Rupee Plunge Spotlights Trade-Credit Currency Risk

The devaluation of India’s currency is sparking accounts-receivable worries among U.S. exporters.
David KatzOctober 7, 2013

The large recent drop in the value of the Indian rupee relative to the U.S. dollar is causing worries among American companies that sell products to businesses on the subcontinent. More broadly, however, the rupee’s relatively sudden dive is bringing currency volatility overall into the spotlight as a trade-credit risk.

4603522450_e870af34fc_bAs with many other business perils, commercial insurers are serving as a lightning rod of risks that may just be starting to emerge. “Definitely, we’ve been seeing concern from insurers about India,” says Michael Kornblau, the U.S. trade-credit practice leader at Marsh, the insurance broker. “It had been a fairly benign market for a number of years, but now you’re seeing some concern about transactions going into India.”

4 Powerful Communication Strategies for Your Next Board Meeting

4 Powerful Communication Strategies for Your Next Board Meeting

This whitepaper outlines four powerful strategies to amplify board meeting conversations during a time of economic volatility. 

On Friday, the U.S. dollar was worth about 61 rupees, putting the Indian currency slightly off its yearly low of 68 in early September. A year ago, it was worth a whole lot more: 52 rupees to the dollar.

Before September 18, when the Federal Reserve announced its decision not to curtail its bond-buying program, the rupee had fallen 10 percent against the dollar in the third quarter.

The Fed’s announcement was likely a hopeful sign that U.S. exporters might not have to worry too much about their Indian customers paying their bills. The Fed’s stimulus program had driven interest rates “to the floor and poured money into the global economy. Much of that money flowed into emerging markets – including India, Brazil, and Russia,” according to a recent report by FIREapps, a currency risk management vendor, on the effect of currency volatility on corporate balance sheets.

Still, the sluggishness of the Indian economy and increasing U.S. exports to the subcontinent have put U.S.-based insurers and insureds in a watchful mood. For the second quarter, India recorded its lowest quarterly growth since the start of 2009.

No Big Deal?
To be sure, such growth doesn’t put India into even the top 15 importers of U.S. goods. And there apparently haven’t been that many cases of U.S. companies having accounts-receivables problems with Indian importers. “So far, not a lot has materialized in terms of payment delays or claims” by U.S. trade-credit policyholders, says Jochen Dümler,  chief executive officer of Euler Hermes, one of the largest trade-credit carriers.

From his point of view, the level of concern about the rupee hasn’t risen to the level of worries about the volatility of the Brazilian real, which has generated some bill-payment problems for Euler Hermes insureds.

In Brazil, although some importers “were technically okay in their domestic market, [they] were not able to pay their foreign invoices,” says Dümler. (Devaluations of the real hurt the profits of 46 multinationals in the second quarter, according to FIREapps. The real declined 7.8 percent relative to the U.S. dollar in the second quarter.)

Yet the widely reported devaluation of the rupee is contributing to a rising interest among the CFOs and risk managers of U.S. multinationals in buying trade-credit insurance, according to Kornblau. Marsh expects a 10 percent increase in trade-credit business for 2013, he says.

To Kornblau, the rupee’s slide, although by no means as globally serious or as extreme, recalls the Mexican peso crisis. In that 1994 debacle, the peso, which had been allowed to float, crashed from four pesos to the dollar to 7.2 in just a week. “Things will be going along fine for an economy and then something like this will happen,” he says.

Most at risk are U.S. companies exporting to Indian ones and issuing invoices based on dollars, according to the broker. The difficulty occurs in cases in which the rupee’s value against the dollar drops precipitously after the importer’s been billed.

If the rupee’s value versus the dollar drops from, say, 50/1 to 100/1, “you can see that it’s now going to take twice as many rupees to pay that debt,” he says. “That puts immense strain on the Indian importers, and oftentimes they might not be able to make that full payment. So they’ll either make partial payments or they’ll delay payment.”

Dümler says that in such cases Euler Hermes often enters into three-way agreements with its client exporters and their cash-strapped customers in which the latter pay out their invoices in installments that can last for as long as three to five years. Such arrangements are made “to avoid an insolvency” of the importer, the insurance executive says.

Under a typical arrangement, the insurer pays the exporter up front and is paid in installments by the importer. “The benefit for the U.S. exporter is that he does not have the situation that he has to wait for the money for years. He’s getting the money from us, and then we wait patiently – or not so patiently – for the claim to finally be settled,” Dümler says.

Photo by Stan Dalone