Surety bonds, serving as a risk management tool, have been welcomed by the industry as a potential game changers for infrastructure development. They cater to the sector’s long standing need for alternatives to conventional bank guarantees. Aligning well with India’s pro-business agenda, it was considered especially helpful for micro, small and medium enterprises (MSMEs), which have traditionally struggled with credit access and capital constraints.
The concept of surety bonds emerged two years prior to their formal launch in response to the pandemic’s pressure on banking sector liquidity. It was the Ministry of Road Transport and Highways (MoRTH) that highlighted this issue, recognising the need to reconsider the overreliance on bank guarantees. In this context, surety bonds were found to be critical in addressing cash flow challenges faced by construction projects. Soon, with the MoRTH’s advocacy for the same, the Insurance Regulatory Development Authority of India (IRDAI) established a nine-member committee to assess the feasibility of such bonds. After a thorough evaluation, the National Highways Authority of India (NHAI) too backed the potential of this concept.
With goals such as the National Infrastructure Pipeline and individual cross-sector construction programmes on the anvil at that time, the timing for surety bonds could not have been more strategic. However, shortly after they were officially introduced, surety bonds seemed to be a non-starter due to technical and financial impediments. These included the lack of awareness and interest, limited availability, delays in policy changes, and the absence of standardised processes (with various insurers employing different approaches), which made navigating the market challenging for contractors.
Gaining deserved recognition
The relevance of these bonds is intact even today, amidst India’s resolute dream of becoming a $30 trillion economy by 2047. With huge amounts of investment needed to achieve these national development goals, timely capitalising on surety bonds is crucial. The successive union budgets have consistently demonstrated a strong commitment towards infrastructure creation. However, it is fiscally untenable for the government to maintain this capex trend in the long term. While private capital has partially filled the overall financing gap and banks have been proactive in their support, the evolving infrastructure funding landscape needs to transition away from being predominantly public sector-led.
As investments in this space continue to rise, the demand for bank guarantees threatens to reach unsustainable levels. Moreover, for contractors, with deteriorating balance sheets, coaxing banks for such guarantees is a serious financial issue. This situation becomes particularly alarming considering scenarios where banks accumulate stressed assets, limiting their risk appetite and potentially choking infrastructure development. Into the bargain, with a huge dearth of non-fund credit in India, the untapped potential of the surety bond market must now be fully leveraged.
Making steady headway
At present, across infrastructure sectors, especially roads, many small contractors have entered the market. This increased participation directly translates to more competitive bids and faster construction timelines. These small-scale contractors, already starved of funds, face a dual challenge – they struggle to secure bank guarantees, and when they do obtain them, these guarantees deplete their collateral, margin money and working capital.
Particularly for these contractors, surety bonds serve as a strategic and financially viable alternative, which simultaneously supports uninterrupted infrastructure development. With some guidelines now in place, these bonds are heading in the right direction. Moreover, the finance ministry has recognised insurance surety bonds as equivalent to bank guarantees for all government procurements. NHAI has been actively encouraging insurance companies and contractors to utilise this instrument as an alternative method for submitting bid security or performance security. In another first step forward, NHAI has embraced this innovative approach by accepting the first insurance surety bond for the toll-operate-transfer Bundle 14 monetisation bids. It has collaborated with the Highway Operators Association of India, SBI General Insurance and AON India Insurance for the same. The insurance surety bond, issued at 0.25 per cent, eliminated the need for margin money, resulting in substantial cost savings for concessionaires. Following this, in May 2024, NHAI received 164 insurance surety bonds, consisting of 20 bonds for performance security and 144 bonds for bid securities. This has marked a major shift towards wider recognition and adoption of these bonds.
Beyond the roads sector, surety bonds have now been incorporated in the tendering processes for SJVN, NTPC Limited, GAIL India, NHPC India Limited, Indian Oil Corporation Limited, Rail Vikas Nigam Limited, Bharat Sanchar Nigam Limited, etc.
Bridging the remaining gaps
In a recent industry meeting focused on strategising wider surety bond adoption, key discussions centred on the necessity for regulatory support and industry-wide collaboration to address critical issues including right of recovery, secured creditor status and acceleration of court settlements.
In terms of regulatory parity, numerous stakeholders are now advocating for insurers to receive equal legal recourse under the Insolvency and Bankruptcy Code, comparable to protections currently enjoyed by banks. These stakeholders aim to enhance the enforceability of agreements between insurers and bond beneficiaries. Additionally, effective data sharing among institutions (bankers and insurers) was identified as another key focus area to take surety bonds to the next level.
In line with these industry recommendations, government intervention to carefully refine the regulatory and operational details, in order to ensure a seamless transition to this financial tool, is crucial.
Promising market potential
The global surety bond market is valued at approximately $21 billion in gross written premiums (GWPs). Despite being the fastest developing economy, India remains significantly underpenetrated in the surety bond market as of January 2025, with only $10 million GWP underwritten since its first regulatory approval three years ago. This disparity between the global market size and India’s minimal participation represents a white space opportunity for domestic insurance companies to expand their service offerings. Moreover, encouragingly, India’s recent issuance of 700 surety bonds (overall) signals growing trust towards these flexible financial instruments, marking an important step in their overall adoption.
With the construction sector contributing nearly 9 per cent to India’s GDP, surety bonds can be advantageous to diverse stakeholders, including engineering, procurement and construction (EPC) contractors, road developers, metro project agencies, MSMEs in infrastructure and renewable energy companies. Unlike bank guarantees that require periodic renewal, surety bonds typically remain in force for the life of the project, providing longer-term certainty. More importantly, this reliable mechanism will help meet India’s increasing infrastructure demands. Their role in mitigating risk, ensuring project completion and fostering investor confidence makes them a key factor in accelerating asset creation. With reduced financial constraints, EPC companies can bid for larger and more ambitious projects under the centre’s flagship construction programmes. Additionally, smaller players will gain access to a more level playing field, while freed-up capital can be directed towards technology adoption and skill development.
For the surety bond market to succeed in India, it must become more readily available and widely accepted. This requires further unified effort from policymakers, regulators and insurers. A clear government mandate with implementation timelines would significantly accelerate progress. With this framework once established, IRDAI can then develop targeted guidelines for key infrastructure sectors.
Above all, these bonds must offer clear pricing advantages to gain market traction. This cost differential will be the deciding factor in determining widespread adoption in a competitive financial marketplace. From the insurers’ side, avoiding concentration risk will remain essential. Insurers cannot afford to overexpose themselves to specific sectors or project types, as this would undermine the risk diversification that makes the surety model viable. Further, effective marketing strategies need to be implemented to generate sufficient demand for these bonds. In addition, banks need to augment their underwriting skills. Understanding the nuances of infrastructure projects will remain paramount, particularly at the under-construction stage.
Surety bonds can help India reach its ambitious infrastructure goals, but their effectiveness depends entirely on their precise implementation.
Harman Mangat
