Page 28 - Banking Finance March 2019

ARTICLE

Benefits of Surety Bonds to each party

in the Transaction :
Once a contractor is known to a surety provider, it becomes
much easier to evaluate projects and issue appropriate
bonds. Many successful contractors view their brokers and
bonding companies as important business partners, involving
them in the bid decision and development process.

Benefits to Project Owners: placed unrealistic low bids to win projects and eventually
many of those ran into financial problems and ultimately
For those instigating a project, bonding ensures that all
bidders are capable, competent and serious. Unqualified or those projects came to a standstill. The banks which took
irresponsible bidders are eliminated. exposure in such projects suffered in the process.

Now, this is one problem which can be bypassed if we have
Project owners can be confident that the contractors they a vibrant market for Bid Bonds in India. In developed nations
select have the necessary skills and resources to complete work like USA, Canada, Germany, a Bid Bond or Surety or
on budget and to be specified standards. In the rare cases Performance Guarantee is a part of pre-qualification criteria
where unforeseen circumstances create problems, the surety
for bidders, especially for government sponsored
company will provide the resources to complete the work.
infrastructure projects. In India, the market for such
instruments has not yet developed. As of now, only banks
Bonding can assure that specific standards are met and that provide such instruments in India and there is an urgent
appropriate payments to subcontractors and suppliers will requirement to develop such Surety Bonds and offerings
be made. This virtually eliminates the filing of liens, making here. We need to expand the market for such instruments
the transfer on completion a far smoother process. by bringing in more issuers. This will help to:

 Mitigate the high construction risk which, in turn, can
Benefits to Contractors bring down the lending rate.
Obtaining a bond tells that a business is successful, well  Curb contractors' tendency to submit ultra-low or
managed and reliable. Bonds are commonly required to bid frivolous bids for the sake of winning tenders as such
on substantial contracts. Even when a bond is not projects have higher chance of running into trouble later.
mandatory, the security a bond provides can be a distinct
competitive advantage. Way forward:
With increasing regulatory burden placed on banks, coupled
In the course of the pre-qualification examination of a
with their enhanced risk aversion since global financial crisis,
company, it is not uncommon for the surety company to Sureties are gradually becoming a popular alternative. This is
make suggestions for internal changes that will make the even more evident in geographies witnessing growth in
contractor easier to bond. These changes usually lead to construction activities where previously 80-90 % of the
operational improvements, more efficient management or requirement was supported by letters of credit issued by banks.
both. The end result can be more profitable, competitive
business for the contractor.
While there is a clear need for adopting sureties as an
alternative to bank guarantees, the growth in its usage has
Ancillary Benefits to Banking in the
to be preceded by changes in the regulations determining
country the scope & acceptance of the product, the role of various
We all are aware of the bad debt problem of the Indian market participants and the judiciary.
Banking System. A sizable chunk of the NPAs that the
banking system is presently saddled with has originated from An instrument like this is an imperative for a nation like ours
the infrastructure sector. Analysis of the nature of the where there will be large scale construction in infrastructure
problem reveals that many of the project contractors had and real estate sector in the coming years.

28 | 2019 | MARCH | BANKING FINANCE