The Hindu Business Line : No fresh credit risk cover for vendors of US auto giants

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No fresh credit risk cover for vendors of US auto giants

Credit rating of US auto industry deteriorating.

Real hit
The freeze is applicable only on fresh exposures.
Existing customers will not be affected.

C. Shivkumar

Bangalore, Nov. 18

The Export Credit Guarantee Corporation (ECGC) has frozen issue of fresh credit risk insurance (CRI) cover to Indian component vendors of US auto giants General Motors, Ford Motors and Chrysler.

ECGC officials said that the development was in response to the deteriorating credit rating of the US automobile industry and fears that Indian exporters would face increased payment risks. The officials said, “The freeze is applicable only on fresh exposures. Existing customers will not be affected.”

ECGC is a specialised credit risk insurance agency that guarantees export credits against payment risks by importers.

Besides ECGC, a clutch of private sector insurers also provide CRI covers to exporters. Among the private sector insurers, Bajaj Allianz General Insurance Company Ltd is the dominant player in the CRI market.

Bajaj Allianz Vice-President (Credit Insurance), Mr Suresh Khairwar, said, “Our outlook for US motor companies is not very good. We look at these sectors with a lot more caution.” But Mr Khairwar added, “Once the outlook changes, we are open to reinstating the risk cover.”

The caution stemmed from fears that the auto companies were expected to announce bankruptcy. As a result, ECGC and Bajaj Allianz preferred to wait for the US Government bailout package. The ECGC officials said that for the new exposures, they were advising exporters to exercise caution.

The officials said that this year ECGC was braced for a 30 per cent increase in claims on CRI covers.

Besides, the current global situation is expected to adversely impact vendors that have not taken ECGC cover. Exporters in the past have often resorted to discounting of bills supported by bank guarantees, without ECGC cover for meeting their working capital requirements. This time, banks are increasingly reluctant to discount export bills not backed by ECGC cover.

A top bank official when contacted said, “Normally we do not discount bills without ECGC cover. The exceptions were only in the case of bills of highly rated importers usually AAA or AA or its equivalent.” However, in the case of General Motors and Ford Motors, risk ratings have sunk.

Both these automobile giants have a Standard and Poor Rating that are six steps below investment grade. “Given this situation, how can the bills be discounted without CRI,” the banker asked.