credit risk analysis by ecgc
TRANSCRIPT
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Country Risk Analysis
A presentation by ECGC
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What is Risk? Uncertainty about
the future
outcome Lack of
knowledge
Imperfection inknowledge
Possibility of Loss
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Export Credit Risk Exports
Goods
Services Credit
Extending supplier credit:
DP, DA, OA Risk
Possibility of non-payment of accounts
receivables
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Types of Export Credit RisksCredit
Risk
Legal
Risk
Political
Risk
Exchange
Risk
Transfer
Risk
Export
Credit
Risk
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Political Risk Some countries may experience major
political instability
defaults on payments
exchange transfer blockages
nationalization
confiscation of property
leading to
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Credit Risk
The risk of
Insolvency Default
Fraud
Unwillingness to accept the goods onthe part of the buyer
Credit riskAll resulting in..
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Exchange Risk The possibility of variability
in the exchange rate on
account of the time lagbetween the date ofcontract and actualpayment is referred to as'Exchange Risk'
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Transfer Risk..
Exchange or trade
controls introduced
in Buyer's country
Weakness in economyof Buyer's country,
viz. low reserves,
BOP problems
Failure of Buyer's
Bank affecting
payment of
outstandings
arising from all/any of the above
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Legal Risk
Differences in law can be expected inoverseas countries
These may have an impact in such areas as:
import procedures taxation employment practices
currency dealings property rights the protection of intellectual property agency/distributorship arrangements
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Export Credit Insurance Export Credit insurance is cover offered
by insurance companies which
encompasses the risk of non-paymentwithin export operations
Risks covered by export credit insurers:
Commercial Risk Political Risk
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Factors Leading to Commercial
Risks
Buyers willingness
to pay:Behavior of the
debtor
Buyers ability topay:
Debtors financial
condition
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Commercial Risks
Insolvency/ Bankruptcy Breach of Contract
Payment Default Refuse to take delivery of goods
Ability or behavior?
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Political Risks
Political risks cover events that occurabroad other than commercial risks suchas:
The general political risk
The natural catastrophe risk
The non-transfer risk
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Methods of Political Risk Control
by Credit Insurers Country Risk Classification:
The arrangement on Guidelines forOfficially Supported Export Credits is a
"Gentlemen's Agreement" among OECD
Participants. The Arrangement, includingthe Knaepen Package, gives a seven
fold classification of countries, which isused by many export credit insurers
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Methods of Political Risk Control
by Credit InsurersThe Country Risk Classification Method measures
the country credit risk, i.e. the likelihood that a
country will service its external debt
It uses an econometricmodel based on
quantitative indicators,
e.g. the financial &economic situation &
the payment experienceof the countries
It takes account ofpossible qualitative
factors, e.g. political &
other economic &financial factors not incl.
in the quantitativeEconometric Model
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Methods of Political Risk Controlby Credit Insurers
The final classification, based onlyon valid country risk elements, is a
consensus decision of the sub-Group of Country Risk Experts
that involves the country riskexperts of the participating Export
Credit Agencies
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Role of ECGC as an ExportCredit Insurer
Providing credit insurance covers to exportersagainst loss in export of goods & services
Providing export creditguarantees to banks &FIs to enable exporters obtain better facilities from
them
Providing Overseas Investment Insurance toExporters - Indian Entrepreneurs in OverseasVentures (Equity/Loans)
Maturity Factoring
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Policy
INSURERECGC
RISKS BUYER/COUNTRY
INSUREDEXPORTER
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LC
TRANSACTION
POLITICAL RISK
(Open Cover &Restricted cover
COUNTRY
BUYER BANK
NON LC
COMMERCIAL RISK
Risks Covered by ECGC under
ST Policies
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Risks Covered Under STPolicies
COMMERCIAL
RISKS Insolvency of
buyer/LC openingbank
Default of buyer Repudiation by
buyer
POLITICAL RISKS
War/civil
war/revolutions
Import restrictions
Exchange transfer
delay/embargo Diversion ofVoyage Risk
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Buyer & Country Underwriting
The 2 pillars of Export Credit Insurance :
and
With the help of these two, ECGC controls
the commercial and political risks
BuyerUnderwritingthat assessesbuyer risks
CountryUnderwritingthat assessescountry risks
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Country Underwriting
Assessment and evaluationof political risks associated
with countries for thepurpose of premiumcalculation, determiningtypes of cover and terms of
coverCountry reviews are takenup on a regular basis forup/down grading
Evaluating a
Country
Reviewing a
Country
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Evaluating a Country
Country Underwriting involvesassessment of a countrys ability
and likelihood to honour itscommitments undertaken both, aspart of trade as well as sovereign
debt The country risk is evaluated on
the basis of the politico-economic
situation prevailing in a country
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Reviewing a Country
Politicalstability/instability
InternationalRelations:
relation withneighbours, IMF,
WB, TradeBodies
Policy Trends:fiscal, monetary
policy, structuralreforms
Eco. Structure:
GDP, inflation,exchange rates,
BOP, import cover,external sector, debt,
reserves, FDI
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Reviewing a Country
Late Payment
Experience
International
Rankings
Trade Relations
with India
ECGC
Experience
Experience withother credit
insurers
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Country Evaluation: ECGCsObjective Scoring Methodology
ECGC classifies the countries with the help of an
objective scoring methodology
Under the rating system followed, the weighted
averages of scores on economic risk rating,
political risk rating, past experience of ECGC,
trade relations with India and experience with
other credit insurers are calculated to arrive at
the Country Risk Indicator
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Country Evaluation: ECGCsObjective Scoring Methodology
Economic RiskRating
Political RiskRating
Eco-PolRelations with
IndiaECGCExperience
Exp of CreditInsurers
Country
Risk
Indicator
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Objective Scoring Methodology
The individual scores are added up as
per pre-determined weights Weightage scores are summed up
to obtain a total final score on a
base of 100 This score is used to derive anoverall rating for classifying thecountries
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Seven Fold CountryClassification
Risk Category ECGC Classification
Insignificant A1 (1/7)
Low A2 (2/7)
Moderately Low B1 (3/7)
Moderate B2 (4/7)
Moderately High C1 (5/7)High C2 (6/7)
Very High D (7/7)
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Types of Cover
While underwriting the country risk, ECGCplaces the country either in
The basis for deciding on the type of cover andterms of cover is a host of economic andpolitical factors
Open Cover Restricted CoverOR
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Open Cover Countries
Cover with No Restrictions Cover is offered usually on normal
terms and conditions i.e. 90% cover, 4months waiting period forascertainment of loss and settlement of
claims, etc. Currently ECGC places 195 countries
under Open Cover
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Restricted Cover Countries
Usually those countries where thepolitical and/or economic conditions
are relatively deteriorating or havedeteriorated and likelihood ofpayment delays or non-payment are
imminent or have occurred Permits selection of risks ECGC
wishes to underwrite
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Divided into 2 Categories
Category 1: Countries for which revolving limits areapproved normally valid for one year
Basis of cover:
ILCs opened or confirmed by banks listed inBankers almanac or by local banks whose reportsare satisfactory. Cover will be 90%
Normal cover of 90% on DP/DA terms subject tosatisfactory report on the buyer
20 countries under this category
Restricted Cover Countries
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Category 2: Countries where SpecificApproval will be given on case to case
basis on meritsValid for six months
Normal waiting Period of 4 months
Only 7 countries under this category:Afghanistan, Argentina, Cuba, EastTimor, Iraq, North Korea, Somalia
Restricted Cover Countries
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Restricted Cover Countries
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Underwriting Options forRestricted Cover Countries
Options exercised to control risk in Restricted Covercountries:
Reduce percentage of cover Increase waiting period for the settlement of claim
Provide cover against availability of governmentguarantee/confirmed ILCs
Payment in convertible currency
Fix country exposure limit
Fix transaction limit per exporter per buyer
Fix bank exposure limit
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Restricted Cover (case by case)
Restricted Cover (revolving credit)
Open Cover
Liberalization of ECGCsUnderwriting Policy
222 countries placed in 7-fold classification
195 placed in Open Cover
20 countries RestrictedCover and Revolvingcredit limit basis
7 countries in RestrictedCover
case to case basis
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Country Classificationas on 1st April 2004
Country
ClassificationOpen
CoverRestricted Cover
(revolving
limit facility)
Restricted
Cover
(case by
case)
Total
A1 (1/7) 26 0 0 26
A2 (2/7) 59 0 0 59
B1 (3/7) 28 0 1 29
B2 (4/7) 30 1 0 31C1 (5/7) 25 5 0 30
C2 (6/7) 17 7 1 25
D (7/7) 10 7 5 22
Total 195 20 7 222
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Distribution of Country RiskRatings
Very High Risk
High Risk
Moderately High Risk
Moderate Risk
Moderately Low RiskLow Risk
Insignificant Risk
26
59
29
31
30
25
22
D
C2
C1
B2
B1
A2
A1
Risk
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Case Study of SelectedCountries
A1: USA (Open Cover)
A2: China (Open Cover)
B1: Russia (Open Cover)
B2: Kenya (Open Cover)
C1: Serbia & Montenegro (Open Cover) C2: Uganda (Open Cover)
D : Iraq (Restricted Cover)
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Comparison: EconomicIndicators
Country GDP (US bn) CAD/GDPDebt Service
Ratio (%)Import Cover(in months)
USA 10987.9 0.05 - 0.7
China 1446.9 CA Surplus 4.8 12.45
Russia 433.5 CA Surplus 9.4 11.64
Kenya 13.2 0.17 10.6 4.8
Serbia & Montenegro 19.8 1.1 15.3 5.67
Uganda 6 0.67 11.6 10.96
Iraq 19.9 CA Surplus 0 NA
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Country ECGCRV
(2003-04)in Rs.mn
TransferDelay
ClaimsPaid
(Rs.mn)
PoliticalSituation
India TradeBalance(2002-03)in Rs. Mn
EuromoneyScore
ForexDelays
USA 59124.06 Nil Stable 311571 96.64/100 0-1 m
China 5549.67 Nil Stable -99751.53 61.52/100 1-3 m
Russia 970.45 NilRelatively
Stable 31549.48 49.02/100 1-2 m
Kenya 1550.86 NilRelativelyUnstable 8237.8 36.11/100 2-3 m
Serbia & Montenegro 22.13 NilRelativelyUnstable 1663.5 31.5/100 1-2 m
Uganda 414.31 607.2RelativelyUnstable 3097.38 37.8/100 2-3 m
Iraq 1355.56 4025.97 Unstable 10343.39 4.28/100 3-4 m
Comparison: Other Indicators
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Focus LAC
Review of all countries carried out in June 2003.
Mexico, Panama and Venezuela upgraded by 1step, Brazil by 2 steps
ECGC continues to closely monitor the situation inthese countries and reviews the gradings as andwhen the opportunity arises
Argentina is the only country placed in the RC; theCorporation is constantly monitoring the eco-political situation in the country
ECGC Initiatives for MoCFocus Regions
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Focus Africa South Africa, Tanzania, Botswana & Mauritius
upgraded. All countries under 1st phase of Focus
Africa Programme placed in Open Cover Revised and lower premium rates introduced fromApril 2003
ECGC ratings at par or better than OECD gradingsand also grading given by other Berne Union
members ECGC continues to closely monitor the situation in
these countries and reviews the gradings as andwhen the opportunity arises
ECGC Initiatives for MoCFocus Regions
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Focus CIS
Underwriting policy liberalized. Azerbaijan,Kazakhastan, Russia, Ukraine placed in OpenCover from Restricted Cover
Georgia and Moldova upgraded
Corporation is considering upgradation of Armenia
and Belarus and placing them in the Open coverfrom Restricted Cover
ECGC Initiatives for MoCFocus Regions
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ECGC Initiatives for MoCFocus Regions
Focus East Asia All countries in ASEAN as well as Australia &
New Zealand placed in Open Cover
Revised and lower premium rates introducedfrom April 2003
ECGC ratings at par or better than OECDgradings and also grading given by other Berne
Union members
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ECGC Schemes
Schemes for Exporters
Maturity Factoring
Schemes for Banks/ Financial Instns
Special Schemes
Schemes fo E po te s
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Schemes for ExportersShort Term Cover: Payment within 180days
SCR or Standard Policy:To cover risksin respect of all shipments on short term creditby exporters with anticipated annual turnoverof more than Rs.50 lacs
Turnover Policy:A variation of SCR policy
with additional discounts and incentivesavailable to exporters who pay a premium ofnot less than Rs. 10 lacs per year.
S h f E t
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Small Exporters PolicySimilar to SCR Policy, but for exporters withanticipated annual turnover of Rs.50 lacs orless
Specific Shipment Policy (Short term)To cover risks in respect of a specific shipmentor shipments against a specific contract Commercial & Political
Political Only
LC Commercial and Political
Schemes for ExportersShort Term Cover: Payment within 180days
S h f E t
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Exports (Specific Buyer Policy)To cover risks in respect of all shipment to one or afew buyers
Commercial & Political Political Only LC Commercial & Political
Exports of Services Policy To cover the risks of insolvency and default and
political risks for services rendered Without Recourse Export maturity Factoring
Undertaking to pay the amount due for ashipment on the maturity of the credit period.
Schemes for ExportersShort Term Cover: Payment within 180days
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Products in the offing
Consignment policy :to cover consignment exports where goods areshipped and held in stocks overseas ready for sale tooverseas buyers , as and when orders are received stockholding agent policy global entity policy
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Products in the offing
Exposure policy where premium would becharged on the basis of the expected level ofexposure
single buyer policy: covering the risks on aspecific buyer
multi buyer policy : covering the risks on allbuyers
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Bancassurance
ECGC has signed Corporate Agency Agreementswith a number of banks so as to use the Banks
network of branches to market its policies Under this arrangement, exporters can buy their
policies and pay premium through various branchesof these banks
ECGC offers commission to the banks for the policiesand premium secured
ECGC has currently signed corporate agencyagreements with 10 Banks
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E-Connectivity
Re-designed portal www.ecgcindia.com
Explanation of our schemes and Q&A by e-mail
Online facilities to our exporters :- premium calculator,
- online status of applications,
- online premium adjustment status,
- List of defaulted buyers,
- downloading application forms
- online submission of applications and decls.
- payment of premium, fees through payment gateway
http://www.ecgcindia.com/http://www.ecgcindia.com/ -
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For more detailsPlease visit
It is so easy with ECGC