Partial release of bank guarantees a positive for construction sector, to enhance liquidity: ICRA

The recent measures announced by the Finance Minister for the contractors of primary extension of the timeline for project execution by up to six months and a partial release of bank guarantees (BGs) is set to provide some respite to the construction companies.

As per ICRA note, the Finance Ministry’s directive to Government agencies to partially release the bank guarantees is a positive step and can help release some liquidity for contractors which is blocked as the margin money against these bank guarantees.

Shubham Jain, Senior Vice-President and Group Head, Corporate Ratings, ICRA, said “BGs play an essential role in the contract execution and a sizeable quantum of BGs are required by contractors. Therfore, non-availability of adequate BGs can constraint a contractor’s ability to bid for projects or efficiently execute projects. Over the last few years, the enhancement in the BG limits has remained challenging for many contractors and some had to avail the BG against 100% margin, thereby significantly blocking their capital. The provision of a partial release of the BGs can help reduce contractor’s overall requirement, and consequently enhance their ability to take up projects.”

Jain said “The total outstanding bank guarantees for construction and infrastructure sectors is estimated to be in the range of ₹4 to 5 lakh crore. A release of 5% of these guarantees can provide contractors liquidity and increase their ability to take up new projects,”

On the flip side, while this is a positive, there will be operational challenges in getting the partial release of the BGs as in most cases the existing BG issued must have been in a single tranche. Hence, for availing a partial release a new BG of a lower amount will need to be provided, post which the existing BGs can be returned.

Besides the BG release, other measures for contractors include an extension of up to six months in the timelines for work completion, intermediate milestone, and extension of the concession period in the PPP contracts. This will provide some respite to contractors.