Finance Ministry Approves Conversion Of Bank Guarantees To Insurance Surety Bonds For NHAI And NHIDCL Contractors

Union Minister Nitin Gadkari has announced that the Finance Ministry has approved the conversion of bank guarantees into insurance surety bonds for contractors working with National Highways Authority of India (NHAI) and National Highways and Infrastructure Development Corporation Limited (NHIDCL).

This development comes in following Gadkari’s recent statement that changes would be made to the surety bond policies to make them more appealing to contractors — who have avoided purchasing them due to the stringent regulations imposed by the regulator Insurance Regulatory and Development Authority of India (IRDAI).

He further stated, "I conveyed to the road transport secretary that he should talk to the finance secretary once to give it (allowing conversion of bank guarantee to surety bonds) from retrospective effect”, as per Money Control report.

In December last year, the minister launched India's first surety bond insurance to reduce infrastructure developers' reliance on bank guarantees.

"It took us three years to introduce the insurance surety bond product after following up with regulatory authorities. The bond can be offered in place of a bank guarantee. But they have made the product so restrictive that no contractor can avail it," Gadkari said.

"Our secretary spoke to the finance secretary, who has given his approval. So, whatever bank guarantees are there, if they want, they can convert them into insurance surety bonds", reports ET Infra.

The IRDAI eased provisions for surety bonds, safeguarding parties from financial losses arising from contract breaches or non-performance, by tweaking the insurance policy norms last week.

The changes aim to expand surety insurance market by making products more available.

The surety bond insurance is a risk transfer tool for the principal, and shields the principal from the losses that may arise in case the contractor fails to perform his contractual obligation.

The product provides the principal with a guarantee that all contractual terms and business deals will be carried out based on agreed terms.

In case the contractor doesn't fulfil the contractual terms, the principal can raise a claim on the surety bond and recover the losses they have incurred.

Surety bond insurance does not demand high collateral from contractors, unlike bank guarantees —  freeing up funds for growth opportunities.