National Export Insurance Account
National Export Insurance Account
The Government of India (GoI) has implemented a programme known as National Export Insurance Account (NEIA) for the protection of Indian exporters. Exporters supplying infrastructure projects on a credit basis face the risk of default on repayment. To combat the risk, the EXIM Bank introduced the NEIA in the year 2011. The NEIA ensures that the exporter obtains the payment even in case the buyer defaults.
Under the NEIA programme, the exporter and buyer enter into an agreement with the EXIM Bank. According to the agreement, the EXIM Bank pays the exporter for the goods sold. The bank then recovers the amount as a loan from the buyer. After the products have been shipped, the EXIM Bank makes payments to the exporter in instalments. Likewise, the buyer settles his loan towards the EXIM Bank over a period. Even in case, the buyer defaults in making the payment, the EXIM Bank will continue to meet its obligation towards the buyer. The credit arrangement offered under the NEIA programme also serves as an insurance transaction. The exporter pays the premium to safeguard himself against the risk of non-payment by the buyer.
The NEIA seeks to export infrastructure projects to the backward areas. Export of large scale infrastructure projects leads to a positive balance in trade and thus accelerated economic development. On 21st June 2019, the Ministry of Commerce and Industry (MCI) allocated a fund of Rs.300 crores to the corpus of the NEIA. The objective of the allocation is to enhance the risk-taking capacity of the NEIA.
Advantages of NEIA
- The scheme is available only for infrastructure projects, which involve high amounts as the repayment can be made over a lengthy period. It usually extends up to twelve years. Since the loan is distributed over a considerable period, the instalment amount is small. Thus, a small instalment amount can be used to finance large infrastructure projects.
- An essential condition for the NEIA programme is that goods for the project should be sourced domestically. The mandatory requirement for domestic production gives a boost to the local manufacturing industries.
- The payment for goods sold by the exporters are guaranteed as the risk of default is borne by the EXIM Bank.
- The buyer is allowed to make the payment over a long-term period (A maximum of twelve years is allowed). So, he is motivated to purchase more infrastructure schemes in the future.
- The amount of each instalment is generally small. So, the buyer will find it affordable to make the repayment and chances of default are minimised.
- Companies doing business in India, including Small and Medium Enterprises (SMEs), shall export products to foreign markets creating global competitiveness.
The following are the countries’ Governments and government-owned companies are eligible for the guaranteed payment:
All Indian companies which satisfy the following conditions:
- Should not have made default in payment of interest or principal on bonds issued by it or deposits accepted by it
- Should not have made default in payment of gratuity, bonus and other statutory dues to employees
- Should not have defaulted in paying back loans taken from public sector banks, Public Financial Institutions (PFIs), or All India Financial Institutions (AIFIs)
- Should not have accumulated losses in the Balance Sheets of the preceding three Financial Years (FYs).
- Should have had distributable profits during the preceding three FYs
- Should not have violated listing agreements made with the Bombay Stock Exchange (BSE), National Stock Exchange (NSE) or Calcutta Stock Exchange (CSE)
Projects which involve the following are eligible for credit:
- Generation, transmission and distribution of power
- Thermal, hydro, solar and wind energy production
- Laying of railway lines, manufacture of railway coaches and related equipment
- Manufacture of medical equipment, furniture, locomotives and automobiles
- Bitumen roads, flyovers, bridges and toll-plazas
- Heavy commercial vehicles
- Capital goods including engineering goods
- Civil infrastructure generation programmes including the construction of houses, hospitals, and business premises
- Water treatment plants and water distribution systems
- Sanitation facilities
- Irrigation systems
- Meat processing and cold storage facilities
- Abattoirs and tannery plants
Terms of Credit
- The maximum amount of credit allowed is 85% of the value of the contract.
- The amount of interest payable will vary on a case-to-case basis. Generally, the rate of interest cannot be more than LIBOR + 3%. The buyer and the exporter shall bear the interest burden in a ratio specified by the terms of their agreement.
- Guarantee fees (premium) should be paid to the EXIM Bank at the rate of six per cent. The guarantee fees are calculated as a per cent of the sum of all principal and interest payments. The calculation also covers any fluctuations in the exchange rates. The fees should be fully paid at the time of entering into the lending arrangement.
- The repayment period is a maximum of twelve years.
- The categories of bonds which can be submitted as security will be decided by the EXIM Bank on a case-to-case basis.
The following are the circumstances under which the policy applies:
- The buyer becomes insolvent (This will not apply in cases where the buyer is a foreign government).
- The buyer makes the payment in the local currency, but later a restriction arises on remittance of the payment from the buyer’s country to India.
- The buyer is unable to proceed with the contract on account of any war, civil war or natural calamities.
- There is a restriction of import of goods necessary for the execution of the contract.
- There is an interruption of the voyage of the goods on account of cancellation of the export licence.
- The buyer has not paid the contractor for the performance of the contract on account of financial constraints.
- In case the buyer is not a body wholly owned by a foreign government, a Sovereign Guarantee should be submitted to the EXIM Bank. A Sovereign Guarantee is an undertaking made by a foreign government. It promises to reimburse any loss which might be caused to the EXIM Bank on account of a default by the buyer.
- An engineer approved by the EXIM Bank should be appointed to oversee the project. He should submit periodical reports regarding the status of development of the project.
- 75% of the goods and services used in the project must be sourced from India. In the cases of projects involving civil construction, the limit is 65%.
The exporter and the buyer should approach the EXIM Bank with the following documents:
- A letter from the exporter requesting the EXIM Bank to make the payment for the export to his bank account
- An undertaking from the exporter stating that claim cannot be made from the buyer
- Certified copy of the shipping bills used for the export
- A letter from the buyer authorising the EXIM Bank to make the payment on buyer’s behalf
- The financial statements of the buyer and the exporter for the preceding three FYs, certified by a practising Chartered Accountant
- Certified copy of the promissory note executed by the buyer, undertaking to make payment for the contract
To know more about the National Export Insurance Account contact here.