Banks want to revive trade & warehouse insurance

MUMBAI: Indian banks are lobbying with the Reserve Bank of India and the insurance regulator to revive trade and warehouse insurance as the rise of digital tracking and traceable payments has become a lot more robust under TReDS, unlike in the past where inventories could not be tracked and malpractices were rampant in the absence of tech-based tracking.

“We have represented to the RBI that trade insurance should be made available to banks as most of the factoring is done by banks, and we are taking the credit risk when financing lower-rated MSMEs,” said a banker who did not wish to be identified.

RBI did not respond to an email query seeking its response to the story. TReDS is an online electronic institutional mechanism which facilitates the financing of trade receivables of MSMEs through multiple financiers. The platform enables discounting of invoices of MSME sellers against large buyers through an auction mechanism that ensures prompt realisation of trade receivables at competitive market rates. Banks, till a few years ago, were eligible to get an insurance cover for any money lent to trade and trade receivables, but it was later rolled back after several instances of mis-selling, and bogus bills were brought to Irdai notice.

“If Irdai can extend the insurance cover for trade insurance to banks, it will help us in a big way,” said Kalyan Basu, MD, Invoicemart. “Today, banks want collateral for loans which is a huge impediment for MSME finance. Trade insurance can be taken by MSMEs and buyers, but it is not assignable... if the bank is taking a trade exposure and the insurance cover is not assigned to the bank, then it makes no sense.” “Today, banks are only taking risks on select corporates. In due course, this can be expanded to corporates with low rating and for those corporates this insurance risk will play a substantial role,” said Sundeep Mohindru, founder, M1 Exchange.