risks protection

8/8/2019 Risks Protection

1/36

RISKS Carriage Risk

Credit Risk Country Risk

Currency Risk


2/36

CARRIAGE RISKS Marine Perils

Ship Sinks, Fire, Storm, Collision, Earthquakes, Lightning,

floods etc Extraneous Perils

Faults in loading/unloading, pilferage, breakage, leakage

War Perils

War, Civil Disturbance, Revolution, Military Coup

Strike Perils Strikes, Riots, Lockouts


3/36

CARGO INSURANCE

The Insurance Act 1938

Insurance Rules 1939

Marine Insurance Act 1963 Marine Insurance Contract is an agreement

whereby the insurer undertakes to indemnify theassured in the manner and to the extent thereby

agreed, against marine losses , ie, the lossesincidental to marine adventure. It is based onPrinciples of Utmost Good Faith, InsurableInterest and Indemnity.


4/36

MARINE INSURANCE (contd)

Types of Policy Open Cover

Open Policy or Floating Policy

Voyage Specific Policy

Insurance Premium depends on Nature of cargo/nature of packing

Value of cargo

Age of ship

Voyage route

Nature of cover-warehouse to warehouse


5/36

INSURANCE (contd)

Who purchases insurance and pays the premium?

SELLER

-if the contract is CIF, CIP, DAF, DES, DEQ,DDU, DDP terms

BUYER

-if the contract is EXW, FCA, FAS, FOB or CPT, CFR

terms

Only party with insurable interest can insure.

Normally 110% of CIF value is insured


6/36

Institute Cargo Clause

ICC CARGOCLAUSE

Covers loss or damage to the goodsinsured reasonably attributable to

C

(Basic cover)

Fire or explosion, vessel being

stranded/grounded, sunk or capsized,

overturning or derailment of land conveyance,

collision of vessel with any external object,

discharge of cargo at a port of distress.

Exclusions:

Earthquake, volcanic eruption, lightning

total loss of any package dropped while

loading/unloading

and perils excluded in clause A


7/36

Institute Cargo Clause

ICC CARGOCLAUSE

Covers loss or damage to thegoods insured reasonablyattributable to

B(Wider cover)

Risks covered by Cargo Clause C +Earthquake, volcanic eruption, or

lightning, General Average sacrifice,

jettisoning or sea, lake or river water

washing overboard, total loss of anypackage, lost overboard or dropped

while loading/unloading

A

(All Risks cover)

Widest cover, including all risks of loss

or damage covered by Cargo Clause B


8/36

MARINE INSURANCE

Exclusions:

Misconduct of the insured, ordinary leakage,wear & tear, loss of weight or volume,insufficiency or unsuitability of packing, inherentvice of the cargo, insolvency or financial defaultof the owners of the vessel, unseaworthiness of thevessel, war & SRCC

Extensions:ICC War clauses (cargo) & ICC Strike clauses(cargo)


9/36

Types of losses

General average (partial loss covering all

cargo interests)

Particular average (partial loss to part ofcargo) Free of particular average

With particular average

Average = partial loss


10/36

GENRAL INSURANCE

COMPANIES IN INDIAFor Marine Insurance

United India Insurance Co

Royal Sundaram AllianceInsurance Co

Oriental Insurance Co

National Insurance Co ICICI Lombard General Insurance

Co.


11/36


12/36

CREDIT RISKS

Commercial Risks Insolvency of the Buyer

Buyers inability to pay upto 4 months from duedate

Willful default Change in import policy/cancellation of valid

import licence

Political Risks

War, civil war/Coup, sanctions

Restrictions by Governments blocking payment

Balance of payment problems


13/36

CREDIT RISK INSURANCE Export Credit Guarantee Corporation

Government of India company

Provides Credit cover for Commercial andPolitical Risks

Policy covers shipments on DP, DA or opencredit terms

Shipments on LC terms can also be covered

Guarantees Banks for reimbursement of loss onadvances to Exporters


14/36

Political Risk Categorisation

195 countries

Seven categories of country risk

A1, A2, B1, B2, C1, C2, D Premium rates lowest for A1 category

Premium then depends on credit period

Up to 30 days, 31-90 days, 91-180 days


15/36

STANDARD POLICY

Shipments (Comprehensive Risks) Policy For exporters with anticipated annual turnover > Rs

50 lakhs

Whole turnover policy covers all shipments made

during 24 months On DP, DA or Open Delivery terms

Against commercial and political risks

Covers goods exported on short term credit

(not exceeding 180 days) for 90% value No claim bonus 10% every two years

Declaration of exports: monthly

Declaration of overdue payments: 30days, monthly


16/36

SHIPMENTS (Comprehensive Risks)POLICY - SCOPE

Does not cover shipments

against advance payment

against irrevocable L/C confirmed by an Indian

bank

to associates

to an overseas agent on consignment basis

made by air on D/P or D/A terms


17/36

SCR - Exclusions

Does not cover: commercial disputes including quality complaints

causes inherent in the nature of goods

Buyers failure to obtain import or Exchange

authorisation Insolvency or default of exporters agent or the

collecting bank

Loss or damage covered by Marine Insurance

Exchange rate fluctuation

Exporters default

Pre-shipment losses


18/36

OTHER POLICIES-1

Small Exporters Policy; Differences Anticipated annual Export turnover < Rs 50 lakhs

Period of Policy 12 months

Minimum premium Rs 2,000 p.a; n.c.b 5% p.a

Declaration of shipments - quarterly

Declaration of 60 days overdue payments every month

Extent of cover 95% for commercial & 100% for political

Waiting period of claims 2 months

Change in terms of payment;extension of credit period

Resale of unaccepted goods


19/36

OTHER POLICIES-2

Specific Shipment Policy Short Term

Specific Buyers Policy

Consignment Exports Policy

Stock-holding Agent

Global Entity Policy


20/36


21/36

EXPORT FACTORING

Factoring is a contract where the FACTOR(agency providing the protection) agrees to

take over the administration of thecustomers invoices, collects the paymentand assumes the risk of default in payment

by the debtor for an agreed fee.

Thus the Export FACTOR takes over theimporters account from the exporter forrealisation of export proceeds.


22/36

FACTORING - FEATURES

Only for short term receivables(under 90

days)

Good for commercial risks only

Exporter immediately gets 75-80%

FACTOR provides collection service

Expensive


23/36

FORMS OF EXPORT FACTORING

Recourse factoring: does not provide any

credit protection

Non-recourse Factoring: credit protection

available

Maturity Factoring: payment on maturity of

the credit period

ECGC - Non recourse Maturity Factoring


24/36

Factoring & Credit Risk Insurance

FEATURES ECGC POLICY FACTORING

Credit Protection

Realisation ofPayment

Currency of

Payment

Follow up

Risk Coverage

Normally 90% of the

loss

Loss ascertained after 4

months from due date

Indian Rupees

Exporter to follow up

Both Commercial &

Political Risks

100% protection

80% payment upfront &20% when payment

realised

Convertible currency

Factor takes over

Only Commercial risks


25/36

FORFAITING

Non-recourse discounting of exportreceivables on deferred credit terms

exceeding 90 days and up to 5 years.

Deferred credit export transaction convertedinto cash transaction.

Receivables Bill of Exchange or

Promissory Notes co-accepted by buyersbanker (known as Avalisation).


26/36

FORFAITING (Contd)

Forfaiting facility provided by Export-

Import (Exim) Bank of India

Cost of Discounting:

Commitment fee-0.5 to 1.5%

Discounting fee LIBOR plus risk premium

Documentation fee, as applicable.


27/36

Forfaiting - Advantages

Deferred payment export converted to cash

transaction, improves liquidity.

Covers political & commercial risks

Without recourse finance up to 100% available

Exporter is free from credit administration and

collection problems Transaction specific

Export credit insurance not required


28/36

FACTORING Vs FORFAITING Discounting of short

term receivables for

maturity up to 90 days

May be with or

without recourse

Discounting of

receivables up to 80%

Discounting of long term

export receivables i.e

deferred payment contracts

with maturity 91 days to 5

years

Always without recourse

to exporter

Discounting of

receivables 100%


29/36


30/36

RUPEE EXCHANGE RATES

Currencies TT Buying TT Selling

U.S Dollar

British Pound

Europe (Euro)

Singapore Dollar

Japanese yen (100 units)

Swiss Franc

French Franc

Australian Dollar

NewZealand Dollar

Hongkong Dollar

Canadian Dollar

Swedish Kroner

Malaysian Ringgit

45.17

84.39

56.57

28.64

37.98

35.54

34.04

29.95

5.80

39.62

6.11

12.30

45.49

85.01

56.97

28.86

38.25

35.80

34.29

30.18

5.84

39.91

6.15

12.40


31/36

CROSS RATE

Cross rate is the Exchange Rate between twocurrencies in terms of a third currency.

Suppose that a Bank wants to exchange JapaneseYen for Euros. Most foreign exchangetransactions involve US Dollars. The Euro Yencross rate is determined by dividing the directexchange rate of the Euro by the direct exchange

rate of the Yen. Cross Rate Euro/Yen = (Euro:$) /(Yen:$) = 1.3368/0.01209 = 110.57


32/36

SPOT MARKET & VALUE DATE

Standard Chartered Bank Mumbai buys Rs.100

million on 8.9.2009 from State bank of India at an

exchange rate of Rs 48.15 for value on 15.9.2009.

On the value date, SBI credits SCBs account in

Mumbai with Rs 100 million and SCB credits

SBIs account in the US with US$ 2,076,843.2

(100 million/48.15). These transactions consistmostly of bank deposits. Currency rarely leaves

the country of origin, except for tourists.


33/36

CURRENCY RISKOn 11.8.10, Madura Coats contracted for export of

Garments worth US$ 100,000

At US$ 1 = Rs. 45.50 expected receipts Rs

45,50,000.Shipment: September, Terms of payment: D/A 90

days

When payment is received in December 2010 the

exchange rate will be different

Let US$ 1= Rs 45.00.So Madura Coats will get Rs 45,00,000.

Loss Rs 50,000


34/36

EXIM - Effect of currency

Strong Rupee Exporters loss

Weak Rupee Importers loss


35/36

Forward Currency Contracts

This gets you a guaranteed exchangerate at a date in the future for a setamount of currency.

Example:11.11.2010 US$ 1 = Rs 45.5

1 month Forward rate

US$ 1 = Rs 45.4

Exporter enters into a Forward Contract with hisbank to sell US$ 100,000 after 1 month.

After export when payment is received, thebank will buy the amount and pay the exporterRs 45,40,000 based on the F.C.


36/36

EXPORT DOCUMENTS

Bill of exchange (a.k.a Sight or usance Draft)

Commercial Invoice

Packing List Bill of Lading/Airway Bill

Insurance Certificate/Policy

Certificate of Origin Certificate of Inspection/Quality

Phytosanitary Certificate

risks protection

Documents