The finance ministry has agreed to allow highway developers to replace their existing bank guarantees with insurance surety bonds, road transport and highways minister Nitin Gadkari said Wednesday. This would help unlock capital and speed up projects.
Over 4,000 bank guarantees worth `2 trillion are lying with the NHAI itself. Many developers have been seeking the option to convert the guarantees.
Insurance Surety Bonds (ISB), allowed by the Insurance Regulatory and Development Authority in April 2022, has been brought as a replacement of bank guarantees. Five insurance companies have already launched ISB products; However, the market for these bonds is yet to be taken off.
“I am happy to tell you that the road transport secretary talked to the Finance Secretary and (the latter) has agreed. Now you (NHAI) can covert (bank guarantees to ISBs),” Gadkari said at a workshop organized by the NHAI. The ISBs may get retrospective effect.
Surety bond was first announced in 2022 budget, but it hasn’t been taken off because of strict conditions put by IRDA.
It is basically a product that underwrites the performance of a contractor. The contractor pays the premium for the insurance bond and if it fails to perform then the insurance company pays the compensation to the entity that gave out the contract.
It is different from bank guarantee because in security bond only premium is paid while bank guarantee needs collateral. Bank guarantee locks in the capital of a contractor so it is less efficient.
However, unlike in other insurance products, a surety bond insurance company can recover the payment it had made to the entity that had engaged the contractor.
Earlier speaking at the event, Secretary, Ministry of Highways, Anurag Jain said that in the next two months e-Bank Guarantee would be made mandatory.
Gadkari also reiterates his idea of a financing institution for the road sector.
Railways and power sector have their financing companies for highways too there should be a financing arm. The money that will be raised by the institution and lent for highways development can be recovered through toll and cost of funds for the sector would come down.