Economy
Government likely to introduce insurance bonds as alternative to bank guarantees
The government is considering to introduce insurance bonds as an alternative to bank guarantees, Finance Secretary TV Somanathan announced during a meeting between industry captains and Finance Minister Nirmala Sitharaman. An official statement confirmed that the government is exploring on instituting insurance bonds as alternatives to bank guarantees.
A bank guarantee typically involves a party obtaining it by way of a cross-secured bank facility against which fees are paid and interest earned if the bank guarantee is secured by a cash deposit. Insurance bonds, on the other hand, are insurance products for which a premium is paid and cross-indemnities are given. Insurance bonds accordingly provide cash-flow benefits to the party giving them, but may be more costly upfront and are generally considered riskier security by those to whom they are provided. In other words, bank guarantees are usually asked for while extending a loan and typically require collateral, while an insurance bond is also a surety but it does not require any collateral.
The Finance Minister said the government is committed to working towards ensuring policy certainty, and that the regulators also have a key role in ensuring the same. Sitharaman said they are working with the regulators on this important issue. She also emphasized the importance of India’s own equity capital while addressing the industry and assured government facilitation for sunrise sectors and startups. Sitharaman assured the industry of addressing issues related to competitiveness, including high power tariffs, and matters related to cumbersome regulatory compliances.
“Moreover, the economy is moving gradually from a bank-led lending model to a more market-based finance model and the operationalization of the Development Finance Institution (DFI) will ensure long-term lending for projects,” the Finance Minister said. “The DFI will increase competition for banks and also improve their efficiency.”
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Sitharaman told the industry that the government believes in listening, working and responding, and would extend all possible support. This statement comes in the wake of Union Minister Piyush Goyal’s remarks about disenchantment with the industry for not keeping the nation’s interest in mind.
Tata Steel’s TV Narendran said deep rooted growth, sustained demand is critical and the immediate source of demand has to be government expenditure. He recommended frontloading of the committed capital expenditure, especially on infrastructure, adding that the first quarter’s handsome revenues create a room for the same.
