Risk Management and Merchandise Export Finance

Market liberalization has brought profound changes in the way price risks are allocated and managed in merchandise export sectors. Price risks increasingly are allocated to third party organization like factoring companies rather than absorbed by the merchant. The success of market reforms crucially depends on the ability of the emerging small and medium size export sector to make full use of the range of modern marketing, financing, and price risk management instruments.

The merchandising export sector have two process to address while risk management in export .

A) Avoiding Risk by making proper Buyer assessment
B) Recovering money through recovery agency.

On this avoiding risk is a more cheaper solution as presently the recovery agents all over the world is charging 25% of the money looking at the griming market situation .

Obviously there are political and war risk and at the same time there is risk of the buyers bank becoming insolvent . At certain cases however it is seen that there is a deliberate attempt of the buyer not to pay looking at the tough market condition now.

Still small exporter could implement better risk management practices to solve this problem. They can start with correspondence and then put up the case with the relevant authorities and after that they could even file a legal suit under Export Insurance cover and at the end hire a debt collection agency.

Export Risk Management for Small exporters

For small exporters failure to get payment for one consignment is a big deal . It can lead even to the bankruptcy of the organization . Looking at that, there is a burning to need to put right kind of 'Export Risk Management' program in practice. Specially chances of bad debts has to properly analyzed . Most of the small exporters doesn't have proper risk management practices . Following key areas has to be looked after in order to implement proper risk management practices in export.

1. Understanding the Pre-shipment and Post-shipment framework from Bank /Institution.
2. Defining the mode of payment in export which would be benefiting-

a) Direct to customer
b) Through Merchant Exporters
c) Overseas Agent

3. Understanding the barriers which could lead to major problem areas for bad debt

a) Identifying new markets for your product
b) Identifying genuine buyers in new market
c) Understanding the quality norms
d) Financing pre-shipment post shipment activity
e) Cost of Export insurance program
f) Bureaucracy in export process
g) Payment risk in foreign markets
h) Volatile foreign exchange

4. Other items of risk

a) Insolvency of buyer
b) Insolvency of buyers bank
c) Deliberate attempt of buyer not to make payment
d) Foriegn currency risk
e) Political and war risk
f) Rejection due to various other reason ( quality issues,
documentation,perishibality of goods)

5. Possible ways of managing risk

a)Correspondence only
b)Complaint to Indian Embassy
c)Complaint to Export Promotional Council
d)Complaint of authorities in buyer's country
e)Filed case under under ECGC/insurance cover.
f)Intiate legal action against the company.
g)Hire debt collection agency

6. Work on the reason like quality , delay in supply and commercial dispute

7. Using following services from other agencies

1. Market Research report from export promtion council
2. Service of overseas buyer assessment agency
3. Export insurance cover.
4. Forward cover for foriegn agencies
5. Factoring companies
6. Service to debt collecting agencies