IRDAI Issues Draft Guidelines on Trade Credit Insurance Products for MSMEs
Moneylife Digital Team 09 April 2021
The Insurance Regulatory & Development Authority of India (IRDAI) has issued draft guidelines for general insurance companies to come up with trade credit insurance products with customised covers for small and medium enterprises (SMEs) and micro, small, and medium enterprises (MSMEs). 
 
The proposed guidelines will enable general insurers to offer trade credit insurance covers to licensed banks and other financial institutions. These covers will help companies and financial institutions manage their risks overseas, open access to new markets and manage non-payment risks associated with trade financing portfolio. 
 
Trade credit insurance protects businesses against the risk of non-payment for goods and services by buyers. It usually covers a portfolio of buyers and indemnifies an agreed percentage of an invoice or invoices that remain unpaid as a result of extended default, insolvency or bankruptcy and helps in improving economic stability by addressing the trade losses due to payment risks.
 
IRDAI's draft proposal says, "It (the guidelines) will also facilitate general insurance companies to offer trade credit insurance covers to suppliers as well as licensed banks and other financial institutions to help businesses manage country risk, open up access to new markets and to manage non-payment risk associated with trade financing portfolio. It will 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."
 
The policy will cover credit risk that has a direct link with an underlying trade transaction, or the delivery of goods or services. If no such direct link exists, the outstanding amount is not insurable under a trade credit insurance policy. The cover may include but not be limited to commercial risks and political risks.
 
As per IRDAI’s draft guidelines, the trade credit insurance can cover commercial as well as political risks, among others. The political risk cover will be available only to buyers outside India and countries agreed upon at the proposal stage. 
 
The commercial risks covered would include risk of insolvency or protracted default of a buyer or bank responsible for payment in case of letter of credit transactions, among others. 
A trade credit policy can grant an indemnity of maximum 60% of trade receivables from each buyer for all banks, financial institutions, or factoring companies. 
 
According to the guidelines, insurers can offer an indemnity of 90% of the trade receivables from each buyer for all policyholders other than banks, financial institutions, and factoring companies. However, for MSMEs, the policy can cover 95% in case of political risks. 
 
The new guidelines are expected to open opportunities to offer credit insurance-backed financing solutions to MSMEs and large corporates. The IRDAI has invited views and comments on the draft guidelines by 28 April 2021.
 
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