Credit Risk Analysis by Ecgc

7/31/2019 Credit Risk Analysis by Ecgc

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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..
http://g/DAY%20THREE/ECGC/pune.ppthttp://g/DAY%20THREE/ECGC/pune.ppthttp://g/DAY%20THREE/ECGC/pune.ppt


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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



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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



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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



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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



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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


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.



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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

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