VARIOUS TYPES OF RISK IN EXPORT PROJECT

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Q4.) (a.) Discuss the various types of risk in project export.

Ans: In executing a project export, the exporter is exposed to various attendant risks like commercial risks, country risks, and exchange and interest rate risks.

i) Commercial Risk: The commercial risk from the inability of the project buyer to make payment even after full and satisfactory completion of the contract. This risk is linked to the creditworthiness of the buyer and the source of funding for the contract. Large value contracts in developing countries are normally funded by Official Developing Agencies like the World Bank, Asian Development Bank, etc.

It is quite common in project exports to extend commercial credit for medium to long terms. The exporter should have the creditworthiness of the buyer established before allowing credit terms for exports.

ii) Country Risk: Country Risk is broadly a risk that arises out of political, social, and economic factors prevailing in the country of import and having a bearing on the country's ability to honor its cross-border obligation. The importer's capacity to pay cannot be the only criterion for undertaking exports to his country.

At the time of adding confirmation to L/Cs opened by foreign banks, accepting draft drawn under L/Cs, and issuing guarantees/bid bonds against the counter-guarantee of the foreign banks, Indian banks do consider whether the bank/country is placed under "caution".

iii) Exchange and Interest Rate Risk: An exporter is exposed to exchange and interest rate risks when the currency of payment and interest terms on the credit provided for the contract is different from the currency and interest terms of his borrowings. Normally, deferred credit offered by the exporters to the overseas buyer carry a fixed rate of interest and exporter's borrowings to fund the deferred credits are subjected to floating rate of interest.