10.10.3-RISK AND THE RELATION TO TRADE CREDIT-GUARANTEES
Banks need the guarantee that warehouse receipts will become receivables: that is, commercial invoices backed by negotiable bills of lading or other relevant documents of title to the goods. All the gaps and risks in the process from the first purchase to this point need to be quantified and covered. For CMs the risk is enormous. Cases of quality fraud, physical theft and document falsification do occur!
Therefore, if their guarantees are to be truly solid then they need to be backed by fidelity (indemnity) and liability insurance of a quality and level that is acceptable to banks. To be readily enforceable, the insurance policy, and if possible the underlying collateral management contract, must be based on an acceptable jurisdiction, for example English law. See also 10.12, Alternative solutions.
If a CM's overseas parent company provides the guarantees, then it could be said that the collateral manager takes at least part of the country risk on board. This makes it easier for banks to approve certain lending operations, especially when the total credit and risk management package encompasses both the end-user and the producer or exporter.
Coupled with the 'total' credit and risk management packages offered by commodity banks, modern 'all in' collateral management has become an essential component of credit. The increased collateral and transaction security it offers facilitates access to credit, and can help to bring also smaller producers and exporters closer to buyers and end-users in consuming countries.
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