Surety Bonds – The next big opportunity in the Indian Fintech sector

New Delhi New Delhi: Transjoven Capital, a leading global M&A advisory firm with offices in New Delhi, Los Angeles, Sydney and Dubai, shares its view on the next big investable segment in the Indian Fintech sector, i.e., surety bonds. India is on the path to accelerated economic growth with a substantial thrust on the development of infrastructure sectors such as roads and highways, power, railways and water management. The Government of India has planned investments of USD 1.4 trillion over 5 years on infrastructure projects as per the National Infrastructure Pipeline.

Given the long-term nature of these projects, contractors are required to provide guarantees to contracting entities to mitigate the risk of non-delivery and quality as per pre-agreed terms. Until 2022, bank guarantees, which are in limited supply, were the only means to meet the demand for guarantees in India. Moreover, they consume a significant portion of working capital, as they require keeping huge cash margins and collateral with banks. Even considering banks’ non-fund loan CAGR of 22.7%, India will continue to have a significant shortfall in non-fund loans over the next 3-5 years, as India grows at an unprecedented rate.

Bank guarantees are only capable of meeting 40% of India’s demand over the next 3-5 years. This creates a shortfall in the system that poses a significant impediment to infrastructure development in key sectors such as construction (roads and railways), energy, aviation and telecom.

Surety bonds were introduced in the 2022 budget as an alternative to bank guarantees. These bonds issued by insurance companies come under the purview of the Insurance Regulatory and Development Authority of India (IRDAI) and charge a premium as a percentage of the guaranteed amount. Importantly, surety bonds generally do not require any cash margin or collateral.