Lessons from crisis: ECBs now need insurance cover against default

Companies raising overseas loans are being asked to buy insurance cover against loan default, which raises their borrowing costs by at least 150 basis points. Despite a drastic improvement in the liquidity situation globally, lenders are reluctant to lend long-term funds to foreign firms.

Bankers arranging overseas loans for Indian companies said a majority of the ECB deals that have been cut in the past few months are in the form of export credit agency or ECA loans. These agencies, which can be government-owned or private companies, provide an insurance cover against default on a credit taken by a company from overseas lenders.

This helps in transferring the risk of default from overseas lenders—who are otherwise flush with liquidity but do not want to take chances to the ECAs.

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