NeSL in talks with insurers to launch surety bonds in digital format

Although the volumes for surety bonds continues to be low, issuance in a non-paper manner will ease a lot of administrative work for the insurers and could also help in increasing volumes

National e-Governance Services Ltd (NeSL) is in talks with insurance companies to issue surety bonds in digital format, according to industry insiders.

 

Although the volumes for surety bonds continue to be low, non-paper issues will ease administrative work for insurers and could also help in increasing volumes, experts said. 

 

Surety bonds are legally enforceable tripartite contracts that provide a hedge against risks associated with infrastructure projects.

 

The insurance regulator in April 2022 had permitted general insurers to issue surety insurance bonds.

 

NeSL facilitates the issuance, management, and verification of electronic bank guarantees (e-BGs) and is in discussion to add surety bonds also to it. 

 

Debajyoti Ray Chaudhuri, managing director and chief executive officer, NeSlL, said: “Our eBGs are used by banks and others. The National Highways Authority of India (NHAI) is a large consumer of eBGs. A similar solution is there for insurance companies, and we are talking to a few of them. Our feedback is that surety bonds are easier to issue than eBGs, which are costly to issue and working capital is blocked by way of margin. But the larger issue is that only three or four insurance companies are active. One of the reasons for some hesitancy among insurance companies is that the volumes are not much. But, once you have the volumes, you can aggressively push for it.”

 

Only a handful of insurers offer surety bonds. They include New India Assurance, ICICI Lombard General Insurance, SBI General Insurance, HDFC Ergo General Insurance, Tata AIG General Insurance, Universal Sompo General Insurance, and IFFCO Tokio General Insurance.

 

Bajaj Allianz General Insurance was the first to launch this product.

 

Issues of surety bonds remain muted due to several challenges, including collaboration between banks and insurance companies, data sharing, regulatory parity, and the inability to strengthen the enforceability of agreements between insurers and bond beneficiaries.

 

“Currently, most of the surety bonds are physically issued. Beneficiaries insist on physical copy, which too is a minor irritant. But, NeSL is working with insurance companies (for digital issuance) and they have approached the companies with regard to our requirements, which we have explained. When non-paper surety bonds are issued, it will ease a lot of administrative work. It will be a big development because the count will increase,” said Deepak Kumar, senior executive vice-president, and head, reinsurance business, Tata AIG General Insurance.

 

Although volumes are a concern, Chaudhuri said with increased automation insurers could market this product more effectively. 

 

He said: “For insurance companies, it should not be too difficult to implement this. We have a standard application programming interface (API) used by the banking industry. With slight modification, it can be used by insurance companies. They will have to invest a bit to consume these APIs.”

 

The Ministry of Road Transport & Highways recently said surety bonds issued by insurance companies for NHAI contracts crossed ₹10,000 crore.

 

Until July, 12 insurance companies issued around 1,600 bonds as “bid security” and 207 as “performance security”, valued at around ₹10,369 crore for NHAI contracts.

 

According to Kumar, the premiums collected by the industry through surety bonds was ₹200-250 crore in FY25, while they are expected to end FY26 at ₹800-1,000 crore.

 

The sector has big potential due to its close alignment with the infrastructure story. It will accrue up to ₹5,000 crore worth of premiums by FY30.