Highway Contractors Allowed To Convert Bank Guarantees Into Surety Bonds

Union Minister Nitin Gadkari has said the finance ministry has agreed to allow contractors engaged by state-owned NHAI and NHIDCL to convert their bank guarantees into insurance surety bonds.

Mr Gadkari had recently said changes will be made to the surety bond offering to make it more lucrative as no contractor is buying it because of the strict conditions imposed by insurance regulator Irdai.

“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.

“In NHAI, in the road ministry and NHIDCL whatever bank guarantees are there, if they want, they can convert them into insurance surety bonds. Permission should be given for this,” Mr Gadkari said on Wednesday at an event organised by the National Highways Authority of India.

Last year in December, Mr Gadkari launched the country’s first-ever surety bond insurance product with an aim to reduce the dependence on infrastructure developers on bank guarantees.

“I am happy to tell you that the road transport secretary talked to the finance secretary and the finance secretary has agreed. Now you can convert it,” the road transport and highways minister said.

The product, from the stable of Bajaj Allianz General Insurance, has been developed in response to a demand by the industry and the government.

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 gives the principal a contract of guarantee that contractual terms and other business deals will be concluded in accordance with the mutually 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.

Unlike a bank guarantee, the surety bond insurance does not require large collateral from the contractor, thus freeing up significant funds for the contractor, which they can utilise for the growth of the business.

Last week, Irdai relaxed norms for surety bonds, a type of insurance policy protecting parties involved in a transaction or contract from potential financial losses due to a breach of contract or other types of non-performance.

The changes are aimed at expanding the surety insurance market by increasing the availability of such products. 

(Except for the headline, this story has not been edited by NDTV staff and is published from a syndicated feed.)