IRDAI panel moots widening scope of TCI, better coverage for MSMEs

Hyderabad: In a bid to widen the scope of trade credit insurance (TCI) in India, the working group (WG) set up by Insurance Regulatory and Development Authority of India (IRDAI) has proposed better covereage for MSMEs.

In its report on revisiting guidelines submitted to the regulator, the panel has also proposed that banks, factoring companies and financial institutions be allowed to avail credit insurance to cover trade related transactions but should not be permitted to cover loan default of seller.

TCI offers coverage for suppliers of goods and services and other financial institutions, to mitigate non-payment risks and insolvency/default of the buyers. The working group said that insurance companies have to be enabled to offer TCI services with enhanced covers at affordable premiums to boost the MSME sector. Proposing a change in the current guidelines, the WG has recommended that the indemnity provided to policy holders should be increased from 85% to 90% for all policy holders & to 95% in case of political risk for micro and small enterprises. It also proposed that single buyer risk covers be allowed only for micro and small enterprises.

Commenting on the report, Sanjay Datta, chief (underwriting, reinsurance and claims), ICICI Lombard General Insurance said, “The new recommendations will make it easier for large corporates/MSMEs to access trade finance facilities like factoring and invoice discounting since banks, factoring companies and other FIs will have direct credit insurance protection.”

“Besides, MSMEs will be able to get better terms like lower interest rates and more financing since their receivables will now be secured by the insurer. The attractiveness of online invoice financing platforms like TREDs will increase as more lenders would be willing to finance credit insurance backed invoices,” he explained.

The working group had also recommended the creation of a buyer default database with the Insurance Information Bureau of India to keep a check on defaulters. It also proposed that RBI must recognize credit insurance products as risk mitigation tools for banks to make it eligible for capital relief. The panel also proposed a change in the definition of ‘buyer’, wherein an individual can no longer be the buyer and only a business entity, which is liable to pay the policy-holder for a trade credit transaction on open and agreed terms, will be considered a buyer.

As per the report, around 82% of the total credit insurance business is contributed by state-owned ECGC Ltd, which is outside the purview of the existing TCI guidelines with the remaining 18% contributed by other general insurance companies, both public and private, governed by the guidelines.

The credit insurance business, other than ECGC, has grown 18% over the last two years. However, insurance premiums amounted to Rs 277.68 crore during 2018-19 for insurance companies other than ECGC, which is quite less vis-a-vis the size of our economy.

Source: The Times of India