Gadkari wants surety bond insurance, not bank guarantee for infra projects

More than two years after it was first announced, India’s first surety bond insurance product for highway contractors, a product of Bajaj Allianz Insurance, was launched by Union Minister for Highways and Road Transport, Nitin Gadkari, on Tuesday.

Seeking rapid growth for the product, Gadkari said he would approach the finance ministry to make surety bonds a prerequisite for infrastructure projects, instead of a bank guarantee.

Surety bonds are guarantees of payment issued by general insurers that protect the principal from losses in case the contractor fails to meet its obligations under the contract. However, they’re different from bank guarantees, which require a certain percentage of project funds to be locked in as collateral, thus eating into the working capital of the contractor.

“The surety bond offers relief to contractors, as their working capital will not get blocked as in the case of bank guarantees,” Gadkari said at the launch event.

The minister lauded the insurance sector and the Insurance Regulatory and Developmental Authority of India (Irdai) for materialising a demand that has been made by the infrastructure sector for years. But he was disappointed that it took nearly three years after Finance Minister Nirmala Sitharaman’s announcement to launch the product.

Gadkari said that he understands why the financial sector had previously given the infrastructure sector a wide berth, as there were recovery risks attached to these projects due to delays and stalling. He added that insurers needn;t worry, as the government had put in place initiatives such as complete planning and clearances before financial sanctions and rating of highway contractors to help stakeholders identify serious and punctual developers, and ensure that projects do not get delayed due to regulatory obstacles.

“Surety bond insurance will prove to be an effective tool for the industry and will allow contractors to take up more projects as the product will help them optimise capital,” said Tapan Singhel, managing director and chief executive officer of Bajaj Allianz.

The Centre had first pushed for the idea as liquidity with the infrastructure sector, which is capital-intensive, became acute during the Covid-19 crisis. In 2020, the government had formed a nine-member committee to assess the feasibility of these bonds.

Recently, the Centre also extended its Covid-19 relief measures for contractors till April 2023, which include waivers on several financial obligations which had been keeping non-serious players out of the market.