'Making Trade Credit Insurance a Guarantee Can Unlock India’s Trade Finance'

While India's economy keeps expanding and with businesses today increasingly functioning in the backdrop of geopolitical shifts, protectionism, and other external factors, trade credit insurance has come to emerge as a critical tool to secure exports and also guarantee economic resilience. With this, such occurrences as expropriation, sanctions, currency volatility, and geopolitical tensions are reconfiguring global supply chains.

This dynamic macroeconomic context highlights the necessity and the opportunity for India to have a future-oriented strategy and one that utilizes innovative financial tools in order to unleash growth and resilience in the future.

While institutions like Export Credit Guarantee Corporation of India (ECGC) have played a crucial role in India's export environment, the future of trade finance lies in policy reforms that facilitate easier use of risk mitigation instruments on a mass scale. Reserve Bank of India (RBI) should leverage the situation and recognize trade credit insurance as a strategic facilitator and promote its inclusion in the banking system through support at the regulatory level.

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By allowing banks to include trade credit insurance as a guarantee, would ease banks in reducing their capital requirement for providing trade finance backed by insurance, similar to measures successfully implemented by large economies such as the European Union, Singapore, Australia, and the United Kingdom.

The silver lining is that optimistic measures are already underway. The Department of Commerce (DoC) and Directorate General of Foreign Trade (DGFT) have been directed to form a committee, together with ECGC and the Federation of Indian Export Organisations (FIEO), to debate prospective relaxation of collateral requirements on secured loans. In addition to this, ECGC is planning to issue a large export portfolio cover, extending beyond narrow loan-specific guidelines.

These initiatives are a collective endeavour aimed at enhancing India's trade credit insurance system so that it is more inclusive, efficient, and conducive to the country's ambitious export growth plans, which is a reassuring development.

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Although IRDAI allows financial institutions and banks to purchase trade credit insurance, its application in terms of trade finance and factoring is low because it has not provided the benefits of capital relief shared in the majority of nations. This is far from the best international practices and Basel standards where trade credit insurance has been seen as a credit risk reducer that helps banks ease capital requirements.

While the RBI provides capital relief under ECGC policies, similar relief is not extended to trade credit insurance provided by other insurers. The regulatory environment in India has been supportive, but a final policy shift is needed.

The trick to unlocking India's trade finance potential is to make trade credit insurance a guarantee. This would enable banks to substitute the counterparty's higher risk weight with the insurer's lower risk weight—something widely practiced in Singapore, Australia, the UK, and the European Union.

The strategy successfully combines the concepts of guarantee and credit relief under a single, streamlined design of policy, which would have the effect of significantly reducing the capital requirements of banks, thereby improving the penetration of trade credit insurance. This would in itself allow more competitive financing for MSMEs and SMEs, improving their growth and integration into global value chains.

As India marches ahead with economic growth, global best practices clearly show that by integrating trade credit insurance in the financial system as a risk management tool is a winning formula. Closing this policy gap on priority will bring huge value pushing for a more competitive, robust, and inclusive export industry.

India's regulatory and policy environment is poised for change. The RBI and government can take advantage of the moment to make trade credit insurance facilitation a fundamental part of trade finance, aligning with international practices.

This path of bold action will usher in a new generation of export growth, empower Indian enterprise, and position India as a serious player in world trade.

Akshay Bhardwaj is Senior Vice President and Practice Leader—Credit Specialties at Marsh McLennan.