Surety Bond Insurance launched for Infrastructure Projects
Surety Bond Insurance launched for Infrastructure Projects
Union Minister for Road, Transport and Highway, Nitin Gadkari launched India’s first ever surety bond insurance product which will reduce the dependence of infra developer on bank guarantee and help in realising $5 trillion economy target by 2025.
What is Surety Bond Insurance
Surety Bond Insurance is a type of insurance that protect the Principal (owner of the project) against the loss that may arise in case the contractor fails to complete their contractual obligation.
It will give the Principal a contract of guarantee that contractual terms and other deals will be concluded in accordance with the mutually agreed terms.
In case the contractor fails to fulfil the contractual obligation, the Principal can raise claim on the surety bond to recover the losses they have incurred.
Why there is need of Surety Bond Insurance
In bank guarantee arrangement, the contractor has to deposit a large sum of collateral in the bank which can not be utilised by the contractor during the contractual time period which led to freeze of fund.
But in Surety Bond Insurance, the contractor just have to pay small amount of premium to insurance company, hence large sum of fund which remain freeze in the bank guarantee arrangement can be utilised by the contractor for the growth of the business.
Benefits of Surety Bonds
- Provide funding flexibility : to contractor and protect their credit from bank
- Remove growth constraints : with extra available fund, the contractor can consider taking on additional projects without being restricted by security arrangements
- Bonds provide security to principal if the contractor fails to fulfil the contractual obligatios
- Facilitate better cash flow : that help to improve liquidity and free up valuable working capital
IRDAI guidelines on Surety Bonds
- Premium charged on all purity insurance policies should not exceed 10% of total gross written if that year, subjects to a maximum limit of ₹500 crore.
- Bond issuer can issue contract bond which insure developer, suppliers, and subcontractor that contractor will fulfil its contractual obligation.
- Contract bonds may include Bid bonds, Advance Payment Bonds, Performance Bonds, and Retention money.
- Surety Insurance bonds should be issued only to specific projects and not be clubbed for multiple projects,
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