How surety bonds can be made at par with bank guarantees— explained
In a bid to make the surety bond business more attractive, the government is looking at making relevant changes in the Insolvency and Bankruptcy Code (IBC), PTI news reported. While presenting the Union Budget 2022-23, Finance Minister Nirmala Sitharaman said that the use of surety bonds as a substitute for bank guarantees will be made acceptable in government procurement.
What are surety bonds?
Surety bonds are third-party guarantees issued by the insurance companies on behalf of the applicant (i.e. on behalf of whom the guarantee is to be provided)
“Surety Bonds are issued to Beneficiaries and Authorities (i.e. corporations that accept the guarantee). Fundamentally, it is similar to any Non-Fund limits provided by banks to provide Bank Guarantees and LCs,” said Sanjay Kedia, CEO and Country Head, Marsh India Insurance Brokers.
Last week, IRDAI Chairman, Debasish Pandaurged stakeholders in the infrastructure sector to take advantage of offered surety bonds, which complement bank guarantees needed for large-scale funding.
Why Irdai chief stress the need to make use of surety bonds to complement bank guarantees?
IRDAI Chairman, Debasish Panda had mentioned that India is planning to spend almost ₹100 lakh crore+ on infrastructure in the next 5 years, which will generate a need for bonds worth almost ₹90 lakh crore in the next five years.
As per Sanjay Kedia, the current banking setup would urgently need additional support from alternative financing mechanisms to support such a demand for capital of this scale.
The IRDAI issued the Surety guidelines in 2022 which present a significant opportunity for Indian general insurers to complement the bank guarantee mechanism used by banks by providing alternative options for funding, he added.
Purpose of surety bonds
The purpose is to provide corporates an alternative for Non-Fund limits, which are more likely than not, uncollateralized and free of margin money/cash margins
As per Head, Marsh India, in some scenarios, the surety company can also provide a conditional guarantee, where the beneficiary is the private corporation and the chances of the unfair calling of the guarantee are minimised.
Benefits of surety bonds
Sanjay Kedia, CEO and Country Head, Marsh India listed four benefits of surety bonds
1)Diversified source of non-fund based limits
2)Easing of liquidity pressures
3)The ability for companies to participate in more orders
4)Project owners enjoy participation from a larger bidding group which helps them get a fair value for the bid
Source- Livemint
