Export payment security

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

27 May 2013 Dear Experts,

We want to start export of readymade garments . However we are concerned about payment security.

Is there any payment security option available ? or advance payment is the only option?

RAMESH KUMAR VERMA

RAMESH KUMAR VERMA (Expert)
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27 May 2013 ENROLLED YOUR SELF IN ECGC

Payments for exports are open to risks even at the best of times. The risks have assumed large proportions today due to the far-reaching political and economic changes that are sweeping the world. An outbreak of war or civil war may block or delay payment for goods exported. A coup or an insurrection may also bring about the same result. Economic difficulties or balance of payment problems may lead a country to impose restrictions on either import of certain goods or on transfer of payments for goods imported. In addition, the exporters have to face commercial risks of insolvency or protracted default of buyers. The commercial risks of a foreign buyer going bankrupt or losing his capacity to pay are aggravated due to the political and economic uncertainties. Export credit insurance is designed to protect exporters from the consequences of the payment risks, both political and commercial, and to enable them to expand their overseas business without fear of loss.

ECGC ROLE
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Provides a range of credit risk insurance covers to exporters against loss in export of goods and servicesOffers guarantees to banks and financial institutions to enable exporters to obtain better facilities from them Provides Overseas Investment Insurance to Indian companies investing in joint ventures abroad in the form of equity or loan.

http://www.unionbankofindia.co.in/Per_insurance_ecgc.aspx

Querist : Anonymous

Querist : Anonymous (Querist)

28 May 2013 Dear sir,

The above scheme also covers bankruptcy of the importer???

Is ECGC a better option for security than LC?

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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24 July 2024 ECGC (Export Credit Guarantee Corporation of India) offers credit risk insurance covers to exporters to protect them against various risks associated with exporting goods and services. Here’s a comparison of ECGC and Letter of Credit (LC) as payment security options for export of readymade garments:

### ECGC (Export Credit Guarantee Corporation of India)

1. **Coverage**: ECGC provides insurance cover against both political and commercial risks. This includes risks such as non-payment due to political events (war, civil unrest) or commercial events (insolvency, protracted default) of the foreign buyer.

2. **Benefits**:
- **Political Risks**: Protection against payment default due to political instability in the buyer’s country.
- **Commercial Risks**: Safeguard against non-payment due to buyer’s insolvency or default.
- **Flexibility**: Covers both short-term and long-term export transactions.

3. **Cost**: Premiums are payable based on the risk profile of the buyer and country, but it provides comprehensive coverage against various risks.

4. **Ease of Use**: Once enrolled, exporters can insure individual transactions or obtain a policy covering multiple transactions, providing flexibility.

### Letter of Credit (LC)

1. **Security**: LC is a financial instrument issued by a bank on behalf of the buyer that guarantees payment to the seller upon presentation of documents confirming shipment of goods. It reduces the risk of non-payment because the bank undertakes to pay even if the buyer fails to do so.

2. **Benefits**:
- **Payment Security**: Provides assurance of payment once shipping documents are presented in compliance with the terms of the LC.
- **Control**: Seller can negotiate terms of payment and ensure compliance before shipment.
- **Standardization**: Internationally recognized payment mechanism, offering credibility to both parties.

3. **Cost**: LCs typically involve fees paid to banks for issuance and negotiation of documents. Costs may vary based on transaction complexity and risk.

4. **Applicability**: LCs are widely used in international trade and offer a level of security that is acceptable to both exporters and importers.

### Comparison and Considerations

- **Risk Coverage**: ECGC provides comprehensive coverage against various risks, including political and commercial, whereas LC primarily addresses the risk of non-payment.

- **Cost**: While both involve costs, ECGC premiums are typically based on transaction-specific risk assessments, whereas LC costs include issuance fees and possible discrepancies in document handling.

- **Flexibility**: ECGC offers broader coverage against multiple risks, whereas LC provides strict adherence to payment terms as specified in the credit.

**Conclusion**: Both ECGC and LC offer valuable options for securing payments in international trade. The choice between ECGC and LC depends on factors such as the level of risk exposure, cost considerations, and the specific terms acceptable to both parties. For exporters concerned about political and commercial risks beyond non-payment, ECGC can offer broader coverage, making it a potentially better option than LC in certain scenarios. However, LC remains a widely accepted and secure method for ensuring payment upon shipment of goods.

To decide the most suitable option, it's advisable to consult with financial advisors and consider specific circumstances of the export transaction and the buyer's profile.