Surety bonds play crucial role in supporting India's infrastructure development: Irdai Chairman Debasish Panda

Surety bonds play a crucial role in supporting India's infrastructure development, Insurance Regulatory and Development Authority of India (Irdai) Chairman Debasish Panda said on Thursday.

"By addressing the challenges and fostering collaboration, we can unlock the full potential of this valuable financial instrument," Panda said at a conclave attended by various stakeholders.

Insurance surety bonds are financial instruments, where insurers act as 'surety' and provide the financial guarantee that the contractor will fulfil its obligation as per the agreed terms.

The surety bond issued by a general insurance company is a three-party contract by which one party (the surety) guarantees the performance or obligations of a second party (the principal) to a third party (the obligee).

The surety is a company that provides the financial guarantee to the obligee (usually a government entity) that the principal (business owner) will fulfil their obligations.

While the conclave highlighted the significant potential of surety bonds to contribute to India's infrastructure development, it also underscored several challenges that need to be addressed, General Insurance Council (GIC) said in a statement.

Some of the impediments in the way of surety bonds include lack of equal legal recourse for insurers under the Insolvency and Bankruptcy Code as enjoyed by banks and weak enforceability of agreements between insurers and bond beneficiaries.

To address these challenges and drive the growth of the surety bond market, a task force has been formed comprising representatives from insurers, banks, and reinsurers, it said.

The task force will focus on developing strategies for risk sharing, enhancing collaboration between banks and insurers, and fostering a conducive environment for the growth of surety bond insurance, it added.

Speaking on the occasion, Tapan Singhel, Chairman of General Insurance Council & MD of Bajaj Allianz General Insurance said, the collaboration between bankers and insurers, coupled with seamless data sharing, will be key to taking Surety Bonds to the next level.

The formation of a task force is a critical step forward in ensuring that Surety Bonds become a cornerstone of India's infrastructure growth story, he added.