National Export Insurance Account
The Government of India (GoI) has implemented a program known as the National Export Insurance Account (NEIA) to protect Indian exporters. Exporters supplying infrastructure projects on a credit basis face the risk of default on repayment. To combat the threat, the EXIM Bank introduced the NEIA in 2011. The NEIA ensures that the exporter obtains the payment even if the buyer defaults.
Under the NEIA program, the exporter and buyer agree with the EXIM Bank. The EXIM Bank pays the exporter for the goods sold according to the agreement. The bank then recovers the amount as a loan from the buyer. After the products have been shipped, the EXIM Bank pays the exporter in installments. Likewise, the buyer settles his loan towards the EXIM Bank over a period. Even if the buyer defaults in making the payment, the EXIM Bank will continue to meet its obligation to the buyer. The credit arrangement offered under the NEIA program 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 backward areas. The 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 installment amount is small. Thus, a small installment amount can finance large infrastructure projects.
- An essential condition for the NEIA program is that goods for the project should be sourced domestically. The mandatory requirement for domestic production boosts the local manufacturing industries.
- The payment for goods sold by the exporters is guaranteed as the risk of default is borne by EXIM Bank.
- The buyer can 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 installment is generally tiny. So, the buyer will find it affordable to repay, and the chances of default are minimized.
- 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 that are eligible for the guaranteed payment:
List of Countries Approved for the National Export Insurance Account
All Indian companies 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 a 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 programs, 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 interest rate 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 six percent. The guarantee fees are calculated as a percent of all principal and interest payments. The calculation also covers any fluctuations in the exchange rates. The fees should be fully paid when entering into the lending arrangement.
- The repayment period is a maximum of twelve years.
- The EXIM Bank will decide the categories of bonds which can be submitted as security 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 from the buyer’s country to India.
- The buyer cannot proceed with the contract because of war, civil war, or natural calamities.
- There is a restriction on the import of goods necessary for the execution of the contract.
- There is an interruption of the voyage of the goods on account of the cancellation of the export license.
- The buyer has not paid the contractor for the performance of the contract on account of financial constraints.
- If 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 periodic reports regarding the project’s development status.
- 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 authorizing the EXIM Bank to make the payment on the buyer’s behalf
- The financial statements of the buyer and the exporter for the preceding three FYs, certified by a practicing Chartered Accountant
- Certified copy of the promissory note executed by the buyer, undertaking to make payment for the contract.