Money and credit - Ivanov V.М.

21.3. Elimination of credit risks

Credit insurance is a type of insurance, the meaning of which is to reduce or eliminate credit risk. The objects of such insurance are commercial loans that are provided by the supplier to the buyer, bank loans, loan obligations, long-term investments, etc. Separately, export credit insurance covers all mentioned and a number of specific types of insurance, for example insurance of currency risks from inflation, expenses Exporter, associated with its entry into a new market.

Credit insurance protects the interests of the seller and the creditor bank in the event of the insolvency of the debtor or failure to pay the debt for other reasons. Under the loan insurance agreement concluded at the seller's expense, repayment of the loan, if the debtor does not return it, is covered by the insurance organization.

A merchant selling goods on credit is at risk of incurring losses due to the insolvency of his debtor (economic risk) or in the case of foreign trade transactions because of political events (political risk). By means of private insurance of export credits it is possible to cover economic risk. The political risk of foreign trade supplies, together with the economic one, is assumed by the government on the basis of the application. However, in any case, the supplier must bear part of the loss on its own. This should force the supplier to carefully check the creditworthiness of its customer.

In the process of lending, such methods of insurance protection are applied, namely insurance:

• risk of non-return of the loan;

• responsibility of the borrower for non-return of the loan to the bank (or other creditor);

• untimely payment of interest by the borrower for a loan;

• consumer credit;

• commercial credit (bills);

• deposits of individuals;

• Deposits of legal entities.

Credit risk insurance . The object of insurance in this case is the responsibility of all or several borrowers to the bank for the timely and full repayment of the loan and payment of interest for its use in a certain period of the loan agreement.

The insured is the bank. The policyholder determines whether to insure the liability of all borrowers to whom loans have been granted, or insure the liability of each borrower separately. The first option is attractive in that under these conditions, the automatism of the insurer's liability is ensured (this is an essential guarantee of repayment of loan funds) and a preferential tariff rate is established. But in an unstable economic situation it is more appropriate to insure loans with interest of each borrower separately. The policyholder has the right to insure only the amount of the principal debt or the amount of the granted loan with interest.

Under the condition of insurance of the loan and interest for it, the insurer, from the time of the occurrence of the insured event, pays insurance compensation in the amount of 50 to 90% of payments and interest on the debt outstanding by the debtor.

The insurance amount is established in proportion to the percentage of the insurer's liability from the entire amount of the debt (including the credit usage fee) specified in the insurance contract, which must be returned on the terms of the loan agreement.

The insurer is obliged to pay to the insurer a refund within the number of days after the occurrence of the insured event, which is stipulated in the rules. After the bank receives the insurance indemnity, it transfers the right of recovery for compensation of losses inflicted by the debtor within the insurance indemnity paid to him, to the insurer. The transfer of the right of collection is accompanied by the documents necessary for the realization of this right.

If the insurer can not exercise this right through the fault of the insured (the claim is past due), the insurer is relieved from the obligation to pay compensation. And if the payment has already been made, the bank is obliged to return this refund to the insurer.

Insurance of the borrower's liability for non-repayment of a loan.

The insured for this type of insurance are enterprises, institutions and organizations.

The object of insurance is the responsibility of the borrower to the bank that provides the loan for timely and full repayment of the loan, including a fee for using it. The rules and terms of insurance are similar to the rules and conditions of insurance for the risk of non-repayment of a loan. The policyholder submits the application in duplicate, a copy of the loan agreement and a certificate of repayment of the loan.

The insurer determines the insurance payments, which must be paid by the insurer one-time. The day of payment is considered the write-off of funds from the insured's account. The responsibility of the insurer arises when the debtor fails to return the amount to the bank within three days after the due date of the payment due to the insurance contract.

The liability of the insurer also varies between 50-90%. The insurance amount is established in proportion to the share of liability of the insurer, stipulated in the contract, from the amount of debt.

Credit risk insurance in countries with developed market economies provides for compulsory insurance as an obligatory condition. It consists in the fact that a borrower of a loan or a buyer of goods on credit for the period of granting a loan insures life, work capacity, surviving until the end of the contract. This type of insurance is also applied when property is pledged. This means that the borrower is insured for the term of the loan.

When concluding insurance contracts for both types of liability insurance, the borrower's solvency is taken into account.

Under the creditworthiness is understood the presence of the economic entity of the grounds necessary to obtain a loan, and the ability to return the loan granted on time. Conclusion on the creditworthiness of the borrower is made on the basis of an analysis of the thoroughness of its calculations for previously obtained loans, the current financial situation, the ability to mobilize, if necessary, cash from different sources, that is, the level of liquidity.

The bank, when deciding on a loan, determines the level of risk that it is willing to take on, and the amount of credit that it can provide.