CREDIT RISK INSURANCE
Credit risk insurance in banking sector in India is a technical term . Lets’ try to understand in simple way through real life examples. Suppose that RAM has taken some credit i.e. he has taken loan. Suppose he took loan of Rs. 100 crore . RAM started some business with that credit / loan amount . He is worried , whether his business will provide returns or not and whether he would be able to repay the money or not . So he decided to purchase insurance. Insurance of what??? RAM wants insurance/protection because he thinks that If he would not be able to pay this principal/interest in future then some one else ( any entity/insurance company ) should pay this. But for this, the Insurance company will charge some premium. If his business is risky then the insurance company will charge more premium.
WHAT IS THE BENEFIT OF PAYING MORE PREMIUM ?
The benefit of paying more premium to insurance company is beneficial to RAM in the sense that if the insurance company is offering insurance then Ram will get the Bank Credit (loan) will at a cheaper rate. So, in this way credit risk insurance works.
Lets’ consider another example
Suppose today some exporter ( say an Indian exporter ) sold some consignment to a trader in other country. Suppose it takes 30 days to deliver the consignment to the other country trader and once the other trader receives this consignment, he takes another 15 days to release the payment to the Indian exporter. Now in these 45 days lots of things can happen. For eg. The trader in other country may go bankrupt or the political situation in the other country may get changed or United states may impose some restriction in payment through US dollars etc.. and because of all or any of these scenarios the trader may not be able to pay to the Indian exporter. And if the Indian exporter has taken loan for doing business then he will not be able to pay the bank and ultimately bank will declare Indian exporter bankrupt. So, to avoid all this the Indian exporter will purchase “Credit Risk Insurance” from an insurance company.
GOVERNMENTS’ WORK IN THIS REGARD
In this regard government of India has set up its own company “Export Credit Guarantee Corporation (ECGC) Ltd.” (under Ministry of Commerce and Industry) to provide credit risk insurance to Indian exporters . Government of India did so because it wants to promote exports. Also ,ECGC charges less premium vis-a-vis private insurance companies as its’ a government Company.
Ministry of Commerce was already running a scheme “Export Credit Insurance Scheme” to provide credit risk insurance through ECGC Ltd at cheaper premim. But under this scheme it was covering a loss of 60% of Principal and Interest.
WHAT IS NEW ?
Recently a new scheme has been launched called NIRVIK ( Niryat Rin Vikas Yojna ) . In the newly launched scheme “NIRVIK” this coverage has been increased to 90% of the Principal and Interest.
So, if the exporter took Rs. 100 crore loan and he is not able to receive payment because of any aforementioned reasons, then ECGC will pay 90 crore and exporter will have to pay Rs. 10 crore only.
I hope the credit risk insurance in banking sector in India would now be understood with simplicity . Dont’ forget to comment your views . Your views are valuable to us .