In a move that can positively impact the availability of finance for trade, the Insurance Regulatory and Development Authority of India (IRDAI) will liberalise norms for trade credit insurance.

Trade credit insurance is generally offered for short-term receivables in business and is a tool to protect businesses from sudden or unexpected customer insolvency.

According to Suresh Mathur, Senior Joint Director (Non-Life), IRDAI, recent changes in the economy, especially in micro, small and medium enterprises (MSMEs), have increased the need for credit insurance manifold. “Therefore, in order to give a fillip to the credit insurance market, it is necessary to revisit the existing guidelines which regulate the credit insurance market in India,’’ he said.

As part of this initiative, the Authority intends to allow issue of credit policies on all those entities registered with the Reserve Bank of India for conducting business in tune with the Factoring Act 2011.

As of now, a trade credit insurance policy cannot be issued to banks, financiers and lenders.

Further, it proposes to approve assignment of proceeds of a claim under a trade credit policy to be made to banks/NBFCs in order to protect the interests of the financiers.

According to existing norms, a policy-holder cannot normally be offered indemnity for more than 80 per cent of the trade receivables from each buyer or 90 per cent of the cost incurred by the seller for the previous year, whichever is lower.

Under the new norms, to be announced early next year, a trade credit policy shall not grant an indemnity of more than 85 per cent of the trade receivables of each buyer.

Net retentions Similarly, the upper cap on net retentions of the insurer for trade credit insurance is proposed to be increased from 2 to 5 per cent of his networth. According to industry data, the ratio of trade covered under credit insurance to the GDP is only 5 per cent while in most other countries, it is in double digits.

State-owned Export Credit Guarantee Corporation is a market leader and accounts for almost three-fourth of this segment. The new norms will be made applicable to all private general insurers, and not the ECGC, says the exposure draft on the guidelines.