ECGC's listing could transform it into a cost-effective credit guarantor

A listing for the state-owned institution could transform it into a more meaningful and cost-effective credit guarantor for more Indian exporters

There is little doubt the markets would welcome the listing of ECGC Ltd slotted for FY23. The Union cabinet has this month approved the listing of the company that sells insurance cover for goods exported from India, and also promised fresh capital support of Rs 4,400 crore over the next five years. 

This is excellent news for the financial markets. ECGC has been paying dividends regularly for the past 20 years, it earns decent profits and does not stretch itself too far. For major exporters, though, the news is a big disappointment. Of the total goods exported from India, only 28 per cent gets insurance cover from the ECGC. Exporters normally take out two types of insurance covers. One is a short-term cover for the credit they take from banks; the other is the medium-term cover to cover post-shipment risks. ECGC offers almost only the former (see table) and even then, nearly three-fourths of goods exported from India do not get it. Most exporters spend forex to buy insurance cover from overseas, which makes Indian exports less cost competitive.

For longer-term cover and for project exports, the government has bypassed ECGC. In FY 2018, the commerce ministry set up a National Export Insurance Account (NEIA) as a trust fund with a grant of Rs 1,040 crore. A government note acknowledges that NEIA had to be set up “considering the limitations of the ECGC Limited in providing adequate cover on its own and non-availability of reinsurance cover to such exporters”.

The administrative support for NEIA comes from ECGC but the business of insurance cover for project exports is decided by a committee of secretaries. Under the NEIA Trust, exporters get a cover up to 100 per cent of the cost of their project or export and also a cover for exchange rate fluctuation till the repayment of the credit, as the insurance cover is denominated in Indian rupees. This is a costly arrangement since the financial risk is borne by the government and is loaded on the premiums.  

Overall, the Indian export insurance business includes ECGC, the NEIA Trust and Exim Bank, which provides a limited amount of export credit. For instance, for the year ended 31 March, 2020, Exim Bank sanctioned loans of only $6 billion against an average annual goods export volume of $300 billion.

If these three institutions were consolidated, exporters could have shopped for all their insurance needs from a consolidated entity. The listing of ECGC could be the first step towards this amalgamation, bringing in the needed financial scale into India’s export business, apart from lowering costs.

Key Asian economies, China, Japan and South Korea, follow the dual agency system, but all other Organisation for Economic Co-operation and Development countries run a single company. In fact, the bifurcation of the export insurance business into two entities seems to be a relic of the socialist-capitalist bloc divide, because in Europe, too, it is Hungary and the Czech Republic that have continued with two entities. 

A larger entity could also offer exporters more benefit. Globally, many countries offer discounts to exporters when they buy domestic insurance. In the US, for instance, exporters selecting an Exim working capital guarantee could receive a 25 per cent discount on premiums for multi-buyer insurance policies. ECGC has no financial space to offer anything similar. It has made no move to tweak its insurance offering for exports to provide more support for environmentally beneficial products. It cannot also promote the government’s atmanirbhar agenda of mandating, say, that the products must have at least 50 per cent domestic content because, again, it does not have the financial space to do so.

One reason ECGC is reticent about expanding its portfolio is that it was scarred in the 2008-12 period, not only by the collapse of world trade after the global financial meltdown but also because it chased insurance of diamond exporters too enthusiastically. The sole CAG report of the company for FY13 noted that in the post-shipment cover (medium-term insurance business), the claim to premium ratio was “more than 200 per cent and resulted in a loss of Rs 309.27 crore during 2008-09 to 2010-11". ECGC battened down its hatches and was only saved by Rs 1,050 crore of capital support in FY18 by the government. 

So the company, formed in 1957, became risk-averse. It only insures short-term commercial credit offered by banks. Around half of export credit disbursement by banks is placed with ECGC and comes overwhelmingly from small exporters. 

ECGC will continue to enjoy a long-term advantage in the Indian insurance and export credit market because no other major insurance company in India offers a comparable line of export insurance. ECGC’s solvency ratio at 15.02 is way above the numbers stipulated by the Insurance Regulatory and Development Authority of India. This is also why the company has little difficulty securing reinsurance cover for its total portfolio despite the high risks in overseas trade.

Export credit and insurance are now often intertwined. Other than developed countries, trade with any country often needs sovereign support from the exporting country. Political risks often determine the volume of trade, especially those which are long term. The decision to list ECGC could create the scale it needs so that it can offer both room for the small exporters and an almost sovereign-like support to large exporters by subsuming the roles of both the NEIA Trust and Exim Bank.