How To Cut Down Export Risks?

By Author: Aniket
Total Articles: 139
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Exports are looked upon as high-risk high-return business. Conducting trade transactions with a partner who's based miles and miles away is indeed a risky proposition. Consequently, most of the SME units prefer to confine their trade transactions locally and look away from exports.

As per recent reports SMEs in India contribute over 40 percent to the total exports directly and significant amount indirectly via large trading houses, or third parties. Despite their substantial contributions to exports, it may be surprising to know that today only 0.5 percent of SMEs are actually engaged in exports.

The Risk Factors involved

Issues of payment and especially the risk factor involved make SMEs wary of joining the exports bandwagon. The issue was discussed in detail under the project ‘Strategies and Preparedness for Trade and Globalization in India's ministry of commerce. The study recommended SMEs to take the following steps to manage their payment ...
... risks and take corrective actions in case bad debts happen.

Learn more about your Buyer

The most crucial step that needs to be taken into consideration while taking care of export payment risk is to get a report on credit rating of your buyer. There are various agencies in India that provide credit rating reports on companies internationally. In fact there are many agencies that have exclusively dedicated their resources focusing on definite countries. Moreover, an SME can also approach the bank to gather information on the buyer via its banking channels. Likewise insurance companies also helps customer get the credit reports.

However, credit rating report cannot assure you that there won't be any defaults in payments; however, it could offer an added advantage. Further, credit report on companies outside USA and European markets are not always available or are as dependable.

Generally, a credit rating report costs almost $100 to $150. Delivery time takes almost 7-10 days. For faster delivery, the costs become a tad higher. Dun and Bradstreet, Mira are some of the SMEs agencies that offer credit rating report.

Credit Insurance

The next crucial step is to get the insurance done for exports. The whole objective behind export credit insurance is to insure against payment default. ‘Trade credit insurance' or ‘credit insurance' is an insurance policy and a risk management product provided by export credit agencies (ECAs) to businesses wanting to protect their balance sheet asset accounts receivable from loss due to the credit risks such as protracted default, insolvency and bankruptcy.

The export credit insurance market in India is governed by Export Credit Guarantee Corporation (ECGC). After deregulation of the insurance sector, the three top global credit insurance companies Euler Hermes, Atradius and Coface have strengthened their presence in India as re-insurers. Key players in the credit insurance market in India comprise ECGC, Bajaj Allianz, ICICI Lombard, IFFCO-Tokio, New India Assurance and Tata AIG, New India Assurance and Tata AIG. The insurance cost differs from policy to policy and is priced in between 0.3 percent to 1.0 percent of annual turnover considering the bad debt history and current debt management practices.