ECGC’s guarantees protect the banks from losses on account of their lendings to exporters. These guarantees have been designed to encourage banks to give adequate credit and other facilities for exports, both at pre-shipment and post-shipment stages on liberal basis.
ECGC offers following types of guarantees to provide for varying requirements of banks. They are:
1. Packing credit guarantee;
2. Export production finance guarantee;
3. Post-shipment export credit guarantee;
4. Export finance guarantee;
5. Export performance guarantee;
6. Export finance (overseas lending) guarantee; and
7. Transfer guarantee.
1. Packing Credit Guarantee: This guarantee covers advances granted to exporters at the pre-shipment stage for the purpose of purchase, manufacture, pro-cessing and/or packing of goods meant for export against firm contract of sale, whether on credit terms or against irrevocable letter of credit. Advances given by banks to Indian firms engaged in export of services or to those which take up construction work abroad to meet preliminary expenses in connection with such contracts are also eligible.
The guarantee protects the bank against failure of the exporter to repay the advance because of his insolvency or protracted default to repay. The guarantee covers advances made by the bank over a period of time, normally a year. On or before tenth of every month, the bank has to submit to ECGC a declaration of credits granted and repayments received during the previous month. The premium is payable at 10 paise per Rs. 100 per month or part thereof on the basis of monthly declarations on the highest amount outstanding on any day during the month.
ECGC bears loss to the extent of 66-2/3% subject to a maximum liability fixed under the guarantee. In case of guarantees on account of advances not exceeding Rs. 2 lakhs granted to small merchant exporters ECGC’s share is 90% of the loss.
2. Export Production Finance Guarantee: The purpose of this guarantee is to enable banks to sanction advances at the pre-shipment stage to the full extent of cost of production when it exceeds the FOB value of the contract/order, the difference representing incentives available. The extent of cover and the premium rate are the same as of Packing Credit Guarantee.
3. Post-shipment Export Credit Guarantee: Post-shipment finance given to exporters by banks through purchase, negotiation of discount or export bills or advances against such bills qualifies for this guarantee. It is necessary, however, that the exporter concerned should hold suitable policy of ECGC to cover the overseas credit risks. The premium rate for this guarantee is 7 paise per Rs. 100 per month. The extent of loss covered is 75%.
This guarantee can also be had where an exporter does not hold an ECGC policy for finance granted against L/C bills, provided that the exporter makes shipments solely against L/Cs. The premium rate is 10 paise for Rs. 100 per month on the highest amount outstanding on any day during the month. Cover is 75%. Advances against bills under L/Cs opened by banks in countries placed under restricted cover is subject to prior approval of ECGC.
4. Export Finance Guarantee: This guarantee covers post-shipment advances granted by banks to exporters against incentives receivable in the form of cash assistance, duty drawback etc. The premium rate is 7 paise per Rs. 100 per month and the cover is 75%.
5. Export Performance Indemnity: The indemnity which is in the nature of a counter guarantee is issued to the exporter’s bank to protect against losses that it may suffer on account of guarantee given by it on behalf of the exporters. The cover is available for such guarantees as bid bond guarantee, performance guarantee, advance money guarantee, retention money guarantee, guarantee to a foreign bank for finance raised overseas, in case of participating in foreign tenders; guarantees issued for obtaining import licences with export obligations; guarantees to customs for clearing goods without payment of duty; guarantee in respect of export obligation to export promotion councils, commodity boards, the State Trading Corporation of India, the Minerals and Metals Trading Corporation of India, or recognised export houses.
Normally cover is extended up to 75% of loss, but in the case of guarantees in connection with bid bonds, performance bond, advance payment and local finance guarantees and guarantees in lieu of retention money, the cover may be increased upto 90% subject to proportionate increase in premium.
The premium rate for indemnity issued to cover bonds relating to exports on short term credits is 0.9% p.a. for 75% cover and 1.08% for 90% cover. For bonds, relating to exports on deferred credit and projects the rate of premium is lower at 0.8%. p.a for 75% cover and 0.95% p.a for 90% cover.
6. Export Finance (Overseas Lending) Guarantee: If a bank financing an overseas project provides a foreign currency loan to the contractor, it can protect itself from the rlsk of non-payment by the contractor by obtaining Export Finance (Overseas Lending) Guarantee. Premium rate will be 90 paise per annum for 75% cover and Rs. 1.08 per annum for 90% cover. Premium is payable in Indian Rupees. Claims under the guarantee will also be paid only in Indian Rupees.
7. Transfer Guarantee: This guarantee seeks to safeguard the banks on the confirmation they might add to letters of credit opened by banks abroad in favour of the Indian exporters. The guarantee covers risks of: (i) insolvency of the opening bank; (ii) failure of the opening bank to pay within four months from the due date of payment; (iii) operation of law which prevents, restricts or controls transfer of the amount of the credit to India, in circumstances outside the control of the opening bank and confirming bank; (iv) occurrence of war between the country of opening bank and India; and (v) occurrence of war, hostilities, civil war, rebellion, insurrection or other disturbances in the country of the opening bank. The guarantee covers 75% of the loss in respect of risks (i) and (ii) and 90% for risks (iii) to (v).
The premium charged will normally be at the rates applicable under the ECGC’s insurance policy covering export of goods. The actual rate will depend upon the country in which the letter of credit is opened and length of the period to be covered.