Budget 2022: Big lesson for general insurance companies! The government authorizes surety bonds in place of bank guarantees
Budget 2022: Surety bonds could now be used for public procurement, which bodes well for the insurance sector and the infrastructure sector, Anurag Shah of Zee Business reported. The announcement was made by Finance Minister Nirmala Sitharaman in her Union Budget 2022.
Sureties will be an alternative to bank guarantees.
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In the Union Budget 2022, an additional allocation has been increased for the National Highways Authority of India (NHAI). The budget allocated to it for the financial year 23 is Rs 135,000 cr, he said.
In recent years, infrastructure companies have faced huge problems obtaining bank guarantees or had to pay a high premium to obtain them, he said in his report. This created a lot of liquidity-related issues.
Budget announcements have made bonds an alternative to bank guarantees. From now on, infrastructure companies will be able to give bonds in the form of coverage by insurance companies, he added. The Insurance Regulatory and Development Authority of India (IRDAI) has already laid down rules on this and these will be implemented from 1 April 2022.
This will create new opportunities for non-life insurers where they can issue bonds to infrastructure companies.
In order to reduce the indirect costs for suppliers and works contractors, the use of bonds in place of the bank guarantee will be made acceptable in public contracts. Businesses such as gold imports may also find this useful. IRDAI has given the framework for the issuance of bonds by insurance companies,” the 2022 budget document states.
However, the insurance regulator has put some conditions on this. The first is that 10% of the global premium or Rs 500 cr premium can be taken now.
This will open up a big avenue for insurance companies where they can do bonding business, Shah said.
In July 2020, Union Transport Minister Nitin Gadkari said that a bank guarantee of up to Rs 2.5 lakh cr was needed in the infrastructure sector. The decision was made accordingly, Shah added.
More and more companies can now solve their liquidity problems thanks to the introduction of surety bonds.
Shah said that in his conversations with insurance companies, he was told that the companies would be preparing new products and filing them. Products are expected to arrive after April 1, 2022.
However, insurance companies said such infrastructure projects would require huge amounts of bonding and would need reinsurance backing.
Shares of The New India Assurance Companies were trading at Rs 140.30 on the NSE, up 0.6% from the last closing price on Monday. Meanwhile, shares of General Insurance Companies were trading at Rs 142.50 at the time of the news and rose almost 2%.
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Shares of private insurer ICIC Lombard General Insurance Company were trading up 1.5% at Rs 1390.35 at the time.