The International trade is becoming highly competitive. To be successful in international markets exporters are to offer longer and liberal terms of credit to the importers. But the risks involved in the international trade are somewhat more than that involved in the internal trade. In common with the internal trade the risks involved in the international trade are risks of loss or damage to the goods or non-payment or rejection of goods by the buyer.
Though the type of risk is same the intensity is more in the case of international trade because of the distance and two countnes with two different sets of rules and laws involved. Of these, risk of loss or damage to the goods is covered by marine and general insurers. But the risk of non-payment by the buyer is not covered by the insurer.
There are certain risks which exclusively belong to international trade. There are changes in the policies of the Government of both the importing and exporting countries which may have a bearing on the completion of the export contract and remittance of proceeds by the importer. In addition, because of the different currencies involved, there is the risk of exchange rate fluctuations. Exchange risk can be covered by entering into a forward contract, but the facility is available only for short term. Barring this, the other risks are not covered by any institution.
The Export Credit and Guarantee Corporation (ECGC) was established mainly to obviate the difficulties faced by exporters and provide them with cover against these risks which are not normally covered by any other institution. The ECGC issues standard policies which protect the exporters against the risk of failure of the buyer and difficulties in receipt of remittance or execution of the contract due to governmental action either of the importer’s or exporter’s country. These risks are known as commercial and political risks.
The exporters are thus well protected and are in a better position to offer competitive terms to the importers. The policies help the exporter in an indirect way in getting bank finance also. Since the risks of the exporters are reduced, the risk of the bank advance is also reduced. Therefore, banks also come forward to advance on liberal terms to exporters.
The other risk covered by the ECGC is the exchange risk. The exchange risk credit policy covers the fluctuations in exchange rates for deferred payment exports. The policies are issued to exporters which also indirectly benefit the exporter’s bank. But this was thought to be not sufficient to prompt the flow of bank finance to exports. As a direct encouragement to the bank guarantees are issued by the Corporation in favour of the banks.
The guarantees, fundamentally, protect the banks against failure of the exporter to repay the bank advance. The risk of issuing bank guarantees is covered by a set of counter-guarantees issued by the ECGC. Yet another type of guarantee issued by the Corporation covers the risk faced by the banks in confirming letters of credit issued in favour of the exporters.