Union Minister for Road Transport and Highways Nitin Gadkari, on 19th December, unveiled one of India’s first-ever Surety Bond Insurance products from Bajaj Allianz in a move that frees up cash and speeds up the execution of infrastructure projects.
For infrastructure projects, surety bond insurance will serve as a security measure and will protect both the principal and the contractor.
The product meets the needs of a diverse range of contractors, many of whom work in the more unstable environment of today.
The Surety Bond Insurance serves as a risk-transfer instrument for the Principal (the entity that awards the contract), protecting it from potential damages in the event that the contractor breaches the terms of the agreement.
The product grants the principal a guarantee that the conditions of any contracts and other business agreements will be fulfilled in line with the terms mutually agreed upon.
If the contractor doesn’t comply with the conditions of the contract, the Principal may file a claim against the surety bond to recoup their losses.
According to the Ministry of Road Transport and Highways, “Unlike a bank guarantee, the Surety Bond Insurance does not require considerable collateral from the contractor, therefore, freeing up significant funds for the contractor, which they can use for the growth of the firm.”
The product will also significantly lower the contractors’ debts, alleviating their financial concerns. Future infrastructure initiatives in the nation will benefit from the product’s expansion, it was said.
After the product launch, union minister Gadkari remarked, “With this new instrument of Surety Bonds, the availability of both cash and capacity would undoubtedly be improved. Such products stand to strengthen the sector.”
According to Tapan Singhel, MD & CEO of Bajaj Allianz General Insurance, the Indian infrastructure sector has demonstrated extraordinary growth in recent years, establishing records and boosting economic activity in India. Contractors will be able to take on more projects as a result of Surety Bond Insurance’s ability to help contractors maximise their capital.
According to Singhel, as this specialised sector of business expands, employment prospects will multiply, helping society as a whole.
How do surety bonds work?
Surety bonds are payment guarantees provided by insurers; however, they differ from bank guarantees in that a major portion of the project cost is not frozen.
Since liquidity in the infrastructure sector became a significant problem during the Pandemic, the Center had lobbied for this notion.
So, in the Union Budget 2022–23, Finance Minister Nirmala Sitharaman unveiled a strategy to replace bank guarantees with surety bonds.
The usage of surety bonds as a substitute for bank guarantees will be made acceptable in government procurements to decrease indirect costs for suppliers and work-contractors. IRDAI has provided the foundation for surety bond issuance by insurance companies, Ms. Sitharaman stated during her address introducing the budget for 2022–2023.
Following consultation with general insurers, the Ministry for Road Transport & Highways has requested that the insurance regulator Insurance Regulatory and Development Authority (IRDAI), create a model product on “Surety Bonds” that may be made available to highway developers.
How would it benefit the infrastructure sector?
Banks typically demand between 30 and 50 percent of the cash margin as a guarantee before lending money to construction enterprises. As an alternative, big businesses will now be able to purchase “surety bonds,” prohibiting the use of their sizable resources as bank guarantees.
This is due to the likelihood that the cost charged for an insurance bond will be lower, making the product much more accessible than bank guarantees.
Bank guarantees have resulted in a significant amount of financial resources being locked up. Surety bonds will release that funds, speeding up the process of completing road projects, according to a Bajaj Allianz Insurance representative.
