Surety Bond Insurance was allowed for issuance by the Ministry of Finance, GOI, under the Finance Budget of 2022-23. The announcement since gained traction and caught the eye of many construction companies. The contractors have been eagerly awaiting the release of Surety Bond Insurance by the Insurance companies in India since the announcement earlier this year. However, not much has happened on that front since the announcement made by Hon. Finance Minister, Mrs. Nirmala Sitharaman, in the Budget for FY 22-23.
LAUNCH OF SURETY BOND INSURANCE
On 1st April 2022, the IRDAI had released a model bond for Surety Bond issuance. However, no legal recourse of recovery in event of a claim was set by IRDAI. This led the insurance companies to abandon the product until the said recourse was formally mentioned.
Few insurance companies seem to have, since, resolved the claim settlement recourse issue. The launch for the first ever Surety Bond Insurance in India has, now, been announced by the Hon. Minister of Road Transport and Highways, Mr. Nitin Gadkari, for 19 Dec 2022. Reinsurance support for Surety Bonds has been received from the top 2 Reinsurance companies in the world, namely Munich RE and Swiss RE. Furthermore, the reinsurance companies have supported the insurance companies in India to build the right product by setting the appropriate Underwriting Guidelines. An executive at Swiss RE was quoted as saying “The Underwriting is the key to a successful Surety Bond Product in India”
BENEFITS OF SURETY BONDS
- No Collateral – Most insurance companies do not require the principal to post any collateral.
- Working Capital Unblocked – Insurance companies do not ask for FDs as security unlike Banks when issuing Bank Guarantees
- Line of Credit Released – Line of Credit which was erstwhile used by Bank Guarantees will now be released for other productive use
Surety Bonds are used extensively across the USA. They have proven to be extremely useful and successful in the USA and the EU. The benefits of such a product to the liquidity boost is enormous. Conservative estimates put this benefit to liquidity at around INR 5 Trillion in the Indian infrastructure and construction industry.
Problems in adoption of Surety Bonds
The knowledge and awareness around Surety Bonds in India, however, remains low. SMEs, who are pegged to be the biggest beneficiaries of Surety Bonds have seen a relatively low demand for the product. Awareness and Knowledge will be important to make Surety Bonds available to the mass market in India. Few players, if any, have made attempts to resolve the major underlying problems in the Surety Bond Insurance market. 2 insurance companies are actively vying for business in this sector at the moment. The rest of the companies seem to have adopted the watch and learn approach.
Finally, the next few months may prove to be critical for Surety Bond adoption in the Indian construction ecosystem. The GOI will have to make a push for acceptance of Surety Bonds across the departments, starting with NHAI.