It has been nearly six months since the first surety bond product was launched, and there are still no takers for the product, owing to several operational challenges, delays in policy changes and absence of standardised processes.

Touted as an alternative to bank guarantees (BGs), surety bonds offer the benefit of performance or execution-linked cover and waiving off collateral in exchange for a premium, thus freeing up customer assets. But, in their current form, surety bonds offer minimal benefits over regular BGs.

“There is an issue with certain approvals. Demand is high, insurers have been getting calls and want to sell the product, but there are challenges. Product is available, it has been launched, people can buy it. That entire system is in place,” an industry official said, adding that the well-defined process and comfort of using BGs compared with the complexity and conditions in surety bonds also act as deterrents.

Hurdles for customers

Insurers have been asking for humungous amounts of data, including contractors’ experience, past similar experience, credit rating and financial stability and other information, especially in cases involving litigation, thus increasing hurdles for customers.

Despite demand from clients, that may already have several ongoing BGs and find it difficult to approach banks, incremental off-take will still depend heavily on how conditional bonds are structured and whether they are going to be issued like BGs, market participants said.

Also read: Surety bonds are key to infrastructure growth

“Companies are looking at other avenues and surety bonds is the next thing they want. But the product has to be made lucrative for clients to enter into more and better projects, and where they can be covered at varied levels unlike a BG,” said the official of an insurance broker.

Surety bonds are tripartite contracts, wherein insurers provide guarantee in case of a default in project execution. Surety bond products may be based on bid issuance, advance payment, contract, performance, retention money and customs and court bonds.  

However, the products available in the market so far — largely performance, bid and maintenance-based, have left much to be desired, according to market players. These products are conditional, seek collateral, require heavy documentation, and entail more complicated claims processing as against invoking a bank guarantee.

Increase in demand

Bulk of the demand is from the infrastructure and construction sectors, especially in projects where banks do not want to increase exposure or choke their capacities by giving BGs.

“There is a clear requirement in market for unconditional bonds to replace BGs,” said Subramanyam Brahmajosyula, Chief Technical Officer at SBI General Insurance, adding that given the product is new for insurers and there is a steep learning curve, steady and more progressive offerings will take due time.

Also read: Bajaj’s insurance play: Success mantras of two siblings 

In May, SBI General became the third insurer to launch such a product after New India Assurance and Bajaj Allianz General which launch the first product in December 2022.

Optimistic outlook

The recent IRDAI relaxations and government allowing issuance of surety bonds retrospectively, in lieu of certain infrastructure BGs, is expected to open up more avenues for insurers, given the size of the addressable market, expected increase in demand from contractual projects and ability to now charge higher premiums against increased exposure.

Market players are hopeful that in addition to policy changes, as some more policies are underwritten, insurers gain experience and the processes are set in place, products will evolve and more insurers will enter the space, fuelling demand.

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