We, at Surety 007, have been vociferous advocates of the benefits of Surety Bonds over Bank guarantees. Now, SMEs demand Surety Bonds looking at benefits to be availed.
The Federation of Indian Micro and Small and Medium Enterprises (FISME) has taken cognizance of what we have been telling all along. The massive benefit Surety Bonds would provide to businesses of SMEs.
Why SMEs demand Surety Bonds?
As per the FISME, the Surety Bonds free up the working capital that is blocked by the Bank Guarantees. This blocked capital is very high at 10-30%. Freeing up this capital makes it available for more productive areas of a project.
This capital if re-invested in same project would help in its speedy completion. This allows SMEs to do more business in the same amount of time. It also aids in faster development of infrastructure and other services in India.
Why are Insurance Companies better positioned to issue Performance Guarantees?
Risk management is the primary work of the insurance companies & not of the banks. Thus, the insurance companies are better suited at pooling & managing this homogeneous risk of low frequency & high severity.
That is why insurance companies do not require a collateral to back you. The Banks not assessing risk are accessible only to big companies as going for SMEs is highly risky for them.
This harms the ecosystem as SMEs are unable to participate is projects due to low assets available for collateral. Also the obligee is unable to procure best business at lowest cost available, due to this shunting of SMEs.
What is stopping Insurance Companies in India from issuing Surety Bonds?
As SMEs demand Surety Bonds, a last link remains for Surety bond to be widely available for Indian businesses. It is release of a comprehensive recovery framework by IRDAI. This would provide the thrust for insurance companies to introduce novel Surety Bond products to the Indian market.
With 9 months already elapsed since Honourable Finance Minister announced Surety Bonds acceptance in the Budget of FY23, FISME has urged finance minister Nirmala Sitharaman to make surety bonds accessible for making public procurements.
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