Surety Bonds

In News 

• The Finance Minister of India said the use of surety bonds (issued by insurers), as a substitute for bank guarantee (BG), will be made acceptable in government procurements.
• Bank Guarantee (BG) requires a customer to provide a margin (of 10-25 per cent) and commission (2-3 per cent) to the bank. 
  • However, in the case of surety bonds, a customer only needs to pay a premium to the insurer.

About Surety Bonds

• A surety is an organization or person that assumes the responsibility of paying the debt in case the debtor policy defaults or is unable to make the payments.
  • The party that guarantees the debt is referred to as the surety, or as the guarantor.
• A surety bond is a legally binding contract entered into by three parties—the principal, the obligee, and the surety. 
• The obligee, usually a government entity, requires the principal, typically a business owner or contractor, to obtain a surety bond as a guarantee against future work performance.
• They provide a financial guarantee to the obligee that the principal will fulfil their obligations.
• Guidelines:
  • The IRDAI (Surety Insurance Contracts) Guidelines, 2022 will come into effect from April 1, 2022 in this regard.
  • As per the guidelines, the surety contracts will include advance payment bonds, bid bonds, contract bonds, customs and court bonds, performance bonds and retention money.
  • The insurers will be required to have a board-approved underwriting philosophy for the surety insurance business.
  • Surety Insurance Contracts may be offered to infrastructure projects of government/private in all modes and apart from contract bonds, the insurers may underwrite customs or tax bonds and court bonds.

• Benefits: 
  • It recognises the ability of the insurance industry to provide alternative products to the banking sector, thus paving the way to reduce the cost and diversify risk.
  • Businesses such as gold imports may also find this useful. 
  • Bonds will open up a fresh stream of insurance revenue and capital and can even attract many specialised insurance companies to come into India with foreign capital. 

Source: IE