Page 57 - Banking Finance February 2025

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At the same time, surety bonds offer less financial cover to The demand for other products with project-specific terms
the agency or beneficiary, since the insurance company will and conditions, such as advance payment bonds, bid bonds,
pay back the money only after it is satisfied that the project and performance bonds, are slow to pick up. The big issuers
has failed because of the contractor. A bank guarantee, on are SBI General, Bajaj Allianz, New India, and HDFC Ergo.
the other hand, is almost available "on tap" and can be Backing the issues will be the global reinsurance players.
encashed at any time by the agency. Bharadwaj explains that the big reinsurance players have
the capacity to absorb the losses but will not wish to get
Changing the game bogged down in a long recovery process through the courts.

"Surety Bonds are emerging as a game-changing alternative "The reason why the insurers and reinsurers remain hesitant
to bank guarantees. They offer significant advantages, to loosen their purse strings is because there is a lingering
particularly in fostering concern about
financial flexibility for Bond Street enforceability of indemnity.
businesses. Unlike bank Surety bonds can be issued by companies subject to The ask from the industry is
guarantees, surety bonds do 10% premium cap of the total gross written premium that since surety
not require as much that year, subject to a maximum of Rs. 500 crore underwriting is a financial
collateral or impact working (monoline surety insurance companies excepted) product, it should be given
capital, allowing businesses the same status as a
Upto 100% of a project value can be offered as a bond
to deploy their resources financial creditor. In its
Types of surety bonds: Advance payment bonds, bid
more effectively," says absence the concern for
bonds, contract bonds, customs bonds, performance
Tapan Singhel, MD & CEO, large reinsurers is not the
bonds
Bajaj Allianz General volume of the potential loss
Some of the companies accepting surety bonds: AAI,
Insurance. but that a recovery is only
DMRC, GAIL, ONGC, IOC, NHAI, RVNL
The market for surety bonds possible through long term
The upfront rates are higher for surety bonds than litigation," he says.
has expanded because
on bank guarantees, but there is no demand for a
banks are now reluctant to According to Sanjay
collateral, which bank guarantees require
offer bank guarantees. At Agarwal, head of BFSI
This allows the buyers of the bonds (in this case, the
the height of the NPA crisis, contractor) to bid on more tenders and contracts, Ratings at CareEdge
banks were saddled with Ratings, this is a genuine
enhancing their business prospects
huge exposure on their demand. He also says that
At the same time, surety bonds offer less financial cover
guarantees as contractors the market for these bonds
to the agency or beneficiary, since the insurance
for a host of projects, was opened up a bit late,
company will pay back the money only after it is
particularly infrastructure almost by a decade. Banks
satisfied that the project has failed because of the
ventures, turned turtle. have cleaned up the mess in
contractor
their guarantee business
Surety bonds shift the risk to A bank guarantee, on the other hand, is almost
insurance companies. An available "on tap" and can be encashed at any time by and will soon be keen to
industry estimate notes that the agency participate in the market
a bank guarantee costs vigorously. "A surety bond
has limited scope compared to bank guarantees, as those
about 1.5 per cent of the total sum asked for, and a surety
are unconditional, which means the attraction for them is
bond can go anywhere up to 6 per cent.
always going to be higher," he says.
Currently, the bonds being issued are on demand, as
Bhardwaj is more hopeful. He expects things will move
unconditional irrevocable bonds. There is a commitment of
faster if the challenges are addressed. "These will not only
capital from the underwriters that makes them costly. "So, the
enhance the role of sureties in the market but also position
underwriters are slightly more cautious. Yet they realise the them as vital contributors to India's ambition for world-class
market is potentially huge. But that potential can only be infrastructure development," he says. (Source: Business
realised with adequate reinsurance capacity," Bhardwaj says. Standards)
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