India needs a flexible credit insurance for SME prosperity
Mar 04 2013 , Singapore
Trade credit insurance has proved to be an enabler of trade according to studies conducted by WTO as well as the Centre for European Policy Studies.
"Credit insurance on receivables is one specific product that will ensure Indian businesses of financial security and gives confidence to banks as they would be more comfortable in funding companies which have their receivables covered by credit insurance against payment defaults," said Peter Phillips, Principal Officer and Managing Director of Markel International Singapore Pte Ltd.
India had imposed restrictions on credit insurance in 2010 in the wake of large defaults on credit insurance policies issued by some state-owned companies.
However, Phillips emphasised that India's large pool of export-oriented SMEs and major corporations would need "strong insurance schemes" from their home base as businesses expand.
Currently, the Export Credit Guarantee Corp (ECGC) provides most of the coverage, accounting for about 80 per cent of the $ 90 million premium paid for short-term trade credit insurance last year.
The rest was covered by private insurance companies.
India's ratio of trade covered by credit insurance to GDP is around 5 per cent compared to about 10 per cent for China and around 20 per cent in some of major European economies.
"The $ 90 million premium for short term trade credit insurance in India is just 0.0049 per cent per cent of India's GDP whereas the market potential is around 0.03 per cent of GDP or about $ 1 billion in premium in the next 10-15 years.
"This will not happen unless there is a change in the regulations in India," said Abhishek Chhajer, Senior Underwriter and Head for Asia Pacific at Markel in Singapore.
India would also have to build insurance expertise, covering specific trade areas and buyer data, added Phillips.
He said foreign investors were giving top priority in venturing into the Indian market while the country's exporters were among the leaders in key sectors of global trade.
Phillips also echoed global insurance companies' calls for a more open insurance sector in India. "...This should change as international insurers are keen to invest in India in specific products and build expertise," he said.
"It would also aid the growth of the banks in India as it would provide them with capital relief," he said.
Phillips expressed hope India's growing importance in world trade would bring "more openness in the country's insurance sector, and especially for supporting exports.
Markel has a syndicate at Lloyd's of London, the insurance market. Lloyd's wrote gross premiums of $ 199 million in India at end of 2011, up from $ 150 million in 2007.