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8/8/2019 Risks Protection
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RISKS Carriage Risk
Credit Risk Country Risk
Currency Risk
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CARRIAGE RISKS Marine Perils
Ship Sinks, Fire, Storm, Collision, Earthquakes, Lightning,
floods etc Extraneous Perils
Faults in loading/unloading, pilferage, breakage, leakage
War Perils
War, Civil Disturbance, Revolution, Military Coup
Strike Perils Strikes, Riots, Lockouts
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CARGO INSURANCE
The Insurance Act 1938
Insurance Rules 1939
Marine Insurance Act 1963 Marine Insurance Contract is an agreement
whereby the insurer undertakes to indemnify theassured in the manner and to the extent thereby
agreed, against marine losses , ie, the lossesincidental to marine adventure. It is based onPrinciples of Utmost Good Faith, InsurableInterest and Indemnity.
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MARINE INSURANCE (contd)
Types of Policy Open Cover
Open Policy or Floating Policy
Voyage Specific Policy
Insurance Premium depends on Nature of cargo/nature of packing
Value of cargo
Age of ship
Voyage route
Nature of cover-warehouse to warehouse
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INSURANCE (contd)
Who purchases insurance and pays the premium?
SELLER
-if the contract is CIF, CIP, DAF, DES, DEQ,DDU, DDP terms
BUYER
-if the contract is EXW, FCA, FAS, FOB or CPT, CFR
terms
Only party with insurable interest can insure.
Normally 110% of CIF value is insured
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Institute Cargo Clause
ICC CARGOCLAUSE
Covers loss or damage to the goodsinsured reasonably attributable to
C
(Basic cover)
Fire or explosion, vessel being
stranded/grounded, sunk or capsized,
overturning or derailment of land conveyance,
collision of vessel with any external object,
discharge of cargo at a port of distress.
Exclusions:
Earthquake, volcanic eruption, lightning
total loss of any package dropped while
loading/unloading
and perils excluded in clause A
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Institute Cargo Clause
ICC CARGOCLAUSE
Covers loss or damage to thegoods insured reasonablyattributable to
B(Wider cover)
Risks covered by Cargo Clause C +Earthquake, volcanic eruption, or
lightning, General Average sacrifice,
jettisoning or sea, lake or river water
washing overboard, total loss of anypackage, lost overboard or dropped
while loading/unloading
A
(All Risks cover)
Widest cover, including all risks of loss
or damage covered by Cargo Clause B
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MARINE INSURANCE
Exclusions:
Misconduct of the insured, ordinary leakage,wear & tear, loss of weight or volume,insufficiency or unsuitability of packing, inherentvice of the cargo, insolvency or financial defaultof the owners of the vessel, unseaworthiness of thevessel, war & SRCC
Extensions:ICC War clauses (cargo) & ICC Strike clauses(cargo)
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Types of losses
General average (partial loss covering all
cargo interests)
Particular average (partial loss to part ofcargo) Free of particular average
With particular average
Average = partial loss
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GENRAL INSURANCE
COMPANIES IN INDIAFor Marine Insurance
United India Insurance Co
Royal Sundaram AllianceInsurance Co
Oriental Insurance Co
National Insurance Co ICICI Lombard General Insurance
Co.
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CREDIT RISKS
Commercial Risks Insolvency of the Buyer
Buyers inability to pay upto 4 months from duedate
Willful default Change in import policy/cancellation of valid
import licence
Political Risks
War, civil war/Coup, sanctions
Restrictions by Governments blocking payment
Balance of payment problems
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CREDIT RISK INSURANCE Export Credit Guarantee Corporation
Government of India company
Provides Credit cover for Commercial andPolitical Risks
Policy covers shipments on DP, DA or opencredit terms
Shipments on LC terms can also be covered
Guarantees Banks for reimbursement of loss onadvances to Exporters
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Political Risk Categorisation
195 countries
Seven categories of country risk
A1, A2, B1, B2, C1, C2, D Premium rates lowest for A1 category
Premium then depends on credit period
Up to 30 days, 31-90 days, 91-180 days
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STANDARD POLICY
Shipments (Comprehensive Risks) Policy For exporters with anticipated annual turnover > Rs
50 lakhs
Whole turnover policy covers all shipments made
during 24 months On DP, DA or Open Delivery terms
Against commercial and political risks
Covers goods exported on short term credit
(not exceeding 180 days) for 90% value No claim bonus 10% every two years
Declaration of exports: monthly
Declaration of overdue payments: 30days, monthly
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SHIPMENTS (Comprehensive Risks)POLICY - SCOPE
Does not cover shipments
against advance payment
against irrevocable L/C confirmed by an Indian
bank
to associates
to an overseas agent on consignment basis
made by air on D/P or D/A terms
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SCR - Exclusions
Does not cover: commercial disputes including quality complaints
causes inherent in the nature of goods
Buyers failure to obtain import or Exchange
authorisation Insolvency or default of exporters agent or the
collecting bank
Loss or damage covered by Marine Insurance
Exchange rate fluctuation
Exporters default
Pre-shipment losses
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OTHER POLICIES-1
Small Exporters Policy; Differences Anticipated annual Export turnover < Rs 50 lakhs
Period of Policy 12 months
Minimum premium Rs 2,000 p.a; n.c.b 5% p.a
Declaration of shipments - quarterly
Declaration of 60 days overdue payments every month
Extent of cover 95% for commercial & 100% for political
Waiting period of claims 2 months
Change in terms of payment;extension of credit period
Resale of unaccepted goods
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OTHER POLICIES-2
Specific Shipment Policy Short Term
Specific Buyers Policy
Consignment Exports Policy
Stock-holding Agent
Global Entity Policy
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EXPORT FACTORING
Factoring is a contract where the FACTOR(agency providing the protection) agrees to
take over the administration of thecustomers invoices, collects the paymentand assumes the risk of default in payment
by the debtor for an agreed fee.
Thus the Export FACTOR takes over theimporters account from the exporter forrealisation of export proceeds.
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FACTORING - FEATURES
Only for short term receivables(under 90
days)
Good for commercial risks only
Exporter immediately gets 75-80%
FACTOR provides collection service
Expensive
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FORMS OF EXPORT FACTORING
Recourse factoring: does not provide any
credit protection
Non-recourse Factoring: credit protection
available
Maturity Factoring: payment on maturity of
the credit period
ECGC - Non recourse Maturity Factoring
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Factoring & Credit Risk Insurance
FEATURES ECGC POLICY FACTORING
Credit Protection
Realisation ofPayment
Currency of
Payment
Follow up
Risk Coverage
Normally 90% of the
loss
Loss ascertained after 4
months from due date
Indian Rupees
Exporter to follow up
Both Commercial &
Political Risks
100% protection
80% payment upfront &20% when payment
realised
Convertible currency
Factor takes over
Only Commercial risks
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FORFAITING
Non-recourse discounting of exportreceivables on deferred credit terms
exceeding 90 days and up to 5 years.
Deferred credit export transaction convertedinto cash transaction.
Receivables Bill of Exchange or
Promissory Notes co-accepted by buyersbanker (known as Avalisation).
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FORFAITING (Contd)
Forfaiting facility provided by Export-
Import (Exim) Bank of India
Cost of Discounting:
Commitment fee-0.5 to 1.5%
Discounting fee LIBOR plus risk premium
Documentation fee, as applicable.
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Forfaiting - Advantages
Deferred payment export converted to cash
transaction, improves liquidity.
Covers political & commercial risks
Without recourse finance up to 100% available
Exporter is free from credit administration and
collection problems Transaction specific
Export credit insurance not required
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FACTORING Vs FORFAITING Discounting of short
term receivables for
maturity up to 90 days
May be with or
without recourse
Discounting of
receivables up to 80%
Discounting of long term
export receivables i.e
deferred payment contracts
with maturity 91 days to 5
years
Always without recourse
to exporter
Discounting of
receivables 100%
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RUPEE EXCHANGE RATES
Currencies TT Buying TT Selling
U.S Dollar
British Pound
Europe (Euro)
Singapore Dollar
Japanese yen (100 units)
Swiss Franc
French Franc
Australian Dollar
NewZealand Dollar
Hongkong Dollar
Canadian Dollar
Swedish Kroner
Malaysian Ringgit
45.17
84.39
56.57
28.64
37.98
35.54
34.04
29.95
5.80
39.62
6.11
12.30
45.49
85.01
56.97
28.86
38.25
35.80
34.29
30.18
5.84
39.91
6.15
12.40
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CROSS RATE
Cross rate is the Exchange Rate between twocurrencies in terms of a third currency.
Suppose that a Bank wants to exchange JapaneseYen for Euros. Most foreign exchangetransactions involve US Dollars. The Euro Yencross rate is determined by dividing the directexchange rate of the Euro by the direct exchange
rate of the Yen. Cross Rate Euro/Yen = (Euro:$) /(Yen:$) = 1.3368/0.01209 = 110.57
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SPOT MARKET & VALUE DATE
Standard Chartered Bank Mumbai buys Rs.100
million on 8.9.2009 from State bank of India at an
exchange rate of Rs 48.15 for value on 15.9.2009.
On the value date, SBI credits SCBs account in
Mumbai with Rs 100 million and SCB credits
SBIs account in the US with US$ 2,076,843.2
(100 million/48.15). These transactions consistmostly of bank deposits. Currency rarely leaves
the country of origin, except for tourists.
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CURRENCY RISKOn 11.8.10, Madura Coats contracted for export of
Garments worth US$ 100,000
At US$ 1 = Rs. 45.50 expected receipts Rs
45,50,000.Shipment: September, Terms of payment: D/A 90
days
When payment is received in December 2010 the
exchange rate will be different
Let US$ 1= Rs 45.00.So Madura Coats will get Rs 45,00,000.
Loss Rs 50,000
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EXIM - Effect of currency
Strong Rupee Exporters loss
Weak Rupee Importers loss
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Forward Currency Contracts
This gets you a guaranteed exchangerate at a date in the future for a setamount of currency.
Example:11.11.2010 US$ 1 = Rs 45.5
1 month Forward rate
US$ 1 = Rs 45.4
Exporter enters into a Forward Contract with hisbank to sell US$ 100,000 after 1 month.
After export when payment is received, thebank will buy the amount and pay the exporterRs 45,40,000 based on the F.C.
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EXPORT DOCUMENTS
Bill of exchange (a.k.a Sight or usance Draft)
Commercial Invoice
Packing List Bill of Lading/Airway Bill
Insurance Certificate/Policy
Certificate of Origin Certificate of Inspection/Quality
Phytosanitary Certificate