A working group formed by the insurance regulator to suggest changes in trade credit insurance guidelines has proposed that banks, factoring companies, and financial entities should be allowed to avail credit insurance to cover trade related transactions and loan default of sellers.
Trade credit insurance covers a seller against the risk of non-payment by its customers arising due to willful default or insolvency. The repaying capability of the customer depends on various macro and micro economic factors.
The regulator formed the working group after it received flurry of requests from various stakeholders for enhancing the scope of the cover and increase the range of the products. The working group has submitted its suggestions to the regulator and comments of various stakeholders have been invited post which it will take a call on the implementation of the proposed suggestions.
The group has suggested some changes in the current guidelines like the indemnity provided to the insured should be allowed to increase from 85 per cent to 90 for all policy holders and 95 per cent in case of political risk for micro and small enterprises.
Among other recommendations, the working group has said insurance companies will now be able to offer wider range of credit insurance products with enhanced covers at affordable premiums to boost the SME and MSME sectors. And, single buyer risk covers should be allowed only for micro and small enterprises.
The working group has also proposed that a buyer default data base should be created with the insurance information bureau (IIB) to keep a check on the defaulters & better risk mitigation process. And, insurance companies should access CIBIL data base for underwriting purposes so that if a buyer defaults under the trade credit insurance policy, subsequently it can be intimated to the banks through CIBIL.
In India, the credit insurance market has been dominated by ECGC, a specialized PSU insurer for years. ECGC provides only export credit insurance facilities to banks and exporters while other insurers provide domestic credit insurance.
Around 82 per cent of the total credit Insurance business is contributed by ECGC, which is outside the purview of the trade Credit Insurance guidelines. The balance around 18 per cent is contributed by other general insurance companies, both public and private, governed by the trade credit insurance guidelines.
In FY19, claims in the credit insurance segment were to the tune of Rs 373 crore, as against Rs 269.57 crore in FY18. On the contrary, premiums collected saw a 14 per cent rise at Rs 670 crore, compared to Rs 586.11 crore in FY18. According to the latest data available, in the April-February FY20, premiums collected by non-life insurers saw a 5 per cent contraction at Rs 1,294 crore over the same period a year ago.