The government is weighing a plan to remove the bank guarantee clause from road contracts using the engineering, procurement and construction (EPC) model to kick start a large number of stalled projects as part of a larger plan to infuse liquidity into the system.

“The finance minister has told me to do whatever is needed to award projects to boost liquidity in the markets. I told her that we would award ₹5 lakh crore worth of highway projects by March,” Road Transport and Highways Minister Nitin Gadkari said in Mumbai on September 9 during a roadshow organised by the National Highways Authority of India.

“But, we are facing a practical problem regarding bank guarantees. Our projects are delayed because contractors are not in a position to get bank guarantees. Now, the finance ministry is thinking probably of removing the condition of bank guarantees,” Gadkari said.

The government, he said, is looking at adopting specific guidelines framed by the World Bank whereby bank guarantees are not required when projects are insured.

Bank guarantees are widely used in infrastructure projects to check non-performance of a contract.

NHAI currently accepts bank guarantees issued only by scheduled banks having a net worth of more than ₹1,000 crores.

The government may also allow NHAI to accept bank guarantees issued by insurance companies and non-banking finance companies (NBFCs), a government official said.

Rajnish Kumar, Chairman, State Bank of India said that according to the model followed in Canada, “there are certain companies which undertake to complete projects if they are stuck for some reason; so, such projects will never suffer because somebody will step in”.

“Fundamentally, it is flawed to ask for bank guarantees,” Kumar said adding that “arbitration was an issue in such guarantees”.

Admitting that bank guarantees were becoming a hindrance to the award of road projects, a government official said: “Every bank wants to fund only sound parties. Either banks are exhausting their limits or banks might be reluctant”.

Explaining further, he said: “Issuing bank guarantees depends on the financial health of the contractors. Bank guarantee is essentially a non-fund based working capital. So, either the contractor does not have the financial credentials to get it, or they have already fully utilised their limits and are not able to enhance it further. Third, banks have turned conservative due to stress and even whatever limit was granted have not been issued”.

Removing the bank guarantee requirement altogether will not work, he said, calling for some deterrent against potential malpractice by contractors.

“In the Indian scenario, the judicial system that we have, let us be very frank, then no institution will be able to survive. The bank guarantee clause is prevalent worldwide; it is not that only India is asking for it. If there is no restriction, everybody will come in and take up contracts after showing technical and financial qualifications using some devious methods. But, if they don’t have anything substantial with them to execute the contract, then you have to have some deterrent,” he said.

Worldwide, insurance companies also give guarantees, and that comes at a very lesser cost, but the legal framework for that is not available in India. Secondly, NBFCs also provide guarantees, but that framework too is not available in India.

The government is studying the possibility of allowing insurance companies and NBFCs such as REC and PFC to issue such guarantees. It is being considered as part of a larger plan to hand-hold the industry given the current stress in the system, he said.

“But, it is not advisable to remove the bank guarantee condition completely because some deterrent has to be there to prevent unscrupulous entities from entering and damaging the system,” he said.

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