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

AdvertisementHome / Business / Surety Bonds – The next big opportunity in the Indian Fintech spaceNew Delhi [India], January 17: Transjovan Capital, a premier global M&A advisory firm with offices in New Delhi, Los Angeles, Sydney, and Dubai has shared its outlook on the next big investable segment in the Indian Fintech space, that is, Surety bonds.AdvertisementPRNewswireNew Delhi [India], January 17: Transjovan Capital, a premier global M&A advisory firm with offices in New Delhi, Los Angeles, Sydney, and Dubai has shared its outlook on the next big investable segment in the Indian Fintech space, that is, Surety bonds.India is on a path to supercharged economic growth with substantial emphasis on developing the infrastructure sectors – roads & highways, power, railways, and water management. The Government of India has planned an investment of USD 1.4 Tn over 5 years on infrastructure projects as per the National Infrastructure Pipeline.AdvertisementGiven the long-term nature of these projects, contractors are required to furnish guarantees to the contract awarding bodies to mitigate the risks of non-delivery and quality as per the pre-agreed terms.Until 2022, bank guarantees, which have limited supply, were the only instruments to service the demand for guarantees in India. Furthermore, they use up a significant portion of the working capital, given they require huge cash margins and collaterals to be placed with the banks. Even considering banks non-fund credit CAGR of 22.7%, there will still be a significant deficit of non-fund credit in India over the next 3-5 years as India continues to grow at a phenomenal rate.AdvertisementBank guarantees are equipped to meet only 40% of India’s demand over the next 3-5 years. This creates a shortfall in the system that poses a significant bottleneck to infrastructure development in core sectors like Construction (Road & Railways), Energy, Aviation, and Telecom.Surety bonds were introduced in the Budget of 2022 as a substitute for bank guarantees. Issued by insurance companies, these bonds fall under the purview of the Insurance Regulatory and Development Authority of India (IRDAI) and are charged a premium as a percentage of the amount guaranteed. Importantly, surety bonds generally do not require any cash margins or collaterals.While still nascent in India, surety bonds are widely used as guarantees globally. The penetration of Surety bonds is higher than BGs in most developed economies. In fact, it is no coincidence that the top 40 countries in the rankings for ‘Ease of Doing business’ have significantly higher rates of Surety Bonds acceptance. The global industry size of surety bonds is estimated at USD 21 Bn in gross written premiums (GWP), with USA at USD 10 Bn and Europe at USD 5 Bn, respectively.In spite of being one of the largest economies in the world, India is highly underpenetrated with only around USD 10 Mn GWP underwritten to date (almost 3 years since the first notifica