian exporters and is controlled by the Ministry of
Commerce. Government of India had initially set up Export Risks Insurance Corporation
(ERIC) in July 1957. It was transformed into Export Credit and Guarantee Corporation
Limited (ECGC) in 1964 and to Export Credit Guarantee of India in 1983.
 Export Credit Guarantee Corporation of India is 51 years old, it was setup with the
primary objective to provide export credit insurance and trade related services to
exporters.
 ECGC of India Ltd, was established in July, 1957 to strengthen the export promotion by
covering the risk of exporting on credit. It functions under the administrative control of
the Ministry of Commerce & Industry, Department of Commerce, and Government of
India. It is managed by a Board of Directors comprising representatives of the
Government, Reserve Bank of India, banks, insurance companies and exporting
community.
 ECGC is the fifth largest credit insurer of the world in terms of coverage of national
exports. The present paid-up capital of the company is Rs.900 crores and authorized
capital Rs.1000 crores.
Role of ECGC

 Provides a range of credit risk insurance covers to exporters against loss in export of
goods and services
 Offers guarantees to banks and financial institutions to enable exporters to obtain better
facilities from them
 Provides Overseas Investment Insurance to Indian companies investing in joint ventures
abroad in the form of equity or loan.

Benefits of ECGC

 Offers insurance protection to exporters against payment risks

 Provides guidance in export-related activities
 Makes available information on different countries with its own credit ratings
 Makes it easy to obtain export finance from banks/financial institutions
 Assists exporters in recovering bad debts
 Provides information on credit-worthiness of overseas buyers

Need for export credit insurance

Payments for exports are open to risks even at the best of times. The risks have assumed large
proportions today due to the far-reaching political and economic changes that are sweeping
the world. An outbreak of war or civil war may block or delay payment for goods exported.
A coup or an insurrection may also bring about the same result. Economic difficulties or
balance of payment problems may lead a country to impose restrictions on either import of
certain goods or on transfer of payments for goods imported. In addition, the exporters have
to face commercial risks of insolvency or protracted default of buyers. The commercial risks
of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the
political and economic uncertainties. Export credit insurance is designed to protect exporters
from the consequences of the payment risks, both political and commercial, and to enable
them to expand their overseas business without fear of loss.

Credit Insurance Policies of ECGC

Shipments (Comprehensive Risks) Policy

Commonly known as the Standard Policy, is the one ideally suited to cover risks in respect of
goods exported on short-term credit, i.e. credit not exceeding 180 days. This policy covers
both commercial and political risks from the date of shipment. It is issued to exporters whose
anticipated export turnover for the next 12 months is more than Rs.50 lacs. It is an
appropriate policy for exporters with an anticipated turnover of Rs.50 lacs or less is the Small
Exporter's Policy, described separately).

Small Exporters Policy

The Small Exporter's Policy is basically the Standard Policy, incorporating certain
improvements in terms of cover, in order to encourage small exporters to obtain and operate
the policy. It is issued to exporters whose anticipated export turnover for the period of one
year does not exceed Rs.50 lacs.

Difference between Small Exporter's Policy and the Standard Policy

Standard Policy Small Exporter's Policy
Period of
Policy 24 months 12 months
Minimum Premium payable will be
premium No claim bonus in the premium rate determined on the basis of
is granted once in 2 years at the rate projected exports on an annual
of 10%. basis subject to a minimum
premium of Rs. 2000/- for the
policy period.
No claim bonus in the premium
rate is granted every year at the
rate of 5%
Declaration of
shipments declared monthly declared quarterly
Declaration of monthly declarations of all payments monthly declarations of all
overdue remaining overdue by more than 30 payments remaining overdue by
payments days from the due date more than 60 days from the due
date
Percentage of The extent of cover is 90% for both ECGC will pay claims to the
cover commercial and political risks extent of 95% where the loss is
due to commercial risks and 100%
if the loss is caused by any of the
political risks
Waiting period normal waiting period of 4 months normal waiting period of 2 months
for claims

Specific Shipment Policy - Short Term (SSP-ST)

Specific Shipment Policies - Short Term (SSP-ST) provide cover to Indian exporters against
commercial and political risks involved in export of goods on short-term credit not exceeding
180 days. Exporters can take cover under these policies for either a shipment or a few
shipments to a buyer under a contract. These policies can be availed of by 
 (i) exporters who do not hold SCR Policy and 
 (ii) by exporters having SCR Policy,
in respect of shipments permitted to be excluded from the preview of the SCR Policy.

Different types of SSP (ST)

 Specific Shipments (commercial and political risks) Policy - short-term.
 Specific Shipments (political risks) Policy - short-term
 Specific Shipments (insolvency & default of L/C opening bank and political risks)
Policy - short-term

Export (Specific Buyers) Policy

Buyer-wise Policies - Short Term (BP-ST) provide cover to Indian exporters against
commercial and political risks involved in export of goods on short-term credit to a particular
buyer. All shipments to the buyer in respect of whom the policy is issued will have to be
covered (with a provision to permit exclusion of shipments under LC). These policies can be
availed of by
(i) exporters who do not hold SCR Policy and 
(ii) exporters having SCR Policy, 

In case all the shipments to the buyer in question have been permitted to be excluded from
the purview of the SCR Policy.

Consignment Exports Policy  (Stockholding Agent and Global Entity)

Economic liberalization and gradual removal of international barriers for trade and commerce
are opening up various new avenues of export opportunities to Indian exporters of quality
goods. One of the methods being increasingly adopted by Indian exporters is consignment
exports where the goods are shipped and held in stock overseas ready for sale to overseas
buyers, as and when orders are received. To protect the Indian Exporters from possible losses
when selling goods to ultimate buyers, it was decided to introduce Consignment Policy
Cover.

Under what circumstances, Consignment Exports (Stock Holding Agent) Policy cover
can be availed of?

A consignment Exports (Stock-holding Agent) Policy will be appropriate for each exporter –
stock holding agent combination provided the following criteria are satisfied.
Merchandise are shipped to an overseas entity in pursuance of an agency agreement;
The overseas agent would be an independent and separate legal entity with no associate/sister
concern relationship with the exporter;
The agent’s responsibilities could be any or all of the following, viz., receiving the shipment,
holding the goods in stock, identifying ultimate buyers and selling the goods to them in
accordance with the directions, if any, of his principal (exporter); and
The sales being made by the agent would be at the risk and on behalf of the exporter (whether
or not such sales are in the agent’s own name or otherwise) in consideration of a commission
or some similar reward or compensation on sales completed.

Service Policy

Where Indian companies conclude contracts with foreign principals for providing them with
technical or professional services, payments due under the contracts are open to risks similar
to those under supply contracts. In order to give a measure of protection to such exporters of
services, ECGC has introduced the Services Policy.

Different types of Services Policies and protection they offer:

 Specific Services Contract (Comprehensive Risks) Policy;

 Specific Services Contract (Political Risks) Policy;
 Whole-turnover Services (Comprehensive Risks) Policy; and
 Whole-turnover Services (Political Risks) Policy

Specific Services Policy, as its name indicates, is issued to cover a single specified contract.
It is issued to provide cover for contracts, which are large in value and extend over a
relatively long period. Whole-turnover services policies are appropriate for exporters who
provide services to a set of principles on a repetitive basis and where the period of each
contract is relatively short. Such policies are issued to cover all services contracts that may be
concluded by the exporter over a period of 24 months ahead.
The Corporation would expect that the terms of payment for the services are in line with
customary practices in international trade in these lines. Contracts should normally provide
for an adequate advance payment and the balance should be payable periodically based on the
progress of work. The payments should be backed by satisfactory security in the form of
Letters of Credit or bank guarantees.

Services policies are designed to cover contracts under which only services are to be
rendered. Contracts under which the value of services to be rendered forms only a small part
of a contract involving supply of machinery or equipment will be covered under an
appropriate specific policy for supply contracts.

Software Project Policy

The Services Policies of the Corporation which have been in existence for some time were
offered to provide protection of exporters of services including software and related services.
However it was found that the general services policy does not meet with the exact
requirements of software exporters. It was therefore decided to introduce a new credit
insurance cover to meet the needs of the software exporters, namely, software projects policy,
where the payments will be received in foreign exchange. The general services policies will
continue to be offered for the export of services other than software and related services.

The following software services will be eligible for cover under the Software Projects Policy:

Software project services, either on one time/turnkey basis or progressive/milestone basis,

involving

 Development of software off-shore (i.e. at the exporters location in India) to be

delivered and implemented in the buyer’s (client) location; or

 Development of software on-site of the client and supply and implementation; or

 Both off-shore and on-site development.

IT-enabled Services (Specific Customer) Policy

IT-enabled Services (Specific Customer) Policy is issued to cover the following commercial
and political risks involved in rendering IT-enabled services to a particular customer:

ITES policy will provide cover in respect of contracts for rendering service during a defined
period with billing on the basis of service rendered during a period say, a week, a month or a
quarter, where the payments due for the services rendered will be received in foreign
exchange.
Construction Works Policy

Construction Works Policy is designed to provide cover to an Indian contractor who executes
a civil construction job abroad.
The distinguishing features of a construction contract are that (a) the contractor keeps raising
bills periodically throughout the contract period for the value of work done between one
billing period and another; (b) to be eligible for payment, the bills have to be certified by a
consultant or supervisor engaged by the employer for the purpose and (c) that, unlike bills of
exchange raised by suppliers of goods, The bills raised by the contractor do not represent
conclusive evidence of debt but are subject to payment in terms of the contract which may
provide, among other things, for penalties or adjustments on various counts. The scope for
disputes is very large. Besides, the contract value itself may only be an estimate of the work
to be done, since the contract may provide for cost escalation, variation contracts, additional
contracts, etc. It is, therefore, important that the contractor ensures that the contract is well
drafted to provide clarity of the obligations of the two parties and for resolution of disputes
that may arise in the course of execution of the contract. Contractors are well advised to use
the Standard Conditions of Contract (International) prepared by the Federation International
Des IngenieursConseils (FIDIC) jointly with the Federation International du Batiment et des
Travaux Publics (FIBTP).

Specific Policy for Supply Contract

The Standard Policy is a whole turnover policy designed to provide a continuing insurance
for the regular flow of an exporter's shipments for which credit period does not exceed 180
days. Contracts for export of capital goods or turnkey projects or construction works or
rendering services abroad are not of a repetitive nature and they involve medium/long-term
credits. Such transactions are, therefore, insured by ECGC on a case-to-case basis under
specific policies.

Formalities to be completed before applying for specific policies for contracts:

All contracts for export on deferred payment terms and contracts for turnkey projects and
construction works abroad require prior clearance of Authorized Dealers, EXIM Bank or the
Working Group in terms of powers delegated to them as per exchange control regulations
(Kindly refer to 'Projects Exports Manual' of Reserve Bank of India. Applications for the
purpose are to be submitted to the Authorized Dealer (the financing bank), which will
forward applications beyond its delegated powers to the EXIM Bank. Proposals for Specific
Policy are to be made to ECGC after the contract has been cleared by the Authorized Dealer,
EXIM Bank or the Working Group, as the case may be.

Insurance Cover for Buyer's Credit And Line of Credit

Buyer's Credit is a credit extended by a bank in India to an overseas buyer enabling the buyer
to pay for machinery and equipment that he may be importing from India for a specific
project.
A Line of Credit is a credit extended by a bank in India to an overseas bank, institution or
government for the purpose of facilitating import of a variety of listed goods from India into
the overseas country. A number of importers in the overseas country may be importing the
goods under one Line of Credit.

ECGC has evolved schemes to protect the lending banks from certain risks of non-payment.
These covers take the form of an agreement between the lending bank and ECGC and are
issued on a case to case basis. Credit terms and the length of the credit period should be in
conformity with what is appropriate for the export of the relevant items. There should be
adequate security for the repayments to be made by the borrower.

Cover can be granted either for political risks or for comprehensive risks. Political risks
covered under the scheme are:

The occurrence of war between the country of the overseas party and India.

The occurrence of war, hostilities, civil war, revolution, rebellion, insurrection or other
disturbances in the country of overseas party.

The operation of law or of an order, decree or regulation having the force of law which in
circumstances outside the control of the lender and/or the overseas party, prevents, restricts or
controls, the transfer of the sums due to the lender by the overseas party under the Financial
Agreement.

If ECGC agrees to provide comprehensive risks cover, the risk of protracted default of the
borrower to pay the amounts due under the loan agreement and insolvency of the borrower,
where applicable, will be covered in addition to the political risks mentioned above. The
premium rates applicable to comprehensive risk cover will naturally be higher than that for
political risks cover. Normally ECGC covers up to 85% of the loss.

The premium rates depend on the country to which exports are made and the period of
repayment.

Premium to be paid for the cover for Buyer's Credit and Line of Credit:

At least 20% of the total amount of premium should be paid in advance. The balance amount
of premium may be paid on a quarterly basis in proportion to the amount of credit disbursed.
References:

 https://www.ecgc.in/Portal/Welcome.aspx
 www.wikipedia.org
 http://www.eximbankindia.com/