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In the world of business, contracts are the backbone of commercial transactions. To ensure that the contractual obligations are fulfilled, companies often use bank guarantees. However, there is a better option – Surety Bonds, which are increasingly being preferred by obligees (mostly PSUs). In this blog, we’ll discuss why Surety Bonds are becoming the go-to option for obligees over Bank Guarantees.
Security and Protection
Surety Bonds provide a higher level of security and protection compared to Bank Guarantees. Surety companies are regulated by government agencies, ensuring that they meet certain standards and financial requirements. This means that obligees can trust that the surety company will fulfill its obligations under the bond. In contrast, banks issuing guarantees are not specifically regulated for the issuance of these instruments. So, obligees may not have the same level of security and protection when dealing with banks.
Scrutiny Process
Surety Bonds do not require collateral. This is unlike Bank Guarantees, which virtually need no verification as the bank is securing themselves with collateral or margin money. Hence, Surety companies carry out a more thorough scrutiny process before issuing a bond. This level of scrutiny ensures that only reliable and trustworthy companies are bonded, reducing the risk of default for obligees.
Claims Process: The main reason
While banks may seem to offer easy access to funds in case of a claim, the legal battle that follows can take years to settle. Many times, the principal challenges the invocation of the bank guarantee. This often leads to a lengthy legal process that can leave the obligee in limbo. The recovery proceedings for the banks, as stated under the Indian Bankruptcy and Solvency Code (IBC), can also take a long time to complete, causing further delays for the obligee.
On the other hand, Surety Bonds have a more streamlined claims process that benefits all three parties involved. When a claim is made on a surety bond, the surety company will introduce a third-party administrator (TPA). This will ensure that any misunderstandings can be worked outside the court in a amicable manner. The surety company will also carry out an investigation before paying out the claim, ensuring that it is valid. This process helps to ensure that the obligee can get what they need the most, which is the completion of the work.
Additionally, if the guarantee of the existing principal is invoked, it can be a tough and time-taking task for the obligee to find a new principal for the project. With a surety bond, the surety company can step in and provide a replacement principal, ensuring that the work can continue without any further delays.
Cost: Surety Bonds preferred over Bank Guarantees?
Surety Bonds may seem initially more expensive than Bank Guarantees (in some cases being similar in cost to bank guarantees). However, when you consider the level of security and protection that they provide, the cost is justified. Surety companies thoroughly investigate the companies they bond, and only bond those that meet their strict underwriting requirements. In contrast, Bank Guarantees may not provide the same level of security and protection. This can result in higher risks and costs in the long run, such as legal fees and potential losses.
Conclusion: Surety Bonds preferred over Bank Guarantees
In conclusion, Surety Bonds are becoming the preferred choice for obligees over Bank Guarantees due to their higher level of security and protection, a thorough scrutiny process, streamlined claims process, and justifiable costs. According to a report by Zion Market Research, the global Surety market size was valued at USD 16.97 billion in 2020 and is projected to reach USD 28.77 billion by 2028, with a CAGR of 6.8% from 2021 to 2028. This growth is a clear indication of the rising demand for Surety Bonds in the business world. In conclusion, Surety Bonds offer a safer, more efficient, and cost-effective alternative to Bank Guarantees, making them the ideal choice for obligees. Surety Seven remains only company in India providing Surety Bonds technology to contractors, traders, etc.
