The surety insurance bond market is yet to take off in India due to unaddressed risks and the absence of market makers, according to The Infravision Foundation (TIF), an independent think-tank.
Yet, its potential is huge. In a research paper, TIF noted that the estimated maximum possible supply of bank guarantees over the next five years would be about INR35tn ($421bn) when infrastructure projects would require guarantees amounting to INR95tn over the period. This works out to be a shortfall of INR60tn ($722bn). TIF works to shape and evaluate India’s public policy in infrastructure, particularly transportation, energy, water & sanitation, urban planning, rural & agri, and healthcare
Surety insurance as an alternative
Noting the guarantee gap, IRDaI chairman Debasish Panda has called on stakeholders to tap surety bonds to meet demand, reported The Hindu Business Line.
He pointed out that India is expected to spend about INR100tn ($1.2tn) on infrastructure through the National Infrastructure Pipeline in the next five years. This requires bank guarantees of about INR90tn in the next five years, which banks in India currently do not have the capacity to provide.
Mr Panda was speaking at a Confederation of Indian Industry (CII) roundtable with senior officials from Ministry of Finance and the National Highways Authority of India (NHAI), as well as representatives from several insurance companies, reinsurance companies, the World Bank, other public & private banks, infrastructure companies, and insurance brokers.
The current regulatory framework for surety bonds presents the general insurance industry with a unique opportunity to diversify its portfolio and play an important role in nation-building, Mr Panda said.
In Budget 2022–23, Finance Minister Nirmala Sitharaman announced that surety insurance would be allowed as a substitute for bank guarantees in government procurement and gold imports.
