Trade credit insurance protects businesses against the risk of non-payment for goods and services by buyers. It usually covers a portfolio of buyers and indemnifies an agreed percentage of an invoice or invoices that remain unpaid as a result of protracted default, insolvency/bankruptcy
The Insurance Regulatory and Development Authority of India (Irdai) on Wednesday issued draft proposals on regulatory framework to promote sustainable and healthy development of trade credit insurance for businesses.
Trade credit insurance protects businesses against the risk of non-payment for goods and services by buyers. It usually covers a portfolio of buyers and indemnifies an agreed percentage of an invoice or invoices that remain unpaid as a result of protracted default, insolvency/bankruptcy.
It further contributes to the economic growth of a country by facilitating trade and helps in improving economic stability by addressing the trade losses due to payment risks.
Irdai's draft proposal said, "It (the guidelines) will also facilitate general insurance companies to offer trade credit insurance covers to suppliers as well as licensed banks and other financial institutions to help businesses manage country risk, open up access to new markets and to manage non-payment risk associated with trade financing portfolio. It will enable general insurance companies to offer trade credit insurance with customised covers to improve businesses for the SMEs and MSMEs, considering the evolving insurance risk needs of these sectors."
The policy will cover credit risk that has a direct link with an underlying trade transaction, i.e. the delivery of goods or services. If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy. The cover may include but not be limited to commercial risks and political risks.
Political risk cover is available only in the case of buyers outside India and in respect of those countries agreed upon at the proposal stage. On the other hand, Commercial risks will cover insolvency or protracted default of the buyer, banks' responsible for payment in case of a letter of credit transactions and stock holding agent in case of consignment transactions.
It will also cover rejection by the buyer after delivery subject to conditions of contract and the buyer before shipment, where the goods are manufactured or being manufactured exclusively as per the requirements of the buyer and cannot be sold elsewhere.
Any non-receipt of payment on account of collecting bank`s failure will also be covered.
"Considering the significant impact, the proposed guidelines may have on many of the stakeholders involved in trade-related transactions, it has been decided by the Authority to place these draft guidelines for seeking their valuable comments and inputs," said Irdai's draft proposal.