It's high-time to use more credit insurance to support trade financeBY EUGENE CHEN 陳仲漁
During Chinese New Year, I visited a friend working for the Exim Bank of Taiwan (EBT), the only export credit agency(ECA) in Taiwan set up in 1979, I was advised with joy that business turnover of the Bank has passed TWD90billion (aroundUSD3 billion) in 2012 and will be easily over TWD100billion (around USD3.33 billion)this year. He is so happy because the growth rate is almost ten folds compared to ten years ago .
However, knowing that total turnover of Sinosure, EBT's counterpart in China set up in 200, was up 35% from previous year to USD293.6billion in 2012 and the percentage of export coverage for China is more than 10% while EBT's % of coverage is less than 1% during the same period, he has to admit that EBT has plenty room to improve.
From study, I found out that the difference between the two institutions is the marketing strategy. EBT is selling policy without financing but Sinosure is selling through banks which are providing trade finance. Similar practice was experienced by Coface in China through its strategic partner, Pin-An Insurance, to support banks' clients to obtain trade finance.
Other private credit insurance companies such as Euler-Hermes, Atradius, and Chartis...etc. are also growing and compete seriously with each other since financial crisis in 2008. The product is formally available only for large enterprises but many banks are using it to support supplying chain finance, factoring, and invoice discount..etc. for SMEs clients recently.
This is because many sellers consider that the premium as part of banks' charge is easier to transfer to the buyers as long as their credit limits are obtained, compared to the cost of issuing Letter of Credit which is not only expensive but also difficult to be given to SMEs . It fits perfectly into the current practice of using open account as term of trade.
The banks which used to use credit checking agencies to control buyers' credit risk have created a surging need from credit insurance companies whose dynamic data base system can replace those credit agencies through global network.
Besides, capacity of reinsurance behind the credit insurance companies is also a logical safety net for taking more risk of payment default of the buyers.
Practice of Traditional trade finance by banks is based more on experience of examining documents or taking collaterals for risk sharing.
With the assistance of credit insurance, it is possible to improve the quality of trade finance by monitoring the buyer's credit first and to share the credit risk by way of insurance and reinsurance. In the case of EBT vs. Sinosure, Chinese banks seem adapting better with credit insurance than Taiwanese banks.