Surety bond
Also called: Surety insurance · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
A surety bond is a guarantee backed by an insurer. It promises that a contractor will complete a contract as agreed. If the contractor fails, the insurer (the surety) compensates the project owner, often the government. It replaces bank guarantees in infrastructure contracts. This frees up the contractor's bank credit lines for working capital. Surety bonds were announced in Budget 2022-23, IRDAI issued guidelines in 2022, and the first surety bond was issued in December 2022.
Example
A road builder wins a highway contract and must give the highway authority a performance guarantee. Instead of getting a bank guarantee, which uses up part of its bank credit limit, it buys a surety bond from an insurer. Its bank credit then stays free to pay for cement, steel and wages.
Don't confuse with
- Ordinary bond: a debt security that pays interest to investors. Despite its name, a surety bond is not borrowing. It is a guarantee.
- Catastrophe bond: moves disaster risk to capital-market investors. A surety bond covers a contractor failing to perform.
Related concepts
- Insurance penetration
- Bancassurance
- Reinsurance
- Microinsurance
- Parametric insurance
- Catastrophe bonds
- Composite insurance licence
- Defined benefit pension
- Defined contribution pension
- National Pension System