India's auto component makers not only face slower growth in the domestic market, the Export Credit Guarantee Corporation of India is now refusing credit insurance to over 50 auto component companies that sell to the Big Three car makers in Detroit.
Credit insurance protects manufacturers against payment defaults from buyers and is crucial if suppliers are to access working capital from banks. ECGC credit accounts for about 90 per cent of the value of auto parts exported from India.
With Detroit's Big Three - General Motors, Ford Motors, and Chrysler - facing financial crises, ECGC is reluctant to take a big hit in terms of pay-outs if any of them file for bankruptcy under Chapter 11 in the US, which effectively freezes payment to creditors.
"Since we are unable to assess the creditworthiness of these US car companies we have not been able to cover these risks which come from supplying to them," a senior ECGC official said.
The three car-makers and their Tier-1 or primary suppliers account for 70 per cent of Indian auto component exports to North America. The region, in turn, accounts for about 27 per cent of the Rs 18,000-crore (Rs 180 billion) worth of auto components exported last year.
Component makers face a serious financial crunch as a result of ECGC's move. The squeeze comes at a time when component players are facing a 40 to 60 per cent drop in their order books from domestic auto makers due to a drop in sales.
"Vendors are facing an acute credit shortage with banks refusing to extend credit to fulfil export orders in the absence of a cover," said a leading car parts exporter to the US, adding, "Worse, once any of the US car-makers file under Chapter 11 in the US courts, vendors will be the last to be paid."
ECGC, however, is denying insurance cover mostly to new companies and to those manufacturers that have returned to the guarantor after shifting to private players like Bajaj Alliance and AIG which offered lower premiums. Private insurers have stopped issuing credit guarantees for the past two months, forcing their clients to return to ECGC.
Established players with whom ECGC has a long-standing relationship have not been affected for the moment.
Auto component manufacturers that have been denied cover, however, said they have no choice but to fulfil export obligations despite difficulties in accessing bank credit.
"Contracts, which are typically between three and five years, can't be stopped, otherwise we'll be sued in the US. We are arranging money from our own sources, but it is difficult in these circumstances," an exporter said.
