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FISME thanks FM for acceding to MSME demand on Surety Bonds in lieu of BGs in Govt purchases

The Union Budget 2022-23 marks a great departure from the regime of traditional Bank Guarantees in Government purchases.

The Finance Minister in her Budget speech said, “To reduce indirect cost for suppliers and work-contractors, the use of surety bonds as a substitute for bank guarantee will be made acceptable in government procurements...IRDAI has given the framework for issue of surety bonds by insurance companies”.

As MSMEs form a major chunk of suppliers to Government, Federation of Indian Micro and Small Medium Enterprises (FISME) has been raising the issue for several years.

Although 25% of the Central Government purchases are ear marked for MSMEs but cost of acquiring Bank guarantees has always been a great limiting factor.

BGs eat away bulk of their Working Capital as Banks don’t distinguish between fund-based or non-fund based limits and apply same norms for extending them to MSMEs. 

Typically, an MSME is required to give margin money, a charge for the time period a BG is used and also offer collateral security to cover for the risk of Bank Guarantee. Therefore, BGs choke Working Capital and limit the MSMEs from participating in more tenders reducing their chances of securing orders.        

During the pre-Budget meeting with Finance Minister, FISME raised the issue and pressed for ‘allowing Bank Guarantees to be offered by Insurance companies’. 

FISME Budget memorandum mentioned that ‘Bank Guarantees impose substantial cost burden on suppliers. So much so that Bank/ Performance Guarantees suck the liquidity out of MSMEs’.

It pointed out that at the behest of Shri Nitin Gadkari, former Union MSME and  now Minister of Road, Transport & Highways, IRDAI had formed a Working Group to examine possibility of extending Surety offering by insurance companies to Highway contractors.

It highlighted that as was prevalent in many countries including the US, the Insurance companies should be allowed to extend Bank/ Performance Guarantees.

‘It would increase competition (for Banks), reduce cost of BGs and improve services. Most importantly, it would help reduce cost of procurement through tendering], FISME’s memo noted.

With today’s announcement, a long pending demand of MSMEs has been met.