New warning system aims to protect drug exporters from payment delays and defaults

Copyright © HT Digital Streams Limited All rights reserved. Coin Explainer: ‘Traffic Light’ Warning System Aims to Protect Indian Drug Exporters from Payment Delays, Defaults India exports nearly $28 billion worth of medicines annually and supplies 20% of the global volume of generic medicines. Image: Pixabay Summary The move directly addresses an increase in delayed payments, mainly from key growth markets in Africa and Latin America. The Pharmaceuticals Export Promotion Council of India (Pharmexcil) is to introduce a ‘traffic light’ warning system to protect its around 4,000 member companies from payment defaults by overseas buyers. This system will categorize international customers as red, yellow or green based on their record of payments, providing important information about a customer’s credibility and payment reliability at a glance. The move directly addresses an increase in delayed payments, mainly from key growth markets in Africa and Latin America. It also aims to curb cases like that of Indian exporter Pharmaken, whose payment for a shipment of an active pharmaceutical ingredient (API) to Pakistan stalled for months around the time of Operation Sindoor in May. India is the world’s generic medicine capital, exporting nearly $28 billion worth of medicines annually and supplying 20% ​​of the global volume of generic medicines, and ensuring smooth, predictable transactions is essential for the country to maintain this dominance. In FY24, India’s total pharmaceutical exports stood at $27.85 billion, of which Africa accounted for $3.9 billion (14.18%) and Latin America and the Caribbean (LAC) contributed $1.82 billion (6.54%). Munt explains how the new warning system aims to ensure this. What is the main problem that the new standard operating procedure is trying to solve? The core problem is the persistent disruption of companies’ financial operations and cash flow caused by delayed payments or non-receipt of funds from international buyers. These challenges create significant obstacles to seamless export operations. Exporters face increased risk when competitive pressures lead to credit extensions or transactions involving conflicting letters of credit (LCs) that are not formally accepted by a bank. In such cases, buyers may acquire and sell the goods before payment is released, leaving the exporter exposed. However, as an export promotion board, Pharmexcil can only play the role of facilitator and does not have the statutory authority to enforce payment recovery. Generally, pharmaceutical exporters take 50% of the payment up front and the remaining on shipment, Pramexcil Chairman Namit Joshi told Mint earlier this month. But with increased competition, some exporters have started offering credit to buyers, especially in long-term relationships, through LCs. This is where potential risks can turn into real problems. “The buyers get the goods released in the market and sell them; if they want to continue the business, they ask the bank to release the payment,” says Joshi, who is also chairman of Centrient Pharmaceuticals India. Sometimes the buyer does not do this under some excuse and the payment is delayed or remains unpaid. The cases are largely seen among buyers in Africa and Latin America. When will the ‘traffic light’ rating system be introduced, and how will it work? The rating system, which is expected to be implemented between November 15 and 20, will indicate a buyer’s trustworthiness based on aggregated complaints. The categories are: Green: For importers who have no complaints from exporters. Amber: For importers facing one or two complaints. Red: For importers with three or more complaints, indicating a consistent pattern of payment issues. What government and external agencies will Pharmexcil work with, and what is its ultimate goal? Pharmexcil is developing the SOP in collaboration with Indian Missions Abroad, the Export Credit Guarantee Corporation of India Ltd., the Directorate General of Foreign Trade, and various payment collection agencies. This collaboration is intended to strengthen the council’s advocacy and verification capabilities. Once the verified data on defaults is compiled, the council plans to present it to the government with a request for a formal policy that addresses these challenges and provides official support for the new system. Does the new framework also take into account complaints against Indian exporters? The SOP was developed as a bipolar model that addresses complaints from both sides. The board has received complaints from overseas buyers regarding payment defaults by Indian exporters, and these will also be taken into consideration. This system also allows importers to rate Indian exporters in an effort to prevent cases such as one where an Indian exporter allegedly fled after receiving $50,000 in advance payments from an African buyer. “In this new system, both the buyer and the seller will be held accountable,” added Joshi. What specific transaction details did Pharmexcil request from exporters? Pharmexcil requested that exporters submit specific details about any cases of payment default or undue delay they encountered, including name and contact details of the overseas buyer, country of transaction, invoice value and date, payment terms, specific nature of the default (delay, partial payment, or non-payment), and any related communication or documentation regarding the dispute. Director General Raja Bhanu K said the data “will be treated with strict confidentiality and used solely for the purpose of designing the SOP and liaising with relevant authorities”. Has Pharmexcil quantified the total value of payment delays and defaults? The council is still collecting and consolidating the data to determine the total value of payment delays and defaults. However, the seriousness of the challenge is highlighted by specific cases, such as the one involving the exporter Pharmaken, which supplied APIs to Pakistan. Payment for that shipment was held up for several months due to political complications, but was finally received in August after considerable challenges and intervention from the Indian government. Get all the industry news, banking news and updates on Live Mint. Download the Mint News app to get daily market updates. more topics #Pharma #mint explainer Read next story