Bonds instead of bank guarantees in public procurement: FM

Union Finance Minister Nirmala Sitharaman on Tuesday approved surety bonds in place of bank guarantees in case of government contracts and also for gold imports.

Presenting the Union Budget 2022-23, she said that in order to reduce indirect costs for suppliers and subcontractors, the use of surety bonds in place of bank guarantees will be made acceptable in public procurement.

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She said gold importers might also find it useful and the Insurance Regulatory and Development Authority of India (IRDAI) has given the framework for issuance of bonds by insurers.

Recently, IRDAI released the IRDAI (Guarantee Insurance Contracts) Guidelines 2022 setting the standards for this line of business.

It capped the quantum of bond insurance contracts for an insurer at 10% of gross premium written subject to a maximum of Rs 500 crore per annum.

The IRDAI has also stipulated that non-life insurers wishing to underwrite surety insurance risks must have a solvency margin of 1.25.

Non-life insurers are authorized to carry out this activity from 1 April.

“The standards will help regulate/develop surety as a business in India which is otherwise an accepted standard in Western countries,” said Vikash Khandelwal, CEO of Eqaro Guarantees, a surety solutions provider based in India. in Mumbai.

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“However, it would have been ideal if the final standards also provided for a specialist surety insurance company,” he added.

According to Khandelwal, enabling surety insurers to work alongside banks and other financial institutions to share risk-related information and technical expertise will help foster a strong ecosystem and prevent contagion.

“The guidelines are also silent on the right of recourse that a surety insurance company has in the event of default by the contractor. These are essential and can hinder the creation of surety-related expertise and capacities and possibly dissuade insurers from writing this class of business,” he added.

There are three parties to this contract, namely, the surety is the person who gives the guarantee, the person against whom the guarantee is given is called the principal debtor, and the obligee is the person to whom the guarantee is given.

Other underwriting guidelines, in accordance with IRDAI, are surety insurance contracts that can be issued for public/private infrastructure projects in all modes.

Contract bonds may include bid bonds, performance bonds, advance payment bonds and holdback bonds, and insurers may also enter into customs or tax bonds and court bonds.

However, the guarantee limit cannot exceed 30% of the value of the contract, surety insurance can be taken out for specific contracts alone, the insurer cannot issue any surety insurance contract on behalf of its promoters/subsidiaries , groups, associates and related parties, and the insurer must not enter into another risk transfer mechanism.

Furthermore, surety insurance contracts cannot cover financial security and surety insurance cannot be issued when the underlying assets/liabilities are located outside India.

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