ABSTRACT

A CRITICAL ANALYSIS OF 'EXPORT CREDIT

INSTITUTIONS IN INDIA
In the ancient period, barter system was in use. Gradually it was
replaced by the idea of exchanging goods for gold and precious metals and as
time went by. Traders eventually accepted coins and currencies in return for
goods and services. From the early days the realities of economics have played
an important part in international trade. Thus, it was when buyers could not
afford to pay for merchandise immediately, credit extensions began to be
granted, allowing the buyers to receive the goods but pay at a later date. Credit
extensions and financial assistance have emerged as important factors in
today's international business environment, the success of exports, among
other things depends upon extensions of export credit. Competition in the
world markets is not confirmed to price and quality alone but it extends to
credit terms also.

It is important for a country to develop and maintain an efficient system

of providing export credit lest it should become a bottle neck in winning an
export contract in a way it adds to international competitive strength of
exporters of a country. Short term (a period not to exceed 180 days) finance is
provided by the commercial banks, where as long term export credit is
provided by the EXIM bank of India. The insurance cover to Indian exporters
is provided by the wholly government owned export credit guarantee
corporation of India (ECGC).

An export credit is an insurance, guarantee or financing arrangement

v/hich allows a foreign buyer of exported goods and/or services to defer
payments over a period of time. Export credit is required in pre-shipment and
post-shipment stages. It is needed either in Indian currency or foreign currency.

Numerous working groups, panels and task forces relating to important

export sectors and other high powered committees were set up in the recent
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past. Their objectives were to review the structure of the import and export
policies, activise, the role of policy instruments of export promotion review the
perfonnance of India's foreign trade and the promotional progrmmes with
particular reference to specific product and markets and review the institutional
service support to back the trade promotion strategies. In this context, salient
features of the recent three high level committees, namely - The Alexander
Committee, The Tandon Committee and The Abid Hussain deserve special
mention for the purposes of present thesis entitled, A Critical Analysis of
Export Credit Institutions in India, two Institutions namely, Export-Import
bank of India (EXIM Bank) and Export Credit Guarantee corporation (ECGC)
of India have been studied.

The EXIM bank was set up by an Act of Parliament in September 1981.

The bank commenced it operations in March 1982. EXIM bank is a wholly
Government owned financial institution. The EXIM bank was established, "for
providing financial assistance to exporters, to importers and for functioning as
the principal financial institution for coordinating the working of the
institutions engaged in financing export and imports of goods and services with
a view to promoting the country's international trade. It takes the promotional
activities and provides counseling services to persons engaged/connected with
export-import business. It has taken over the export loan and guarantee
portfolio of Industrial Development Bank of India (IDBI).
The bank was established with the following objectives:
To translate national foreign trade policies into concrete action points; to
provide alternate financing solutions to the Indian exporter, aiding him in his
efforts to be internationally competitive; to develop mutually beneficial
relationships with the international financial community; to initiate and
participate in debates on issues central to India's International trade; to forge
close working relationships with other export development and financing
agencies, multilateral funding agencies and national trade and investment
promotion agencies; to anticipate and absorb new developments in banking,
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export financing and information technology; to be responsive to export

problems of Indian exporters and pursue policy resolutions.

Exim Bank is quite unique in its global and national network of institutional
and professional linkages. Bank's five overseas offices have forged strategic
institutional linkages for the bank. Bank's Nine offices in India help to respond
to regional developmental activities in the export sector.

Exim bank plays a four pronged role with regard to India's foreign trade,
those of a coordinator, a source of finance, consultant and promoter. Exim
Bank has introduced lending programmes, which aims at providing loans to
Indian companies, foreign governments, companies commercial banks in India.

As at March 31, 2003, the Bank had a paid capital of Rs. 6.5 billion, and
net worth of Rs. 19.67 billion. It also raise funds from domestic and
international markets. Exim bank shares in short term export financing.

Th Exim bank has introduced the following two schemes in this

connections:

• Export Bills rediscounting scheme and refinance of export credit scheme.

The establishment of Exim bank may be regarded as a right step in the

export promotion policy and programme of the government. Since its inception
in 1982 to the end of 2002-2003 the total amount of loan sanctioned by the
bank were Rs. 363389 million, where as for the above same period Rs. 280973
million were disbursed. Paid up capital of the bank as on March 31, 2003 was
Rs. 6500 million, while it was Rs. 750 million on the end of 1982. Profit after
tax during 2002-03 was Rs. 2686 million where as it was Rs. 63 million.

As part of the export promotion, the government of India set up in July

1957 the Export Risk Insurance Corporation (ERIC) whose main objective was
to protect exporters against certain kinds of risks. Later on 15"^ January 1964
ERIC was transformed into Export Credit and Guarantee Corporation (ECGC)
geared to impart a sense of security to the exporters through insuring their
overseas credit risks and to encourage banks to extend liberal credit to the
exporters for their various export needs through furnishing financial
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guarantees. The objectives of the corporation, as Usted in the Articles of

Association, are:

To provide insurance to exporters against any risk of loss by reason of their

failure to recover any amount payable in respect of transaction involving
export; to give guarantees to or for the benefit of persons residing in or
belonging to a foreign country, in connection with goods exported or services
rendered from India; to give facilities for financing exports; to provide such
supplementary finance as may be required for promotion and development of
exports; to give loans against hypothecation of pledge of goods, title to
property, for the purpose of promoting export trade; to provide financial help
for the purchase of Indian goods on extended payment terms; to provide
guarantees in respect of advances given by banks and other financial
institutions in connection with exports of goods; to give guarantees to exporters
with a view to assisting them in conducting market surveys, publicity and
stock holding for the development of overseas markets and to share expenses
on such promotional measures if expenses are not fully recouped with sales; to
undertake such functions as may be entrusted to it by the government from
time to time, including grant of credit and guarantees in foreign currency for
the purpose of facilitating the import of raw materials and semi-finished goods
for manufacturing and processing of goods for exports; to act as agent of the
government or with the sanction of government on its own account, to give
guarantees, undertake such responsibilities and discharge such functions as are
considered necessary in national interest.

There are four broad categories of facilities which are extended by

ECGC to exporters and financial institutions:

Standard insurance policies, which are issued to exporters to protect them

against the risks of trading with overseas buyers on credit terms; specific
policies, designed to protect Indian firms against payment risk involved in (a)
exports on deferred terms of payment (b) services rendered to foreign parties
and (c) construction works and turnkey projects under taken abroad; financial
guarantees, which are issued to banics against the risks involved in providing
credit to the exporters; and Special scheme, viz. Transfer guarantee meant to
protect banks which add.

Trading with overseas buyer is risky but when International trade is

carried on credit terms, the risk becomes all the more greater. Financial
Institutions are often rcluctant to grant export credits unless adequate
guarantees are given. Although banks in India do show a flexible attitude and a
developmental bias in extending export credits, the various activities of the
ECGC have contributed significantly to increased and strengthen their
willingness to advance these credits on substantially large scale. 1 The
integration of the economics has led to a substantial growth of multi sourced
transactions, where the buyer in an importing country obtains its goods from
different exporting countries. For banks, Exporters, importers and Export
Credit Agencies (EGAs) this implies a substantial amount of work. To obtain
adequate cover negotiations have to be held with all EGAs involved. Different
application forms have to be filled in, various underwriting criteria have to be
met, diverse conditions of cover have to be taken into account and each EGA
changes its own premium. A lot of time, and thus money, could be saved if the
EGAs so cooperated more closely with one another. Standardization of policies
and premium fees would be very helpful to all parties concerned.

The importance attached to export promotion by Governments in

developing countries is an important explanatory factor for the greater share of
the EGAs in developing countries in financing their national exports. Thus,
developing country EGAs are expected to be strongly involved in accelerating
exports by offering a diversity of schemes as well as through energetic business
promotion efforts.

In under writing short term business. Export Gredit Agencies tend to

adopt a conveyer belt approach. This is necessary both to handle the large
volume of individual cases or contracts, often with quite small values and to
minimise administrative expenses. In the short term area, export credit agencies
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sell not a guarantee but rather conditional insurance cover. Most export credit
agencies do not cover disputes between seller and buyer and will normally only
examine a claim after a dispute has been resolved. Political risk include non-
payment due to war or civil war, the enactment of laws, that prevent the
transfer of funds, and the imposition, after the export credit institution has
come on risk, of export or import licensing. Devaluation or depreciation of
local currency as such is not covered as a political risk. Indeed, it is not covered
at all unless it is followed by the default or insolvency of the buyer, in which
case the claim is normally regarded as a commercial risk claim - that is as an
insolvency or default claim, without regard to the reason for the insolvency or
default.

A relatively small number of export credit installations are prepared to

issue separate forms of short term cover directly to banks. These can include
cover directly to banks in those countries that opens letters of credit for imports
from the country of export credit institution. On the basis of this cover, the
bank in the exporting country may then consider confirming the letter of credit
on either an open or a silent basis.

Export credit institutions' involvement in the medium to long term

financing of project is very difficult from their involvement in short term trade
finance. First, of course, the horizon of risk is much longer. For example a
power station may take 5 years to build, and the repayment of the loan used to
finance it may take 10 years more. Thus export credit institutions that insure (or
offer) these credits are faced with risks that run over 15 years or more.
Individual cases can also be very large. It is not unusual for an export credit
institution to under write a number of cases every year where the contract value
or the size of the exposure involved in each case is considerably larger than the
agency's total premium income for the year. In the past, the export credit
institutions insured many projects in politically difficult markets, where the
risks were perceived as being very high or, at best, impossible to predict. These
uncertainties were not solved by a host government guarantee in many of these
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cases. Also the absence of any kind of reinsurance market meant that each case
represented a large block of exposure, which could remain on the institution's
books many years.

When the export credit agency is in a OECD (organisation for economic

cooperation and development) country, the credit terms that it supports must
comply (if more than tvvo years credit is involved) with the terms of the OECD
arrangement (Formally, the arrangement on Guidelines for official supported
export credits). Rules under OECD arrangement non apply to the maximum
length of credit, the minimum rate of interest, the minimum down payment,
the starting point of credit, and the repayment profile. In addition, and of great
importance, beginning in 1999 rules also apply to minimum premium rates for
political risks.

Export credit institutions normally underwrite both political and

commercial risks. The key concern in a number of areas is the ability of the
buyer (or the borrower in a buyer credit arrangement) to fulfill its contractual
obligations. Thus, timely and accurate information about the buyer is vital to
the underwriter. This includes status and financial information, supported by
the audited accounts and, preferably, details of a track record. Such information
is needed not just for private buyers but also for public buyers that are wholly
or in part Government owned but can not commit the full faith and credit of
their Government. Unless the Government in the buying country will stand
behind and be fully and formally responsible for a company's debt (which is
now rather unusual), underwriters need the same kind of information on public
(but non sovereign) buyers and banks that they seek for a private company.

If the information is satisfactory, the underwriter will accept the buyer

for a specified sum and specified terms (e.g. $ 1,00,000 and six months' credit
on an open account basis). However, if the underwriter is not satisfied that the
information available provides a prudent basis for insuring credit, there are a
range of possibilities:

The under writer can seek further and/or more up to date information.
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The under writer can seek to reduce some of the risk by declining open account
business and stipulating that payment be made by means of a letter of credit or
by bills of exchange or promissory notes; the underwriter can seek a guarantee
of payment from some acceptable third party, for example, a shareholder or the
parent company of the buyer or a bank; the underwriter can offer cover at a
reduced level (e.g. a credit limit of $ 30,000, where $ 1,00,000 was sought).

Many export credit institutions have suffered severe consequences from

the international debt crises of the 1980s. In some years they paid claims
significantly in access of their premium income, and most of them - at least
with respect to their medium and long term credit activities - exhausted their
reserves and began to accumulate deficits. In addition, in recent years the trend
has been toward forgiveness of country's external debt, in the form of Paris
Club rescheduling for low income countries. For this and other reasons, the
recoverability of some claims that export credit agencies have paid has
worsened or disappeared. And this has had an impact on their balance sheet.

There is also now the discipline provided by the WTO Agreement on

subsidies and countervailing measures, which requires export credit agencies to
break even over the long run. Export credit agencies may be subject to action in
the WTO if they do not conform to these rules.

In the past, export credit agencies tended to be national, and so

competition in the export business was between countries. However, in the area
of short term export credit the role of government is being reviewed in many
countries, and competition is increasingly between insurers, and thus between
export credit agencies.

Project financing present a whole new range of challenges and

problems, not only for export credit institutions and banks, but also for
exporters, contractors and investors. One key question is whether it really
makes sense for borrowers, host Governments; lenders, investors and those
who insure them to finance large numbers of infrastructure and other projects
in foreign currency. Most of these projects, after all, generate little if any
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foreign exchange to repay the debt incurred. There surely be much greater
emphasis on encouraging the local financing (or at least the financing in local
currency) of large projects that do not earn foreign currency. The international
financial institutions are encouraging more and more governments to privatise
and decentralize and to disengage from industrial and commercial activities.
This has led to a proliferation of project financing.
Two examples may help illustrate some of the problems:

For many export credit agencies the traditional policy has been that
exporters and their banks are responsible for their own documents. Thus, if a
claim arises because a document is faulty or not enforceable, this is not an
insured risk and the claim is not payable. If an export credit agency stipulates a
particular kind of guarantee, it will normally not examine or approve the
guarantee at the time it is obtained. Th key stage is then the claims stage.

The issue of action or inaction by a host government giving rise to non

payment and thus to a claim is also much more difficult in project financings.
This is specially true of infrastructure projects (but not restricted to them),
because in such projects different agencies and levels of the host government
can play so many different roles.

A third example of the blurred risks that arise in both short term and
medium term business is what happens when a country experiences a foreign
exchange shortage. In the past such shortages led to transfer delays and so to
political risk claims. Now and in the future however, they are likely to lead to
currency depreciation and to the default or insolvency of buyers who can no
longer afford to purchase the foreign currency they need to repay external
creditors. It is not helpful to wait for problems or claims to arise before
deciding who is carrying this or that risk.

Problems can also arise if some lenders or investors - including the

international financial institutions - are not prepared to accept a paripassu
position (i.e. equal treatment with other lenders and investors).
Against this background, export credit agencies face certain constraints and
certain problems. For example:

Expertise: Export credit agencies can not have experts in all sectors.
Analytical capacity: Export credit agencies are limited in the number of
projects they can examine at any one time. And projects whose financing takes
four or five years to structure (e.g. the Hub river project in Pakistan) are a
dubious model for any body or any thing.

The effect of the debt crises: Export credit agencies bear the scars of the 1980s
debt crises, and many have lost substantial reserves. This has led to
unprecedented level of scrunily, by legislatures and ministries of finance, in
most exporting countries.

Overenthusiasm of some project sponsors and advisors: Advisors to a project

may be paid on a daily basis rather than by results. Their eagerness to earn fees
may clog up the system by lodging a host of impractical applications to be
examined.

Coordination: Export credit agency often encounter difficulty in designing and

implementing risk sharing and multisourcing arrangements (i.e. projects where
suppliers and insurers in a number of countries are involved).
Lack of understanding: Export credit agencies must deal with a continuing
misunderstanding on part of many - some of whom should know better - about
their role. Again export credit agencies are not source of aid, nor are they
sources of united finance. They are not solely or even primarily vehicles for
industrial support or foreign policy.

Another difficult area is that of pre-completion risk: who takes the risks
of non-completion of a project, and what is the proper role of export credit
agencies in this area ? this has been an area of some change in recent years.
Initially, some export credit agencies did not wish to cover any risks until after
projects were commissioned. Their feeling was that the project sponsors should
take the pre-completion guarantees of various sorts from contractors and other
suppliers. This partly reflected a view that pre-completion risks were
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essentially commercial risks and thus more appropriate to the commercial

banks and to contractors then to export credit institutions.

In the last chapter of the Thesis conclusions and suggestions for the
improvement and strengthening of the institutions have been summed up, so as
to make these Institutions a still more useful organ of economy. Having gone
through the schemes of Exim bank and ECGC in providing financial cover,
insurance and guarantees to the eligible exporters and importers. It is concluded
that the services provided by these institutions have been satisfactory, specially
among the developing countries like India. More over, the following
suggestions at various stages of export credit are given below

In spite of the tremendous increase in operation of ECGC, its coverage of

India's insurable exports over the past two decades has not exceeded 20
percent. In view of the gradual shift in favour of shipments of non-traditional
goods on credit terms and considerably large volume of insurable exports. Yet
to be covered. Following suggestions are offered to improve the activities of
the corporation:

Premium rates could be reduced considerably by resorting to "group insurance"

as practiced in Japan, rationlazing the premium structure by examining the
probability of loss on various types of risks insured by ECGC and introducing
as a further incentive a non-claim bonus schedules;

Fixation of credit limits on foreign buyers may be done away with and that
these customers be grouped into "good" or "bad" as in Japan;
The corporation should take over from the exporters the responsibility of
instituting legal proceedings against the defaulting importers and establish
suitable machinery to certify exporters' compliance with contract terms,
including "quality", at the pre-shipment stage;

The ECGC share of risks under financial guarantees should be increased from
66 percent to 80-85 percent so as to minimize banks' reluctance to advance
credits to exporters.
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Exim bank through its wide network of alliances with financial institutions,
trade promotion agencies, information providers across the globe assist
externally oriented Indian companies in their quest for excellence and
globalisation. Services include search for overseas partners, identification of
technology suppliers negotiating an alliance and consummating a joint venture.

It is also true and unfortunate that the bank of such a high profile which is
particularly dealing with export-import business has barely nine brnches all
over the country. In twenty one years the Exim bank has opened its branches
with its head quarter in Mumbai, Ahmedabad, Bangalore, Chennai, Guhai,
Hyderabad, Kolkata, New Delhi, Pune as regional branches. It is a matter of
great concern that a bank on which export import is dependent has such a
negligible number of branches in such a large span of time since its
incorporation in 1982.

It has been advised that bank should open new branches at least one in every
state and Union Territory in order to provide its services to every nook and
comer of the country.

Efforts should be made by the Exim bank to focus its attention to new and
small exporters, who are in the process to enter into export business.
Efforts should be made towards the recoveries of the amount of loan sanctioned
for long and medium term export business on the expiry of such term so that
huge amount of capital could not be blocked.

Short-term loan should be provided for a resonable extent as it carries higher

rate of interest and also the rate of interest should be reduced to compete other
institutions.

Bank should organize orientation programmers regarding future prospects

procedure and policies of export financing. Bank should continue a particular
programme over a period.

Bank's income from investment made is meagre. Thus bank should avoid
investing fund for less productive purposes. Bank should provide more and
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more financial assistance to germs and jewelry trade which yields maximum
foreign exchange for the country.

Bank's major expenses are in the form of debt service which reduces its
profitability. Thus bank should raise its paid capital for working capital
requirements.

It has been observed that exporters are not aware of all the policies
programmes and scheme of the Exim bank. Therefore need of the hour is that
Exim bank should regularly take steps to organise seminar and publicity
compaign in general and industrial areas in particular so that new and present
customer would take benefits from such schemes, programmes of the bank.

Export credit is a complex commercial activity which require proper

planning and management. In this field, the Exim bank of India is doing a good
job in providing easy availability of money in desired quantum. An important
requisite of export credit is that the money should be available at cheap rate of
interest. More over, it should be risk free and procedurally convenient.

The Exim bank of India needs more strengthening of its operations

particularly investment finance, credit to overseas buyers so as to enable Indian
promoters to finance equity contribution in more and more joint ventures
abroad and also to enable the overseas buyer to pay for capital goods imported
from India, similarly, lines of credit sanctioned to overseas financial
institutions, foreign governments and agencies, also need to be steramlined and
liberalised to facilitate Indian exporters.

Increased attention of Exim bank is also needed in export bill

discounting extending relending facility to overseas banks and direct financial
assistance to Indian exporters to extend term credit to the overseas importers of
Indian capital goods.