Only Manufacturing Sector Gets Receivables Cover
The service sector seems to have nothing to cheer about the business credit shield risk cover insuring credit receivables that was introduced with great fanfare in September. A host of advertising agencies and non-banking finance companies (NBFCs) are knocking at the doors of the New India Assurance Company, but the state-run insurer is offering the cover only to the manufacturing sector.
The New India has already offered the product to a few exporters and players in the pharmaceutical industry. New India officials said pharma companies were insuring their export receivables to risky countries. Enquiries have been pouring in from the automobile, pharmaceutical, cement and commodity sectors.
Many were eyeing the advantage of taking the credit shield cover as the New India would not only protect against non-payment of dues, but the public sector insurer through its vast 1,000-odd branch network would also actively participate in the recovery of dues.
But the New India is not offering it to the service sector keeping in mind Union finance minister Yashwant Sinha's warning that it must not allow the product to be misused by the industry as a means of passing on their non-performing assets.
The public sector insurer has taken a decision to adopt a sectoral approach and insure receivables of the manufacturing sector. This is because "this sector is more dependable and has actual goods to show for the receivables. In the case of advertising, there are queries as to whether an ad had really been released or whether the payment has actually been made," said officials at New India.
New India will first vet the credit worthiness of buyers before committing itself to insuring the risks. "Only if we find the credit worthiness to be safe, will we offer insurance cover on the credit receivables," said New India officials.
Even after insuring the receivables of manufacturers, the New India will continue to monitor the credit worthiness of the buyers. "We will forewarn clients to reduce their sales based on the latest credit information," said officials. This will help check non-performing assets related to trade.
The product is perceived to have been introduced at the right time, when the manufacturing sector is in dire straits, with the growth rate at two per cent. Many have been forced to make huge provisions against bad debts. With sales affected and dealers unable to sell, the cash flow for many organisations has been negatively impacted by the slow down in the global economy.
Last fiscal 2000-01, the manufacturing sector found it difficult to get back money from buyers and wrote off debts in excess of Rs 500 crore. This was reportedly 50 per cent higher than the preceding fiscal.