Surety/Guarantees can help address structural issues of the infra sector

By Pankaj Bhansali, COO, Eqaro Guarantees

Indian economy, the fifth largest in the world is facing a risk of a slowdown in growth due to the second wave of the pandemic. The government had announced a series of reform measures to support recovery in May 2020. The recovery, signs of which were visible in the early part of this year are fading due to the restrictions imposed post the second wave of the pandemic. For an economy to perform well, most sectors, businesses need to do well. Above all the infrastructure growth story need to be intact, especially for an emerging economy like India.

Surety bonds a relatively new concept in India can help revive the faltering growth, infuse liquidity & help address working capital issues faced by the construction & infrastructure, companies.

Helping free up working capital

Usually, a contractor is required to furnish guarantees to the extent of 10-15% of the contract value throughout the life cycle of the contract. The entire guarantee requirements for the infrastructure sector are currently catered to by the banks in the form of bank guarantees which cut across banking lines, consume on collaterals and margin money thus sucking out liquidity from the contractor who is already reeling from a liquidity crisis A surety bond can help businesses reduce their working capital requirements. By virtue of the comprehensive underwriting conducted by the surety, it can do away with the need for locking up collaterals to indemnify the guarantees which can be used to support other working capital requirements. Since it does not cut into the banking lines, it also results in infusing precious liquidity back into the company and more efficient utilization of the available resources with the company.

Addressing the liquidity concerns

Many companies face liquidity issues due to various reasons. In fact, lack of funding impacts the Capex plans of numerous companies. Some companies are unable to work on large-size contracts due to tight working capital and high bank guarantee requirements. Also, some companies are unable to work on multiple projects simultaneously due to funding issues. A surety bond can help businesses mitigate these liquidity concerns effectively.

Boosting infra growth

India cannot escape the current slowdown of growth without the infrastructure sector contributing its fair share. It is critical to ensure all projects are completed on time with minimal to no cost escalations. A surety bond promises to addresses these structural issues which plague the growth of the sector, namely project delays and cost escalations, the inherent capabilities of a Surety bond issuing company can help underwrite risk better due to their ability to understand the future risk, financial or non-financial. A robust underwriting ecosystem has enormous potential to lift the pace of infrastructure projects in the country, especially public projects. It can help address some of the operational inefficiencies in the economy.

The infrastructure and real estate sector combined accounts for more than 10% of the country’s GDP. The government has a huge thrust on the development of key projects that will help the faster movement of goods & services, reduced commute time for travel. There are project delays even for approved projects with committed expenditure for want of timely liquidity. This delay leads to cost overruns, in many cases larger than the originally envisaged cost. A robust risk management framework can help with certainty, a well-defined timeline for projects which is the need of the hour to address the structural issues of the economy.

source https://nrinews24x7.com/surety-guarantees-can-help-address-structural-issues-of-the-infra-sector/

September 23, 2021