A surety bond is a legally binding contract that provides financial protection and assurance that a party will fulfill their obligations. The Surety bond market is evolving in India, which offers an alternative to traditional bank guarantees and play a important role in managing risks associated with non-performing assets (NPAs) in the banking sector.
Surety Bonds in India:
- Introduction of Surety Bonds:
- Surety bonds in India were introduced with the influence of the Insurance Regulatory and Development Authority of India (IRDAI) in February 2022.
- The Insolvency and Bankruptcy Board of India (IBBI) and surety bonds have established a strong case for banks to mitigate risks related to NPAs.
- Growth Prospects:
- The Indian surety bond market has been growing steadily and is expected to become a multi-billion-dollar industry in the next few years.
- Issuers of surety bonds (primarily non-life insurance companies) are anticipating favorable policy support in the 2025-26 Budget.
- By March 31, 2024, the number of surety bonds issued weekly in India is expected to reach an average of 25 bonds.
- The market is projected to become a trillion-rupee market by FY30.
Surety Bonds as an Alternative to Bank Guarantees:
- Definition:
- Surety bonds are insurance policies that cover firms and contractors, where the insurer assumes financial responsibility in case a project fails or is abandoned.
- They are often seen as an alternative to bank guarantees, which traditionally required collateral or security to issue the guarantee.
- Differences Between Surety Bonds and Bank Guarantees:
- Bank Guarantees: Typically charge around 1.5% of the total guarantee amount and require collateral or security to back the guarantee.
- Surety Bonds: Charge higher premiums (up to 6% of the sum) but do not require collateral or security from the contractor. They also have lesser financial cover for the beneficiary, as the insurance company pays only after the default of the contractor is established.
