Giving Insurers Financial Creditor Status in Infrastructure Project Defaults
The Indian government is considering amendments to the Insolvency and Bankruptcy Code (IBC) to grant insurers the same status as banks in cases of default in infrastructure projects. Currently, surety bonds issued by general insurance companies do not offer the same recovery options as bank guarantees.
Making Insurers Financial Creditors for Surety Bond Defaults
To make the surety bond business more appealing, the government is looking to modify the IBC to designate insurers as financial creditors in cases of default in infrastructure projects. A surety bond issued by a general insurance company is a three-party contract in which one party guarantees the performance or obligations of another party to a third party.
Concerns of Insurers to Be Addressed
The Ministry of Corporate Affairs is addressing concerns raised by insurers regarding their recourse to recovery, which should be on par with that of banks. The Department of Financial Services under the finance ministry forwarded these concerns, and relevant changes made in the IBC to grant insurers with the status of financial creditors during the resolution process.
Seeking Parity for Surety Bonds
General insurance companies are seeking changes in the Indian Contract Act and the IBC to ensure that surety bonds have the same recourse as bank guarantees in case of default.
Advantages of Surety Bond Insurance
Surety bond insurance serves as a risk transfer tool for the principal and protects them from losses that may occur if a contractor fails to fulfill their contract obligations. Unlike bank guarantees, surety bond insurance does not require substantial collateral from the contractor, freeing up significant funds for business growth.
Boosting Liquidity and Capacity
The introduction of surety bonds as a financial instrument will contribute to increased liquidity and capacity in the infrastructure sector. This product has the potential to strengthen the industry.
Acceptance of Surety Bonds in Government Procurement
Finance Minister Nirmala Sitharaman announced in the Union Budget 2022-23 that surety bonds will be considered an acceptable substitute for bank guarantees in government procurement.
Regulatory Guidelines
According to the Insurance Regulatory and Development Authority of India (IRDAI), insurers can underwrite surety insurance policies for up to 10% of the total gross written premium or a maximum of Rs 500 crore in a financial year.
These amendments to the IBC aim to provide insurers with the same status as banks in cases of default in infrastructure projects, ensuring parity and boosting the surety bond business in India.
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