Exporters' argument for `with recourse' funding rejected

C. Shivkumar

Bangalore, July 3

Public and private sector banks have turned down discounting of export bills in the absence of cover from the Export Credit and Guarantee Corporation (ECGC).

Banking sources said that ECGC covers were not mandatory, but more of a safety net. ECGC offers protection to exporters against payment risks and losses in goods/services. Yet few exporters were interested in taking ECGC covers, bankers said.

This was in view of the pricing. ECGC pricing is based on the country risks and the kinds of risks covered. The lowest premium is about 7 paise per Rs 100 of sum assured though this could rise as credit increases, beyond 90 days. Similarly, the premiums are low if the exports are backed by letters of credit from the importers.

Covers political risks too!

ECGC covers payment as well as political risks for exporters up to 90 per cent of the value of the goods exported. Bankers said that exporters had consistently argued since the bulk of their exports were against letters of credit, the payment risks were negligible. Among the exporters reluctant to ECGC covers are commodity and software exporters. The reasoning was that premiums increased their costs and therefore their competitiveness.

Moreover, exporters have also conveyed that in any case the discounting was done on a with-recourse basis.

Traditionally, bankers provide non-recourse discounting of bills only to destinations in the US and Europe and to importing entities, which enjoy good credit rating from international rating agencies. With-recourse implied that in the case of defaults, the banks' dues could be recovered from the exporters themselves.

However, bankers said, irrespective of the nomenclature, funding without payment risk covers were fraught with risks. This was because even in the case of full recourse, the exporters' ability to repay the bank deteriorated and consequently there was the risk of a build-up of non-performing assets ( NPA). An NPA implied that the bank would have to take a hit by way of large provisions.

Additional line of security

ECGC covers were intended to protect banks from the risks of a build-up of NPAs from export credit. The insurance covers against insolvency of the buyer (importer), protected default and political risk. ECGC covers therefore acts as an additional line of security for bank financing of exporter.

But, bankers said, the major advantage related to risk weighting, capital charge and provisioning. Discounting export bills with ECGC covers attracted lower risk weighting.

This effectively meant a lower capital charge.

Risk weighting for discounting of export bills, either recourse or on non-recourse, backed by ECGC covers, was only 50 per cent. This implied a lower capital charge for the bank, under the current Basel II norms.

The lower capital charge, bankers said, in turn translated into better funding rates for exporters, the bankers said. This implied that the fully covered export bills attracted lower discounting rates, they added.

(This article was published in the Business Line print edition dated July 4, 2006)
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