The Institutional arrangement for Financing Exports in the United Kingdom

The special institution connected with export finance in England is the Export Credits Guarantee Department affording credit insurance to the exporters. The Export Credits Guarantee Corporation of India has been modelled after this institution.

Export Credits Guarantee Department (ECGD) is a government department but runs on commercial lines. The claim settled is expected to be met out of the premium collected. ECGD does not finance exports direct but facilitates export financing by banks by providing credit insurance. What would otherwise appear to be too risky a proposition to a bank asked to make an advance, becomes a good banking risk when an ECGD policy is offered as security. ECGD provides two types of cover: (i) Comprehensive policy for short-term exports, and (ii) Specific policy for medium and long-term exports.

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1. Comprehensive short-term Guarantee. This cover is available for export of consumer goods, durables and engineering manufactures sold on up to six months’ credit. The exporter should cover all exports on a whole turnover basis. Generally the cover is available from the time the goods are despatched, but it is possible to obtain the cover for the ‘pre-credit risk’, i.e., from the date of the contract of sale. A basic premium is paid in advance annually and further premium paid once a month when the exporter declares the actual exports.

The risks covered under the policy are: (i) Insolvency of the buyers. (ii) The buyer’s failure to pay within six months of due date for goods he has accepted. (iii) The buyer’s failure to take up goods that have been despatched to him (where not caused or excused by the policyholder’s actions, and where the ECGD decides that the institution or continuation of legal proceedings against the buyer would serve no useful purpose). (iv) A general moratorium on external debt decreed by the government of the buyer’s country or of a third country through which payment must be made. (v) Any other action by the government of the buyer’s country that pre-vents performance of the contract in whole or in part. (vi) Political events, economic difficulties, legislative or administrative measures arising outside the UK that prevent or delay the transfer of payments or deposits made in respect of the contract. (vii) Legal discharge of a debt (not being legal discharge under the proper law of the contract) in a foreign currency, which results in a shortfall at the date of transfer. (viii) War and certain other events preventing performance of the contract provided that the event is not one normally insured with commercial insurers. (ix) Cancellation or non-renewal of a UK export licence or the prohibition or risk restriction on export of goods from the UK by law (this risk is covered only where the pre-credit risk section of the guarantee applies). (x) In the case of certain public buyers (central, regional, provincial and local government buyers), the ECGD may agree to cover the risk of failure or refusal of the buyer to perform the contract. Each buyer is approved individually.

2. Specific Guarantees. Transactions involving capital goods are covered by ECGD by specific guarantees. These transactions involve granting of credit for five years and above. A separate guarantee is to be obtained for each contract. The cover may be available from the date of shipment or from the date of contract. The risks covered are similar to those under the comprehensive policy. Maximum cover is 90%. Special varieties of specific guarantee are available for special types of transactions.

3. Other Schemes. (a) Exchange Risk Insurance. ECGD provides a measure of protection for UK exporters against adverse exchange rate movements. This takes two forms: (i) Exporters can take out an additional pound-sterling denominated cover under their ordinary specific guarantees or by way of endorsements to their basic cover policies. (ii) A tender-to-contract cover is available designed to protect exporters from adverse exchange rate movements over the contract life. Where bids have to be submitted in foreign currency, the cover is available from the date of such bid. The cover is provided for nine months, with ECGD having the right to reset the rates at the end of such period. (b) Consortium cover. The scheme is designed to assist UK suppliers in bidding for major projects with other UK companies. It covers a consortium member against losses arising from the insolvency of another member. It also protects a UK contractor against cost overruns caused by a sub-contractor’s or joint venturer’s failure to perform, where such failure lies outside the insured’s control.

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