India drafts rules for insurers offering trade credit insurance

A policy can grant an indemnity of up to 60% of trade receivables.

The Insurance Regulatory and Development Authority of India (IRDAI) has issued draft guidelines for general insurers offering trade credit insurance with customised covers to SMEs and MSMEs.

The guidelines will also be applicable to banks and other financial institutions to help businesses manage country risk, allow access to new markets, and manage non-payment risks related to the trade financing portfolio.

A policy can grant an indemnity of up to 60% of trade receivables from each buyer for all banks, financial institutions, or factoring companies. Insurers can also offer an indemnity of up to 90% of the trade receivables from each buyer for all policyholders other than banks, financial institutions, and factoring companies.

For MSMEs, the policy can cover up to 95% in cases of political risk.

Policies will cover credit risk directly connected to an underlying trade transaction or the delivery of goods and services. It can cover commercial and political risks, with the latter only available to buyers outside India and countries agreed upon at the proposal stage.

The commercial risks covered include insolvency or protracted default of a buyer or bank responsible for payment in case of letter of credit transactions.