Export credit insurance is quietly holding back India’s MSMEs
NEW DELHI : India’s export ambition is inseparable from its micro, small and medium enterprises. MSMEs are responsible for more than 30 per cent of India’s GDP and almost 45 per cent of its export activities and are therefore vital engines of inclusive growth and job creation. Despite their significance, MSMEs are subject to structural impediments to accessing global value chains, such as restricted access to cheap trade financing, high compliance fees, changes in tariffs in major markets like the United States, and reliance on intermediaries accessing markets.
These bottlenecks are further exacerbated in high-risk markets, where political risks, poor law enforcement, and exchange rate risks heighten financing exposure. Yet as policymakers urge exporters to diversify markets and integrate into global value chains, a quieter structural constraint continues to undermine this ambition. The export credit insurance system, meant to protect MSMEs from global risk, is itself imposing economic costs that weaken their competitiveness.
Export credit insurance should reduce uncertainty, unlock working capital, and embolden firms to enter new markets. In India, this responsibility rests primarily with the Export Credit Guarantee Corporation (ECGC), supported by schemes such as the National Export Insurance Account (NEIA). On paper, the framework is comprehensive. In practice, for a large share of MSMEs, particularly micro enterprises, it is costly to access, complex to comply with, and uncertain to rely upon.
The result is a paradox. India’s export credit system is expanding in scale, premium income is rising, and coverage volumes are growing, yet a significant proportion of MSMEs either remain outside the system or use it defensively, avoiding precisely the markets and opportunities policy seeks to promote.
Payment default: The Risk That Never Goes Away
Payment default remains the most acute concern for MSMEs engaged in export trade. Buyer insolvency, delayed remittances, and non-payment by letter-of-credit banks rank consistently as the highest risks identified by exporters. Export credit insurance is intended to address this vulnerability precisely. Yet uptake among MSMEs remains limited.
Steep premiums relative to turnover, coupled with complicated paperwork, discourage small exporters from adopting insurance. Micro businesses and rural cluster units often lack trained administrative staff to manage compliance. Evidence from the ECGC–IIFT study (2023) indicates that incomplete documentation, delayed reporting, or even minor clerical errors frequently result in claim rejection, leaving MSMEs exposed almost as if they had no coverage at all.
The economic cost of non-payment extends well beyond the immediate loss of export earnings. Disrupted cash flows derail production schedules, weaken buyer relationships, and erode confidence in international transactions. Over time, these shocks reduce a firm’s capacity to reinvest in export growth, adopt digital trade tools, or venture into higher-risk markets.
For micro enterprises, the combined direct and indirect costs can threaten business survival itself. Direct costs are the expenses that are immediately visible. These include export credit insurance premiums, bank charges, documentation fees, compliance costs and the administrative effort required to maintain insurance coverage. For micro enterprises, often operating on very thin margins these costs consume a disproportionately large share of working capital. Unlike larger firms, micro exporters cannot spread these expenses across high volumes of trade.
Indirect costs are less visible but often more damaging. When a payment is delayed or defaulted, cash flow is disrupted. Production schedules are interrupted, workers may not be paid on time, raw material purchases are postponed, and future orders may be cancelled. Even if insurance coverage exists, delays in claim settlement or rejection due to minor procedural errors mean that liquidity stress continues during the most critical period.
Over time, these disruptions create a cycle of vulnerability. The enterprise loses buyer confidence, hesitates to accept new export orders, avoids unfamiliar or higher-value markets, and becomes increasingly dependent on intermediaries or domestic sales. This reduces profitability and limits reinvestment in technology, compliance capacity, or skill development.
The Visible Costs MSMEs Pay Upfront
Even before defaults occur, MSMEs confront significant upfront financial barriers. ECGC premiums, service fees and compliance charges are calibrated to destination risk and buyer profiles. While risk-based pricing is commercially rational, its impact on small exporters is disproportionate.
For micro exporters, handloom weavers, artisan collectives and small agri-processors, premiums can absorb a meaningful share of working capital. Empirical estimates reported by ECGC in collaboration with the Indian Institute of Foreign Trade (IIFT, 2023) suggest that the direct financial burden of export credit insurance, including premiums and associated charges, typically ranges between 0.5 and 2 per cent of export turnover for small exporters.
More significantly, indirect costs arising from compliance requirements, procedural delays, and missed market opportunities are estimated to account for approximately 5 to 10 per cent of potential export earnings, a burden that falls disproportionately on micro enterprises with limited bargaining power and administrative capacity.
Schemes such as NEIA, designed to support exports to high-risk destinations, often involve collateral requirements, formal banking histories and extensive documentation. These conditions are manageable for larger exporters but exclusionary for micro firms that operate with informal accounts or limited institutional credit access. Insurance, in such cases, becomes an export-preventing cost rather than an enabling instrument.
Only around 61 per cent of MSMEs currently hold ECGC policies, with adoption rates varying sharply across sectors and regions. While food and agro-based exports exhibit relatively higher penetration, sectors such as electronics, machinery, and manufacturing show significantly lower uptake. Notably, even in export-intensive states such as Maharashtra, a majority of MSMEs remain outside the ECGC coverage framework. Taken together, these findings suggest that the cost burden faced by MSMEs is not merely expense-driven but systemic, reflecting deeper issues in policy design, operational delivery, and market access rather than isolated financial constraints (ECGC–IIFT, 2023).
Compliance: Where Protection Turns Punitive
Beyond financial costs, compliance obligations impose a heavy operational burden. MSMEs must navigate GST 2.0 regulations, customs procedures, foreign trade documentation, banking norms and insurance reporting requirements, often simultaneously. These obligations require coordination with freight forwarders, banks and government agencies, a task that overwhelms small exporters without dedicated compliance teams.
For artisans, weavers and micro manufacturers, documentation complexity translates into delayed shipments, rejected claims and higher administrative costs. Procedural inflexibility in ECGC schemes, including NEIA, compounds the problem. Many MSMEs are unaware of eligibility conditions, reporting timelines or documentation standards until after claims are filed, often too late. As a result, insurance coverage exists in theory but fails in execution, particularly for the smallest exporters.
Challenges do not end once MSMEs adopt ECGC coverage. Post-adoption issues further dilute its value. Exporters report disputes over letters of credit, quality-related disagreements, blocked funds, restrictive credit limits and premium escalation as persistent problems. Currency volatility and delays in obtaining policies or enhanced credit limits exacerbate uncertainty. Transportation risks add another layer.
More than half of exporters identify sea routes as the riskiest, citing natural calamities, piracy and port disruptions. Air and road transport follow at a distance. Yet exporters consistently prioritise buyer insolvency and non-payment risks, areas where insurance outcomes must be swift and predictable to be effective.
Awareness gaps worsen matters. Most exporters learn about ECGC products through internal staff or banks, while ECGC’s own outreach, seminars, official visits and advertising have had limited traction. Evidence from the ECGC reports reveals that only around 10 per cent of policyholders have made claims in the past five years. Notably, those who have used ECGC report improvements in export volumes, market consolidation, product quality and integration into production chains. The issue, therefore, is not insurance efficacy but uneven access to its benefits.
The Opportunity Cost Of Staying Small
Perhaps the most damaging cost is invisible. Many MSMEs self-restrict their export ambitions due to perceived insurance constraints. High-growth but high-risk markets in Africa and Latin America are often avoided, not because demand is lacking, but because premiums are high, credit limits are restrictive, and claim outcomes are uncertain.
As a result, exporters remain locked into familiar markets, foregoing diversification benefits and long-term growth. This conservative behaviour contradicts India’s strategic goal of expanding its presence in emerging economies.
Dependence on intermediaries compounds this constraint. In rural and semi-urban clusters, intermediaries dominate pricing, market access and payment regimes. They absorb a significant share of export value, delay payments and impose additional administrative burdens. For smallholder farmers, weavers and artisans, this weakens the protective impact of credit insurance, as benefits accrue upstream rather than to producers.
OECD studies on SME digitalisation show that integrating e-commerce platforms with digital trade finance reduces intermediary dependence and enhances transparency. In India, platforms such as TReDS, particularly at Gift City, offer similar potential. Yet low awareness and digital literacy limit adoption among micro exporters.
Comparative experience reveals a critical gap in India’s export credit architecture: digital integration. Japan’s NEXI and South Korea’s K-SURE operate integrated IT systems linking risk assessment, policy issuance and claims settlement. Digitalisation reduces errors, accelerates processing and improves transparency, benefits especially valuable for small exporters with limited administrative capacity. In contrast, ECGC’s digital penetration remains modest, with partial reliance on platforms such as TReDS and limited end-to-end integration.
Digital and fintech-based trade finance solutions also allow MSMEs to convert receivables into working capital efficiently, reduce reliance on intermediaries and expand market access. Studies indicate that full digital integration significantly lowers transaction costs and clarifies claim assessment, advantages that disproportionately benefit micro enterprises.
What Global Peers Do Differently
Japan’s NEXI demonstrates how reinsurance can unlock high-risk markets. By sharing exposure with global insurers, NEXI prevents premiums from becoming prohibitive and enables SMEs to access destinations in Africa and Latin America on viable terms. MSME-specific schemes with simplified documentation and digital processing reduce compliance burdens.
South Korea’s K-SURE exemplifies digital efficiency. Real-time credit assessment, instant policy issuance and automated claims handling reduce rejection rates and settlement delays. Graduated compliance standards recognise that small exporters often lack formal accounting systems or banking links. Crucially, K-SURE adopts a global value chain approach, extending risk coverage across suppliers, logistics providers and financiers.
By contrast, ECGC remains focused primarily on direct exporter protection. While coverage expanded to over Rs 7.3 lakh crore in FY2023–24 and premium income rose, claims paid declined sharply. Limited integration with upstream suppliers and value-chain partners constrains systemic risk mitigation and discourages MSME participation.
Recent reforms in India’s credit ecosystem offer an opportunity to rethink export credit insurance alongside broader financial infrastructure.
Fintech lenders have expanded access to credit using alternative data such as GST filings and digital transactions. The Unified Lending Interface (ULI) further reduces documentation burdens by enabling consent-based data sharing. With only around 15 per cent of MSMEs accessing formal credit and a credit gap exceeding USD 500 billion, ULI can materially reduce transaction costs.
Legal reforms reinforce this shift. Revised MSME classification thresholds better reflect business realities, while proposed statutory mandates on MSME lending could anchor affordable credit access. However, these reforms will succeed only if aligned with risk protection mechanisms. Micro enterprises, constituting nearly 99 per cent of MSMEs, lack formal bookkeeping, collateral and digital sophistication. Any insurance or credit regime designed around mid-sized exporter assumptions will exclude the majority by design.
A Reform Agenda Grounded In Global Best Practice
International experience suggests that ECGC can reduce economic costs and expand MSME participation through a focused reform agenda:
● Deepening global reinsurance partnerships to stabilise high-risk exposure
● Adopting GVC-oriented risk assessment across supply chains
● Automating and time-binding claims processing through digital workflows
● Designing MSME-specific schemes with minimal documentation and collateral
● Integrating trade finance platforms to reduce intermediary dependence
● Launching capacity-building programmes for compliance and digital literacy
● Incentivising exporters through preferential premiums and faster settlements
The ECGC–NEXI reinsurance agreement is a vital first step. But without complementary reforms, digitalisation, procedural simplification and MSME capacity-building, its promise will remain unrealised.
India’s export challenge today is not merely about production or market access. It is institutional. When risk protection mechanisms impose costs that exceed perceived benefits, firms rationally opt out. ECGC has played, and continues to play, a vital role in India’s export ecosystem. But for MSMEs, the issue is not the absence of insurance; it is the cost of using it. Reducing both visible and hidden costs is not a technical adjustment; it is a strategic imperative.
If India wants its MSMEs to move from survival to scale, export credit insurance must evolve from a compliance-heavy safeguard into a growth-enabling instrument. The difference between the two will determine whether India’s smallest exporters merely participate in global trade or help shape it.