IRDAI (Trade Credit Insurance) Guidelines, 2021

2021 SEP 21

Preliminary   > Economic Development   >   Miscellaneous   >   Ease of doing business

Why in news?

  • The Insurance Regulatory and Development Authority of India (IRDAI) issued revised guidelines for trade credit insurance that will come into effect on 1 November 2021.

More about the news:

  • The aim of the guidelines is to promote the sustainable and healthy development of the trade credit insurance business and improve economic stability by labelling trade losses because of credit risks.

What is Trade Credit Insurance?

  • Trade credit insurance protects businesses against the risk of non-payment for goods and services.
  • It usually covers a portfolio of buyers and indemnifies an agreed percentage of an invoice or invoices that remain unpaid as a result of protracted default or insolvency.
  • It contributes to the economic growth of a country by facilitating trade and helps improve economic stability by addressing trade losses because of payment risks.
  • A trade credit insurance policy may be issued to the following:
    • (a) Seller or supplier of goods or services.
    • (b) Factoring company as defined in The Factoring Regulation Act 2011.
    • (c)  Bank / Financial Institution, engaged in Trade Finance, licensed and regulated by respective Statutory Bodies which have better quality appraisal and effective risk management system.

Applicability:

  • These guidelines will apply to all insurers transacting general insurance business, registered under the Insurance Act, 1938.
  • However, ECGC Ltd (Export Credit Guarantee Corporation of India Ltd) is exempted from the application of these guidelines

Coverage:

  • The scope of cover under the trade credit insurance policy will be the credit risk that has a direct link with an underlying trade transaction, the delivery of goods or services, according to the IRDAI circular. If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy.
  • The cover may include commercial risks and political risks
    • Commercial risks:
      • The cover may include commercial risks such as insolvency or protracted default of the buyers of good and services. The trade credit policy will also cover rejection by the buyer after the delivery, subject to conditions of a policy contract.
      • The cover could also include non-receipt of payment because of the collecting bank’s failure.
    • Political risks:
      • Political risk cover is available only in the case of buyers outside India and in respect of those countries agreed upon, according to the IRDAI circular.
      • Political risks include operation of a law or an order restricting the transfer of payment from the buyer’s country to India.
      • They also include war between the buyer’s country and India and civil war, rebellion, revolution, insurrection or other disturbances in the buyer’s country.

Benefits:

  • IRDAI’s decision to unveil a new trade risk cover is expected to aid corporates, suppliers, banks and financial institutions in opening up access to new markets and managing country political risk and non-payment risk associated with the trade financing portfolio.
  • It will also enable general insurance companies to offer trade credit insurance with customised covers to improve businesses for the SMEs and MSMEs, considering the evolving insurance risk needs of these sectors.

PRACTICE QUESTION:

Consider the following statements:

1. Insurance companies in India can issue trade credit insurance policy to Public Sector Banks only

2. Guidelines on trade credit insurance policy are issued by Insurance Regulatory and Development Authority of India.

Which of the statements given above is/are correct?

(a) 1 only

(b) 2 only

(c) Both 1 and 2

(d) Neither 1 nor 2

Answer