'Changes to be made in surety bond offering for making it more lucrative'

Road, transport and highways minister Nitin Gadkari on Tuesday said that 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.

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

"Don't impose such conditions that nobody is able to take benefit of the scheme...It took 3 years to come out with surety bonds and when it has been finally launched, no contractor is buying it," Gadkari said at an event organised by CareEdge Ratings.

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

"Changes will be made to surety bond offering to make it more lucrative," he added.

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 their 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.

Gadkari said to support infrastructure-led growth, mere budgetary provisions will not be insufficient.

He noted that the credit rating assessment should incorporate performance evaluation of the contractors, giving a lot of emphasis on quality parameters, transparency, technical innovation in works execution.