Alternate to Bank Guarantees

The Indian Government is working out a plan to see the possibility of doing away with the Bank Guarantees on Infra projects including Road contracts using Engineering, Procurement and construction (EPC) model which would enable regenerating the large number of projects which are not undertaken due to the difficulty in submitting a Bank Guarantee by the customers.  This means what?

• This would increase and boost the liquidity in the market
• This would also pave way for going ahead with around Rs. 5 lakh crore projects by March next year.
• As of now the projects are lying in the cold storage due to the difficulties faced in getting Bank Guarantees which would possibly get addressed.

Difficulties faced:

• Projects are unduly delayed since the contractors are not able to get Bank Guarantees and hence the condition of submission of a Bank Guarantee is being done away with by the Government.
• NHAI accepts Bank Guarantees issued only by scheduled banks having a net worth of more than Rs. 1000 crores.

Issues Involved:

1. There are projects in other countries, wherein a different company undertakes to complete the projects of other companies which are struck for some reason and hence the projects do not suffer in the normal course.
2. Hence experts are of the opinion that insisting for Bank Guarantees is rather termed as a flaw in the system.
3. Every bank wants to fund only sound parties which mean that either banks might be exhausting their limits or might be reluctant in issuing Bank Guarantees.
4. Issuing Bank Guarantee depends on financial health of contractors and since Bank Guarantees are non-financial limits, contractors either do not have the financial credentials to get it or they have already utilized the limits fully and are unable to enhance it further.
5. One more important fact is that due to Stress, banks have turned to be conservative and whatever limit under Bank Guarantees have been approved have not been fully issued.
6. Another notable factor is that Worldwide insurance companies also issue bank guarantees but at a lesser cost and there is no legal frame work for such things in India.
7. Notably in such countries, NBFCs also issue Bank Guaantees but that frame work is not available in India.

Framework

• Government is said to be looking at specific guidelines framed by World bank wherein Bank Guarantees are not required when projects are insured.
• Also Government has plans to permit acceptance of Bank guarantees issued by Insurance Companies and Non-Banking Finance Companies (NBFCs)
• This is expected to handhold the industry which is currently under stress in its system.

Note: Bank Guarantees are largely used in projects, to check non-performance of a contract.