Context

Government launched the first-of-its-kind ‘Surety Bond Insurance’ for the infrastructure sector.

About

About the initiative:

• Aim: To enhance the participation of contractors in project bids, freeing collaterals in between to support the working capital requirements.
• Functions:
  • Surety Bond Insurance will act as a security arrangement for infrastructure projects and will insulate the contractor as well as the principal (contract awarding authority) from any loss.
• Launched by: Bajaj Allianz General Assurance.

Finance Minister Nirmala Sitharaman in the Budget 2022-23 had said Surety Bonds can be used as a substitute for bank guarantees for government procurement.

Significance:

• Surety Bonds Insurance is a benchmark initiative in the infrastructure sector in line with the Government’s vision to up-scale the infrastructure development in the country to enhance the pace of development of upcoming projects.
• The Government of India is making concerted efforts to implement measures that will accelerate the development of infrastructure in India and Surety Bond Insurance is a decisive step in this direction.

What is Surety Bond?

• A surety bond is a kind of risk transfer tool for the Principal and protects the Principal from losses that may cause in case the contractor fails to perform their contractual duties.
• The product gives the principal a contract of guarantee that contractual terms and other business deals will be concluded in accordance with the mutually agreed terms.  
• In case the contractor does not fulfil the terms then the Principal can claim surety bonds to recover the losses.

Who is Principal in bond agreement? The principal is the party being required to obtain the surety bond by the obligee. When filling out a surety bond application, you are the principal. The obligee requires the principal to obtain a surety bond to ensure they uphold their end of the agreement.

Benefits:

• The surety is provided by an insurance company which acts as a security arrangement for infrastructure projects and insulates the contractor as well as the principal.
• The availability of both liquidity and capacity will definitely be boosted; such products stand to strengthen the sector.
• It will lead to more prosperity, increased employment opportunities, and increased social connectivity.

How is it different from a Bank guarantee?

• Unlike a bank guarantee, the surety bond Insurance does not require large collateral from the contractor, thus, it frees up significant funds for the contractor, which they can utilize for the growth of the business.
• The product will also help in reducing the contractors’ debts to a large extent by addressing their financial worries.
• The insurance product aims to facilitate the growth of upcoming infrastructure projects in the country.