The Credit Insurance in India is Banned by IRDA

The Credit Insurance in India is Banned by IRDA

According to Economic Times,

The non-life insurance industry has been barred from selling any form of credit insurance, following state-owned insurer Oriental Insurance facing claims up to Rs 400 crore on a cover granted to Paramount Airways. Companies that provide this cover have termed the reaction knee jerk and fear that it will have repercussions on the economy .
A circular issued by the regulator on Tuesday said soliciting and marketing of all credit insurance policies has been banned. Although Irda had issued a similar order earlier, many companies interpreted that as a ban on providing credit insurance to banks since the order arose following a large claim made by banks who had lent to Paramount.

Let me explain that, What is Credit Insurance and How it Works?

Credit Insurance is a term used to describe both business credit insurance (a.k.a. trade credit insurance) and consumer credit insurance, e.g., credit life insurance, credit disability insurance (a.k.a. credit accident and health insurance), and credit unemployment insurance,

The easy way to differentiate between these two types of insurance is:

• Business credit insurance is credit insurance that businesses purchase to insure payment of credit extended by the business (their accounts receivable).
• Consumer credit insurance is credit insurance that consumers purchase to insure payment of credit extended to the consumer (insurance pays lender or finance company).

Consumer credit insurance is a way for consumers to insure repayment of loans even if the borrower dies, becomes disabled, or loses a job. Consumer credit insurance can be purchased to insure all kinds of consumer loans including auto loans, credit card debt, loans from finance companies, and home mortgage borrowing. Although purchased by the consumer/borrower, the benefit payment goes to the company financing the purchase or extending the credit to the consumer.

India is the only country in the world which largely depends on the Bank Guarantees while in the western world, Credit Insurance is largely used. I am sure that this move will definitely affect the Insurance companies as well as the Indian Businesses.