IRDAI proposes changes in trade credit insurance norms

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New Delhi | Published: December 25, 2015 7:18:34 PM

Seeking to give a fillip to the MSME sector, insurance regulator IRDAI has proposed changes in guidelines on trade credit insurance.

Seeking to give a fillip to the MSME sector, insurance regulator IRDAI has proposed changes in guidelines on trade credit insurance.

In an exposure draft on ‘Amendment to Guidelines on Trade Credit Insurance’, the sectoral regulator said changes in the economy, especially in micro, small, medium enterprise (MSME) sector, has increased the need for trade credit and has enhanced the scope for the credit insurance sector manifold.

“Therefore, in order to give fillip to the growth of credit insurance market, it is felt necessary to revisit the guidelines which regulate the credit insurance business in India,” it said.

Trade credit insurance is an insurance policy offered by private insurance companies and governmental export credit agencies to business entities wishing to protect their accounts receivable from loss due to credit risks such as protracted default, insolvency or bankruptcy.

Insurance Regulatory and Development Authority of India (IRDAI) said it proposes to allow issuance of trade credit insurance policy to RBI registered entities, for conducting factoring business in line with The Factoring Act, 2011.

“This cover shall be restricted to short-term financing against receivables, representing supply of goods, materials and services,” said the exposure draft.

In the factoring business, a financial intermediary purchases receivables from a company. A factor is a funding source agreeing to pay the company the value of the invoice after subtracting a discount for commission and fees.
Besides, to protect interest of financiers, proceeds of a claim under a trade credit policy may be made to banks/NBFCs, it said.

As against the existing policy of net retention of the insurer for trade credit insurance of up to 2 per cent of the net worth, IRDAI is proposing the same to be increased to up to 5 per cent.

Among others, the proposed changes include an indemnity of not more than 85 per cent of the trade receivables in a trade credit policy.

In the existing law, a policy holder normally can’t be offered indemnity for more than 80 per cent of the trade receivables from each buyer or 90 per cent of the cost incurred by seller for previous year, whichever is lower.

It also proposes that no trade credit insurance policy is allowed to cover reverse factoring and bill discounting.

Also, factoring transactions by entities not registered with RBI shall not be allowed to be covered under trade credit insurance policy.

As per existing rules, no trade credit insurance policy is allowed to cover factoring, reverse factoring and bill discounting.

These guidelines, IRDAI said, shall be applicable to all registered general insurance companies except Export Credit Guarantee Corporation of India Limited (ECGC).

The regulator has invited comments and suggestions on the proposed guidelines by January 8, 2016.

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