Finance Ministry exploring insurance bonds as alternative to bank guarantees

Bank guarantees are usually asked for while extending a loan and typically require a collateral. An insurance bond is also a surety but it does not require any collateral

The government is considering introducing insurance bonds as an alternative to bank guarantees, Finance Secretary T V Somanathan said here on Tuesday.

Somanathan made the announcement during a meeting between industry captains and Finance Minister Nirmala Sitharaman, who is on a two-day visit to the financial capital.

"Government is exploring on instituting insurance bonds as alternatives to bank guarantees," an official statement said.

Bank guarantees are usually asked for while extending a loan and typically require a collateral. An insurance bond is also a surety but it does not require any collateral.

As per reports last year, insurance regulator Irdai was also looking at the option of insurers offering surety bonds in the context of road projects.

Sitharaman, who met the industry captains in the evening, said the government is committed to working towards ensuring policy certainty, adding that the regulators also have a key role in ensuring the same.

She said the government is working with the regulators on this "important issue", as per the statement.

The finance minister emphasised the importance of ''India's own equity capital'' while addressing the industry and assured government facilitation for sunrise sectors and startups.

Revenue Secretary Tarun Bajaj said his department was working on tax-related issues of startups and sought industry inputs on the same.

Sitharaman also assured the industry of addressing issues related to competitiveness, including high power tariffs, and matters related to cumbersome regulatory compliances, the statement said.

The economy is moving gradually from a bank-led lending model to a more market-based finance model and the operationalisation of the Development Finance Institution (DFI) will ensure long-term lending for projects, Sitharaman said.

The DFI will increase competition for banks and also improve their efficiency, the statement quoted her as saying.

In the meeting, which comes in the wake of a controversy caused by her cabinet colleague Piyush Goyal''s reported remarks about disenchantment with the industry for not keeping the nation's interest in mind, Sitharaman said, "This government believes in listening, working and responding and would extend all possible support."

Tata Steel's T V Narendran said for growth to take deep roots, sustained demand is critical, and the immediate source of demand has to be government expenditure.

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Narendran also recommended frontloading of the committed capital expenditure, especially on infrastructure, adding that the first quarter's handsome revenues create a room for the same, as per the statement.

On the issue of arbitration awards being appealed, Somanathan said there is a need for a behaviourial change and added that the government trusts wealth creators.

The constraint on vaccination is on the supply side and the same is likely to be addressed soon, he further said.

Sitharaman met officials from income tax, Goods and Services Tax (GST) and customs departments in two separate meetings in what is her maiden visit to the financial capital since the second wave of Covid-19.

She is scheduled to address chiefs of state-run banks at a meeting on Wednesday.

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