Surety of Surety Bonds in India

For decades, India’s infrastructure and trade ecosystem has leaned almost entirely on bank guarantees (BGs) as the security mechanism. But this over-reliance is beginning to show cracks. To unburden this security instrument mechanism, surety bonds were introduced in India three years ago.

Globally, they have long served as an alternative security instrument, providing project authorities the same risk cover while freeing up contractors’ credit capacity. In India, with government support and regulatory reforms, surety bonds are now being positioned as a game-changing solution for both contractors and financial institutions. 

Why? With RBI capping outstanding BG exposure at 10% of a bank’s paid-up capital, reserves, and deposits; and unsecured BGs capped at just 25% -- both contractors and banks are feeling the squeeze. 

Values of such guarantees depend on the purpose and could be financial or non-financial. For earnest money deposit, guarantee cover is between 1% to 3%, for performance between 5% to 10%, for mobilization payment and retention between 100% to 110%, and for defect liability between 5% to 15%.

With nearly 80% of all BGs in India linked to infrastructure projects, the pressure on banking credit lines has only intensified.

How? In India, the total value of bank guarantees (BGs) required for projects under implementation, those in tendering stages, and for trade and commerce transactions is estimated at Rs 30 trillion. As of March 2025, Indian banks collectively hold Rs 240 trillion in owned funds, comprising about Rs 16 trillion in shareholders’ equity and Rs 224 trillion in deposits.

Under RBI norms, the total value of BGs that banks can issue cannot exceed 10% therefore, of these owned funds, it’s roughly Rs 24 trillion. This immediately creates a shortfall of Rs 6 trillion that BGs alone cannot cover. Presently, the outstanding BGs already stand at Rs 18 trillion. As India’s infrastructure pipeline expands, the demand for BGs will only grow, thus widening the gap further and amplifying pressure on both banks and contractors.

Enter surety bonds to fill this gap. Countries like the US (where they have been used for over 90 years), the UK, Germany, and France, surety bonds provide the same financial security for contractual obligations without tying up bank credit lines. Globally, the surety insurance market is valued at $30 billion, and is projected to reach $38 billion by 2030, underscoring its growing relevance in large-scale projects.

India Scenario: BGs versus Surety Bonds

Insurance Regulatory and Development Authority of India (IRDAI) issued guidelines in April 2022 to the General Insurance Companies for issuing surety bonds. Bajaj General Insurance pioneered the issuance of surety bonds followed by New India Assurance and later by other general insurance companies.

Of the 30 general insurance companies in India, 10 insurance companies are issuing surety bonds, and several others are planning in that direction. On the demand side, 120 authorities are accepting surety bonds, out of which 10 authorities are accepting surety bonds only for earnest money deposit (EMD) (EMD is like a security deposit). So far, about Rs 60,000 crore value of surety bonds have been issued, and Rs 42,000 crore worth of surety bonds are outstanding.

For BGs, banks earn the processing fee while sanctioning limits, and the interest floats on the margin money. Effectively, the all-in cost for BGs is about 3% to 5%. 

Whereas, premium is the only charge for surety bonds and not the processing fee or commission. Most of the surety bonds do not have margin requirements. The effective cost of surety bonds is now less than 0.80%.

IRDAI currently caps surety bond issuance at 10% of an insurer’s gross premium, up to a maximum of Rs 500 crore. Also, considering an average surety premium of 1%, this translates to a potential bond value of Rs 5 trillion from the 10 insurers presently active in this space. However, unless more insurers begin issuing surety bonds or the cap is revised upward, a significant gap will remain.

One key difference between bank guarantees (BGs) and surety bonds lies in the recourse mechanisms. When a BG is invoked, banks can fall back on collateral securities of the borrower and recover part of their exposure. Insurers, on the other hand, lack such collateral support and face the risk of outright losses. To mitigate this, they are increasingly turning to reinsurance cover for surety bonds.

This highlights the complementary strengths of the two sectors: banks are better positioned to evaluate a contractor’s financials, while insurance companies can assess operational capabilities and project risks. A collaborative approach, where insurers and banks jointly issue surety bonds, could bring more accurate risk pricing, higher recovery rates, and larger underwriting volumes.

Such partnerships would benefit all stakeholders, including insurers, banks, contractors, and project authorities. Despite early skepticism, surety bonds have rapidly gained traction and, within just three years of introduction in India, are emerging as one of the most promising instruments for financing infrastructure security. Project authorities also tend to benefit together for surety bonds or BGs, as more volumes will be available to underwrite the performance of the contractors. It will therefore be a win-win situation for all the stakeholders.