The surety bonds market in India in 2023 is off to a spectacular start. Here are seven developments cherry-picked by Surety Se7en experts that businesses, especially construction, Trade (EXIM) & manufacturing, just can’t ignore moving forward in the new year:
1. Surety Bonds Issuance allowed for insurance companies
Presenting the Union Budget 2022-23, The Hon’ble Finance Minister Nirmala Sitharaman gave thumbs up for Surety Bonds as a substitute to bank guarantees.
Over the past few years, the infrastructure companies were facing huge problems with bank guarantees. They had to block capital for extended periods as collateral or pay high premiums to banks to get them. This created a lot of issues related to the liquidity & business capacity in these companies. Many entitites like FISME , a major SME group & Surety Se7en, demanded the introduction of Surety bonds in India.
Surety Bonds in India in 2023 are a natural solution to these woes, observing the sucess of Surety Bonds as a much better alternative to Bank Guarantees in the western countries. In countries like the United States of America, the Surety bonds are even mandated by law just like motor insurance in India. This is due to the fact that Surety bonds require minimal to zero collateral & have lower direct costs than bank guarantees. They thus solve the said liquidity & capacity issues.
This critical milestone has made available Surety Bonds to more and more companies to address their liquidity & capacity issues. This is an important devolopment for companies to take note of & work on in 2023.
2. Surety Bonds launch in india for construction sector benefits in year 2023
Following chronological steps made available Surety bonds to the Indian Construction sector at the dawn of 2023:
- Drafting of Surety Insurance Contracts Guidelines 2022 by IRDAI,
- Union Budget anouncement
- Recovery rights given to the surety bonds within the frame work of Insolvency and Bankruptcy Code (IBC).
These advancements made possible the launch of Surety bond insurance product for the construction sector. On 19th December 2022, Bajaj Allianz, working with Surety Se7en, launched First such product. It marks a big moment for Indian growth outlook & for its contributors – GOI, IRDAI, Insurers, Re-insurers, Surety Se7en etc.
Now more Insurers & Reinsurers are lining up to introduce novel Surety bond Insurance products. TATA AIG & Liberty General are next in line.
Surety Se7en, India’s first surety-tech company is making Surety Bonds accesible by application of technology & risk assessment expertise.
With such availability the liquidity & capacity issues of construction companies are soon going to be a thing of the past. The Indian infrastructure sector could be soon out of the woods in 2023.
3. Payment Surety Bonds shape up the indian EXIM space in 2023
During her Union Budget 2022-23 speech Hon’ble Finance Minister Nirmala Sitharaman talked about the usefulness of Surety bonds for gold importers. The Surety Bonds in India are here to revolutionise the EXIM space in year 2023.
Surety bonds offer a more secure and predictable way to manage risk in the export-import market than trade credit. Trade credit involves extending credit to a trading partner, usually in the form of a loan or line of credit. Trade credit is not secure . It does not provide the same level of protection against non-payment as a surety bond. If a party fails to pay under a trade credit arrangement, the creditor does not has any recourse beyond trying to collect the debt, which is difficult in cross-border transactions.
Three types of Surety bonds are of prime importance for the indian EXIM sector in 2023:
- Payment bonds
Payment Bonds provide coverage against the risk of non-payment by a debtor. It protects against the risk of default or bankruptcy by a trading partner. Advance Payment Bond secures the advance payment made by to procure a supply to initiate EXIM work. In both cases the surety (insurance company) pays outstanding balance of payment in case of a payment default.
- Custom bonds
Custom bonds ensure that an EXIM party pays any duties, taxes, and other fees that are due to the customs. Continuous bonds cover multiple EXIM transactions over a period of time. They are particularly useful in ensuring compliance & securing the EXIM companies.
- Performance bonds & Bid Bonds
Surety Bonds are often required by international buyers to award contracts. Performance Bonds and Bid Bonds are asked for particularly to apply for & finalize these contracts. Introduction of Surety bonds to the Indian market would make these available readily with the help of technological partner like Surety Se7en. This would open up many gates for the Indian EXIM companies in the international market.
4. Bail Bonds become the norm in Indian Judicial System
These and alike questions have been important points of social contention. They express the pain of society when personal right & liberty are only reserved for the rich. The right to not allow a person to get harassed or victimized by the police. For long, a solution for this bane of society has been sought. Surety Bonds in the form of Bail Bonds are the solution.
The key difference between bail and bonds that can free the judicial system of this menace is that Surety bonds require minimal to no collateral from the person seeking the bond. One only needs to pay a low premium to activate bond coverage.
With such efforts, Bail Bonds are going to become the part & parcel of Indian Judicial System in 2023.
5. Rental Bonds to end trust deficit between landlords and tenants in 2023
Rental Bonds address the concerns of both landlords & tenants at a nominal cost. The number of residential units lying vacant in India is huge. The rental yield for landlords or property owners is a big concern in India. The reason for this is primarily trust issues between the landlords and tenants. Particularly over the regular payment of rent & the payment of hefty security deposit. This culminates in low rental yields.
Typically to protect losses arising from the tenant’s default, landlords follow the practice of taking security deposits from the tenant. Huge security deposits act as a deterrent for tenants. Also, Landlords still face trust issues. Some of which even play out after tenants vacate premises. For e.g., non-payment of TDS or even involvement of police due to some legal cases against tenants.
Rental bonds address these issues. Rental Bond is issued only when convinced about the credibility of the tenant. If the tenant defaults, the bond pays the landlord the amount of the loss.
Moreover, Rental Bonds eliminate the need for payment of bulky security deposit, benefitting the tenants. This could jump-start the stagnant & low-yield rental housing in India in the upcoming year 2023.
6. Bid Bonds to ramp up Procurement & Tendering Sector in 2023
Most government & big private companies float tenders and invite bids for all their service & supply requirements. Their goal is to get these services & supplies at best possible rates.
Furthermore, To ensure that only serious & trust-worthy parties apply for these tenders & submit meaningful bids, various measures are undertaken currently. These are Earnest Money Deposit (EMD) , Bank Guarantees & self attested affidavits. Problem with these are :
- Even after they are included, trust difficulties continue to exist and manifest themselves after the bids are chosen.
- Hefty EMD & collateral for bank guarantees discourage many serious parties from applying due to lack of funds.
This fails the basic reason to float tender which is to get the “Lowest possible cost of services or supplies”.
Bid Bonds have the potential to eliminate this problem. Bid Bonds will benefit both parties as:
1. Viability to complete the project is checked by underwriters who are well versed in risk management
2. The need for payment of EMD & collaterals is replaced by payment of nominal premium.
7. Stagnated Surety markets of the west will find newer opportunities to invest in 2023
Surety bonds although introduced at the dawn of 2023 in India is a reputable & profitable risk transfer product since long in the western countries. Moreover, It is even mandated by law in countries like United States of America but the Surety Markets in these countries have matured and reached saturation levels.
Opening up new markets, particularly India, the world’s fastest-growing large economy, is a win-win situation for both the western countries, particularly, G20, and India. Western countries can enter the Indian market as reinsurers and reap benefits of this multi-billion dollar market. India will benefit from the experience of these mature players in the development of a more secure market, as western reinsurers are well versed in these types of risks.
Munich Re, Swiss Re, Hannover Re, SCOR S.E & many more are lining up, as we speak, to enter Indian market in 2023.