Bringing attention to the lack of bank guarantees to meet the rising credit demand for infrastructure development over the next five years, Insurance Regulatory and Development Authority of India (IRDAI) chairman Debasish Panda has called upon stakeholders to come together to reap the benefits of surety bonds to bridge the gap in demand.
Panda says India is expected to spend nearly ₹100 lakh crore on infrastructure through the National Infrastructure Pipeline in the next five years and this requires bank guarantees of approximately ₹90 lakh crore.
This is where surety bonds need to step in to bolster bank guarantees as banks do not have the capacity to fill the gap.
With such a large market potential, chairman, IRDAI exhorted all the stakeholders to come together and tap the potential which this segment offers.
"The current regulatory framework (for surety bonds) presents the general insurance industry with a unique opportunity to diversify portfolio and play an important role in nation-building," he added while speaking at a roundtable organised by the Confederation of Indian Industry (CII) in the capital.
He said the time for only organic growth is over and there is a need to look at other sources of finance like surety bonds to boost growth.
The guidelines that IRDAI issued last year on surety bonds, among them the IRDAI (Surety Insurance Contracts) Guidelines, 2022, the chairman attributes those to opening up the sector.
The IRDAI followed this with circulars of January 2023 and May 2023 which removed restrictions on business to be underwritten, relaxed solvency margin requirements, allowed insurance for commercial and contractual surety and removed limit of guarantee with the aim of giving a boost to the business of surety insurance.
Eye on surety bonds
The National Highways Authority of India (NHAI) also held a high-level meeting last month to touch upon various aspects to explore possibilities and remove operational constraints for wider adoption of surety bonds in place of bank guarantees.
NHAI had urged insurance companies and contractors to consider insurance surety bonds as an additional means of submitting bid security and performance security deposit. Once issued, these bonds are anticipated to be cost-effective and provide substantial security for NHAI projects.
Insurance surety bonds are financial instruments where insurance companies act as 'surety,' offering a financial guarantee that the principal will surely fulfill their obligations as per the agreed-upon terms. The Ministry of Finance has placed e-BGs (bank guarantees) and Insurance Surety Bonds on equal footing with traditional BGs for all government procurements. Typically, these bonds are aimed at construction and infrastructure projects and act as a risk transfer tool to shield from any unexpected losses.
On a global scale, the surety insurance market is estimated to be worth $29.5 billion, but India's penetration in this industry has been finite until now.
A research paper presented by The Infravision Foundation (TIF) on the event further stressed upon the point that the surety bond market is yet to take off in India due to unaddressed risks and the absence of market makers.
The research paper noted that the estimated maximum possible supply of bank guarantees over the next five years is about ₹35 lakh crore, as against a requirement of ₹95 lakh crore in this period.
The gap between demand and supply is about ₹60 lakh crore, stipulating the rich potential for surety bonds to emerge as a substitute for bank guarantees in the next five years, as per the TIF paper.
"Surety bonds have a robust $20 billion market in advanced economies," noted Vinayak Chatterjee, founder and managing trustee of TIF, "and it is about time they were widely used in India." He advocated a structure where the traditional banking structure and the insurance sector could work in partnership with each other.
With India estimated to become the third largest country with infrastructure activity by 2030, the Indian infrastructure sector alone would require an estimated ₹2.70 lakh crore of bank guarantees in 2023, which is expected to grow by 6 to 8% year on year basis.
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