Almost all PSUs float tenders and invite bids from supplier of goods & services for all their. They, however, need to ensure that the bidding company is capable of performing the service that it has promised. The PSUs require companies to submit guarantees, in form of FDs or Bank Guarantees, for this purpose. Now, however, an additional method of guarantee called Surety Bond has been allowed by the Government of India (GoI) as a substitute for Bank Guarantees. Surety Bonds acceptance by PSUs like GAIL, IOCL, AAI etc. as a standard financial guarantee is increasing by the day.
List of PSUs accepting Surety Bonds in IndIA
- NHAI - National Highways Authority of India
- AAI - Airport Authority of India
- GAIL - Gas Authority of India Limited
- EIL - Engineers India Limited
- ONGC - Oil & Natural Gas Corporation
- NTPC - National Thermal Power Corporation
- SAIL - Steel Authority of India Limited
This list has been growing ever since the first acceptance of Surety Bonds in PSUs, namely NHAI, on 19 Dec 22, pushed forward by Hon. Minister of Road Transport & Highways, Mr. Nitin Gadkari
Margin Money & collaterals replaced by nominal premium
The reason tenders are floated by the PSUs is to get the lowest possible cost of services or supplies that meet their requirements. Now, various measures are undertaken to ensure that only serious & trust-worthy parties apply & take-up these tenders.
Some of these are Earnest Money Deposit (EMD), Fixed Deposits as security & Bank Guarantees. The problem is that collateral and margin money requirement for bank guarantees discourage some deserving companies, especially SMEs, from applying.
Use of Surety Bonds by Surety Se7en replaces the need for payment of collaterals or margin money with payment of nominal premium. Thus, surety bonds attract more capable & deserving bidders to participate in the tendering process, particularly SMEs. This leads to a more competitive bidding process & selection of the contractor best suited to successfully complete the project.
Surety bonds provide additional security
Use of surety bonds in tenders helps PSUs to secure bids from companies that are capable of completing the project. The insurers and reinsurers specialize in risk management. They base their decision to issue Surety Bonds on a company's past performance and current financial condition and not on their capacity to offer collateral.
Thus, Surety bonds are only issued if applicants are found to have a good financial standing after a rigorous background check. This lessens the possibility of project delays or defaults for the PSUs.
Insurance companies are better at RISK Mitigation compared to banks
Surety Bonds are backed by insurance companies &, as the name suggests, bank guarantees by banks. In India, insurance companies are currently better equipped to mitigate such risks as compared to banks.
The insurance industry in India is well-regulated and has a strong capital base. This allows them to better handle the potential risks from surety bonds. Insurance companies are able to diversify their risk and absorb losses more effectively.
On the other hand, Banks are facing a higher level of stress in their balance sheet due to Bank Guarantees. This is making it harder for them to absorb any further losses. Conclusively, the banks are issuing less bank guarantees & charging higher security deposits to limit their ability to take on additional risk.
Therefore, surety bonds are more suitable for PSU tenders, as insurance companies are better equipped for risk mitigation.
Surety Bonds are customizable
Surety Bonds by Surety Se7en are customizable. This gives Surety Bonds the USP to meet the specific requirements of PSUs for a particular project. As a result, the tendering process is more flexible as the Surety bond is modified to match the PSU's unique requirements.
Furthermore, using Surety Bonds with a duration that aligns with the project duration helps reduce costs for contractors and suppliers. Contrary to typical bank guarantees which charge per quarter (or annually), project-specific bonds mean that suppliers and contractors won't have to pay for bond coverage for any longer than is necessary.
The G20 role in Surety Bond Insurance in India
The G-20 presidency for the year 2023 has been handed over to India. India has taken up the mantle of this presidency head-on with the Government of India pushing agreements with G-20 countries at multiple fronts. One such area of deliberation has ben Surety Bond Insurance. G-20 countries, particularly from the west, have ample experience with Surety Bonds. Surety Bonds have been accepted in the west for well over 70 years. The learnings that the Indian Insurance companies can get from the Insurance & Reinsurance companies of the G-20 countries are enormous. G-20 will have access to the multi-billion dollar market of Surety Bonds in India. This is a probable win-win situation for all involved stakeholders. With $1.4 Trillion planned spend in the National Infrastructure Pipeline in the next 5 years by the Government of India, we are looking at a potential market of INR 100 Billion worth of Surety Bonds.
Summary : Surety Bonds acceptance by psus skyrockets
In conclusion, Surety Bonds are becoming more and more popular among India's PSUs as they offer a more effective and affordable option to the standard EMD or bank guarantee / collateral.
A specialized surety bond provider, Surety Se7en, aids in this by offering customized bonds to meet the specific requirements of the PSUs, thus providing greater flexibility in the tendering process.
Also, Surety Bonds issued are of the project period only. This makes them affordable for contractors & suppliers as well in addition to non-requirement of hefty EMD / collateral.
For other trends predicted for 2023 click here.
