‘Traffic light’ warning system aims to shield Indian drug exporters from payment delays, defaults

The move directly addresses a surge in delayed payments, primarily from key growth markets in Africa and Latin America. It also aims to curb cases such as that of Indian exporter Pharmaken, whose payment for an active pharmaceutical ingredient (API) shipment to Pakistan was stuck for months around the time of Operation Sindoor in May.

India is the world’s generic drugs capital, exporting nearly $28 billion of medicines annually and supplying 20% of the global volume of generic drugs, and ensuring smooth, predictable transactions is vital for the country to maintain this dominance. In FY24, India’s total pharma 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%).

Mint explains how the new warning system aims to ensure this.

What is the main problem the new standard operating procedure seeks to resolve?

The core problem is the persistent disruption of companies’ financial operations and cash flows caused by delayed payments or non-receipt of dues from international buyers. These challenges create significant obstacles to seamless export operations. Exporters face heightened risk when competitive pressures lead to extensions of credit or transactions involving discrepant letters of credit (LCs) that are not formally accepted by a bank. In such cases, buyers can obtain and sell the goods before the payment is released, leaving the exporter exposed.

However, as an export promotion council, Pharmexcil can only play the role of facilitator and lacks the statutory authority to enforce payment recovery.

Generally, pharma exporters take 50% of the payment upfront and the remaining upon shipment, Namit Joshi, chairman of Pramexcil, told Mint earlier this month. But with increased competition, some exporters have started offering credit to buyers, especially in long-standing relationships, through LCs.

This is where potential risks can turn into real problems. “The buyers get the goods released into the market and sell them; if they wish to continue the business, they ask the bank to release the payment,” said Joshi, who is also chairman of Centrient Pharmaceuticals India. At times, the buyer doesn’t do so under some excuse and the payment gets delayed or remains unpaid. The cases are largely seen among African and Latin American buyers.

When will the ‘traffic light’ rating system be introduced, and how will it work?

The rating system, expected to be rolled out between 15 and 20 November, will signal a buyer’s reliability based on compiled complaints. The categories are are:

Green: For importers who have no complaints from exporters.

Amber: For importers who face one or two complaints.

Red: For importers with three or more complaints, indicating a consistent pattern of payment issues.

Which governmental and external agencies will Pharmexcil collaborate with, and what is its ultimate objective?

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 meant to strengthen the council’s advocacy and verification capabilities.

Once the verified data on defaults is compiled, the council plans to submit it to the government with a request for a formal policy that addresses these challenges and provides official backing for the new system.

Does the new framework also consider complaints against Indian exporters?

The SOP has been developed as a bipolar model that addresses complaints from both sides. The council has received complaints from overseas buyers regarding payment defaults by Indian exporters, and these will be taken into account as well. 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 taking advance payments of $50,000 from an African buyer.

“In this new system, both the buyer and the seller will be held accountable,” Joshi added.

What specific transactional details did Pharmexcil request from exporters?

Pharmexcil asked that exporters submit specific details regarding any cases of payment default or undue delay they have 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 concerning 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 engaging with relevant authorities”.

Has Pharmexcil quantified the total value of payment delays and defaults?

The council is still in the process of gathering and consolidating the data to determine the total value of payment delays and defaults. However, the severity of the challenge is highlighted by specific cases, such as the one involving the exporter Pharmaken, who supplied APIs to Pakistan. The payment for that shipment was stuck for several months due to political complications, but was eventually received in August after significant challenges and intervention from the Indian government.