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January 7, 2016
The Insurance Regulatory and Development Authority of India (IRDAI) has proposed allowing the issuance of trade credit insurance policies to entities registered by the central bank, the Reserve Bank of India (RBI), for factoring services. This would liberalise existing guidelines which say that a trade credit insurance policy shall not be issued to banks, financiers and lenders.
In an exposure draft titled “Amendment to Guidelines on Trade Credit Insurance”, IRDAI said that changes in the economy, especially in the micro, small, and medium-enterprise (MSME) sector, has increased the need for trade credit and enhanced the scope for the credit insurance sector. “Therefore, in order to give a fillip to the growth of the credit insurance market, it is felt necessary to revisit the guidelines which regulate the credit insurance business in India,” the regulator said. “This cover shall be restricted to short-term financing against receivables, representing supply of goods, materials and services,” said the exposure draft. To protect interest of financiers, proceeds of a claim under a trade credit insurance policy may be made to banks or non-bank financial institutions, it said.
The various proposed changes include indemnity of not more than 85% of the trade receivables in a trade credit insurance policy. Under the existing law, a policy holder normally can be offered indemnity for up to 80% of the trade receivables from each buyer or 90% of the cost incurred by seller for previous year, whichever is lower. The draft also proposes that no trade credit insurance policy would be 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 a trade credit insurance policy. Currently, the rules bar trade credit insurance for factoring, reverse factoring and bill discounting. The proposed guidelines, IRDAI said, shall be applicable to all registered general insurance companies except Export Credit Guarantee Corporation of India.