10-ways-how-surety-bonds-score-over-bank-guarantees


    10-ways-how-surety-bonds-score-over-bank-guarantees

    Posted by Chetan Thakkar on May 4, 2021 12:03:17 PM

    The World over, Surety Bonds have emerged as a safer, more convenient and reliable mechanism of providing non-funded support to contractors. This support extends end-to-end – right from the bidding phase till completion, even the defects liability period!

    Traditionally, in India, Bank Guarantees have been the mainstay of banks and the go-to for construction/infrastructure companies. This is all set to change, considering the clear cut benefits of Surety Bonds over Bank Guarantees. Before we look at those advantages, let’s take a quick look at India’s economic growth scenario.

    The Infrastructure Sector is a key driver for the Indian economy. It includes power, bridges, dams, roads, and urban infrastructure development. With huge Investments in the offing, there are risks involved like time and cost overruns and non-fulfilment of obligations. Due to this potential risk, the financial sector offers a cushion in the form of Bank Guarantees which liens the collaterals and blocks cash margin money. This forces the Contractors to struggle to mitigate the liquidity crisis they end up facing.

    It’s no surprise that Banks are now increasingly unwilling to lend to the infrastructure sector as it requires a longer gestation period and maturity time for performance along with the urgent need to keep a check on its NPAs.

    This has given rise to the need to an alternative to Bank Guarantees along with a robust system to support the Sector for surety of payments and Risk mitigations in the event of defaults. Surety Bonds have emerged as an alternative to Bank Guarantees in this rapidly growing and competitive environment. Though the concept is new to India, it has been mandated by law on public works projects as an alternative instrument for financial security in countries like the US and numerous other developed countries.

    THE GOOD NEWS: SURETY BONDS ARE HERE

    Surety Bonds are an agreement among three parties, the Surety COMPANY (Guarantee Provider), the PRINCIPAL (Contractor) and the OBLIGEE (project owner). The Surety provider offers this assurance based on its assessment of the Principal along with its expertise in both the financial and industry knowledge.

    With the advent of this new tool in the Indian Financial Ecosystem Surety Bonds have emerged as an efficient alternative to Bank Guarantees for similar assurance requirements. Bank Guarantees have a nature of On Demand honouring of the payments, however, in the case of Surety Bonds, the structure is such that each party has an obligation to each other:

    The PRINCIPAL has the duty to the OBLIGEE to perform its contract. The OBLIGEE likewise owes a duty to the principal to uphold its end of the contract, including payment in accordance with the contract terms.

    The SURETY has a duty to the OBLIGEE to take action under the terms of the bond if the PRINCIPAL defaults under the contract. But the OBLIGEE has a duty to fulfil its bargain under the contract, again, including payment of any sums due under the contract, but this time to the Surety that performs and withstands to the terms.

    The SURETY has the duty to determine whether the PRINCIPAL is in default and abide by the terms of the bond and any agreement of indemnity. The PRINCIPAL must co-operate with any investigation of an allegation of default and reimburse the Surety for any losses incurred due to the default of the principal on its promise.

    Surety Bonds have an inherent advantage over Bank Guarantee as illustrated below:

    ► MORE CREDIBILITY: A Surety is an obligation accepted by the Guarantor to make a payment to a beneficiary if certain terms of the contract are void whereas a Bank Guarantee is an assurance given by the Bank to the beneficiary to make a specified payment in case of default in the terms of the contract. This strengthens the integrity of the parties involved to the terms of the contract.

    ► BETTER LIQUIDITY: Surety Bonds can be viewed as an alternative to the Bank Guarantees which do not require margin/cash collateral. They frees up the working capital originally stuck as margin money/lien saving the contractors cashflow, strengthening their ability to complete projects on time and use the available funds for other avenues to strengthen the business.

    ► THE ASSURANCE: The Surety Company has a comprehensive process of investigating the reasons and aspects of Contractors default unlike Bank Guarantee which has a nature of on-demand honouring the claim, thus saving the interests and rights of all the parties involved.


    ► 
    RISK MITIGATION: he risk of the performance of the Contract is assumed by the Guarantor and it is its obligation to assure the mitigations in terms of the Contract whereas in the case of the Bank Guarantees the primary risk is assumed by the Contractor in the event of the non-performance of terms of Contract. Hence Surety Bonds would be a preferred mode of financial guarantees which a contractor would generally submit in the normal course of its business.

    ► WIDER COVERAGE: Surety Bonds have a wider coverage as compared to the Bank Guarantees. Along with Contract Surety and Commercial Surety the Surety Bonds also cover the ambit of Rentals in the form of Rental Bonds which covers the risks related to Rents; lock in period, wear and tear and damage of the property. This would entail many new clients looking for such guarantors in the real estate space.

    ► BETTER CONTRACTORS: Once a Contractor is known to a Surety Provider it becomes easy to evaluate projects and issue appropriate bonds. The Surety Company turns out to be an important partner in the bidding and project development phase unlike a Bank which is limited to its payment obligation.

    ► LOWER COST: As opposed to a Bank Guarantee which can lock up 8-10% of the project cost for the Contractor, a Surety Bond costs just 1-3% of the Bank Guarantee amount.

    ► SOLID BACKING: Bank Guarantees are backed by individual financial institutions, whereas Surety Bonds have the backing of a network of global giants in the domain. The Surety Bonds of Eqaro for instance are backed by SOPAC, Northern Light and Ion Insurance.

    ► CLAIM PROCESSING: Since the Surety Company specialises in the domain, it will have a number of alternatives in the event of a claim. They include financing the contractor or providing necessary support to finish the project, arrange for a new contractor to complete the project or assume the role of a contractor and sub-contract out the remaining work. On the other hand, since banks have expertise in other domains, they will be inclined to pay out and demand reimbursement from the contractor.

    As a Surety Bond is issued after proper due diligence of the Client with respect to contractor’s history, capacity, financial strength, character, credit history and a host of other factors in lieu of Guarantee Fees, the credibility of the Contractor is established better in the market.

    Also with the available liquidity in hands the Contractor finds more flexibility to use the funds which otherwise would have been stuck in the form of margin money if it would have opted for Bank Guarantees. This additional boost of liquidity strengthens the economy at large enabling a robust holistic growth of the ecosystem which is currently facing credibility issues due to piling up NPAs. Analysis of the nature of the problem reveals that many of the project contractors had placed unrealistic low bids to win projects and eventually many of those ran into financial problems and ultimately those projects came to a standstill. This can be bypassed if we have a vibrant Bonds market in India.

    Topics: Surety Guarantees, Eqaro Guarantees, Bank Guarantees

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      Backed by the financial strength and global expertise of Ion Insurance Company Inc (USA), Southern Pacific Insurance Corporation(USA) & Northern Light Surety Company SRL, Eqaro’s bonding solutions offer financial security to project owners, supplier principals and brand owners alike, protecting them from financial exposure to their contractors, clients, dealers, or franchisees.

      CONTACT US

        (C) EQARO GUARANTEES 2020. All Rights Reserved

        Rental Bonds – Kick starter for residential renting in India post lifting of lockdowns


          Rental Bonds – Kick starter for residential renting in India post lifting of lockdowns

          Posted by Chetan Thakkar on Jun 7, 2021 5:54:00 PM

          It’s been more than a year since the first lockdown because of Covid-19 in India. A lot has changed for millions of people during these challenging times – Lives lost and lives changed.

          Millions of people living in Cities who came to these cities for work – moved back to their hometowns with work from home initially when lockdowns started. Many lost jobs subsequently when lockdowns prolonged and uncertainty grew further.

          The exodus of these working class people from cities back to their hometowns had substantial impact on rental housing sector in the cities with houses lying vacant, leaving landlords devoid of probably their only source of income. On the other hand, the tenants who occupied these houses moved back to their hometowns either because of loss of job or to save on the cost of living in cities.

          Fast forward June-July 2021. 2nd wave is subsiding and economy is about to open up. The institutions that have been operating with down sized teams and employees working remotely are already planning to accelerate the resumption of operations. Hiring new employees and scaling up the downsized operations are also being planned. Even employees are eager to get back to their offices. Normalisation seems to be knocking – obviously with all safety protocols.

          Landlords are looking out to rent their vacant houses at the earliest to start back their rental income but with excess supply of available properties, they are not getting the tenants. On the tenant’s side – People moving back from their home towns to re-join work or pursue new opportunities are looking for rental houses. Though many of these tenants have depleted their savings and are struggling to arrange for hefty security deposits for their landlords.

          So how does the landlords solve their problem of getting their property back to renting as fastest as possible? How do the tenant solve for the issue of managing a hefty security deposit that he is required to put up with the landlord?

          Rental bond is a common solution to the problems of both the landlord & the tenant. Here is how it helps address the challenges of both sides.

          Security deposits are required to protect the landlords against the risks of renting his property to an unknown tenant. These risks are unpaid rent, damage to his property, unpaid bills for services used by the tenant and breach of lock-in period. What if there was a guarantee against all of these risks and the tenant was no more a totally an opaque entity for him? What if an institution was safeguarding the landlords interests against these risks by making sure that the tenant passed through various checks and was no longer an unknown entity but rather a credit verified and trustworthy individual.

          Eqaro Rental Bond – for the first time in India, has solved for these problems that the landlords and the tenants face. It bridges trust between the landlords and the tenants. Here is how it solves the challenge

          Eqaro verifies and assesses the credibility of the tenant by way of its proprietary underwriting process and stands as a guarantor for the tenant.  That eliminates the risk of renting to an unknown tenant for the landlord and he can rent his property without any security deposit from the tenant. Instead, accepting a Rental bond from Eqaro makes his property attractive to the prospective tenant and increases the probability of him getting a trust worthy tenant immediately. No more losing rental income waiting for the tenants.

          For the tenant that qualifies for the Rental bond, does not have to shell out a hefty security deposit to the landlord. He can buy a Rental bond that serves as a guarantee towards his financial obligations to the landlord. So his problem to arrange for a hefty security deposit is eliminated.

           

          Eqaro Rental Bond covers and pays the landlord towards :

          >  Unpaid Rent

          >  Lock-in period breach

          >  Unpaid utility bills like unpaid electricity bills, maintenance cost, club charges etc.,

          >  Any damage to the property apart from normal wear & tear.

          So now the landlords who need to rent out their vacant property faster to start earning their lost rental income & the tenants who are looking for property without putting up a hefty security deposit amount – Eqaro Rental Bonds is the answer.

           

          Topics: Eqaro Guarantees, Rental Bonds, Securitydeposit, Credit Verified Tenants, Zero Deposit Properties

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            Backed by the financial strength and global expertise of Ion Insurance Company Inc (USA), Southern Pacific Insurance Corporation(USA) & Northern Light Surety Company SRL, Eqaro’s bonding solutions offer financial security to project owners, supplier principals and brand owners alike, protecting them from financial exposure to their contractors, clients, dealers, or franchisees.

            CONTACT US

              (C) EQARO GUARANTEES 2020. All Rights Reserved


                Model Tenancy Act: Advantage Rental Bonds


                  Model Tenancy Act: Advantage Rental Bonds

                  Posted by Pankaj Bhansali on Jun 2, 2021 4:00:00 PM

                  The government’s approval for the Model Tenancy Act is a landmark reform that will usher in a new era for the real estate sector in the country. The Indian residential rental segment has been by large been unstructured so far with zero policy interventions so far. The archaic Rent Control Act currently in force has done very little to instil faith in the landlords who viewed it as pro tenant and preferred to keep it vacant rather than let it out. As per some estimates, there are over 11 million residential houses lying vacant despite a huge housing shortage.

                   

                  The Model Tenancy Act lays down the regulatory frame work for renting including the rights and obligations for every stakeholder and the recourse available to it which will help reduce litigation and encourage trust between the landlord and the tenants. The act will help formalise renting and will help make the over 11 million vacant residential units economically productive. The act will also encourage and attract institutional investments into the residential assets, thus ushering a new phase of growth in to the Real Estate Sector. By defining the quantum of security deposit, it also comes as huge relief to the tenant who has been so far required to put up large amounts as security deposit sometimes even extending to 8 to 10 months of rental.

                   

                  Implementation will be key if we are to experience the full benefits as intended under the act. Its critical that the states act swiftly and adopt the law, have the necessary regulatory structure in the form of tribunals, rent authorities & courts to provide speedy resolutions and a common framework across the country. The Act once adopted and enforced by states will reform the rental housing business in India with utmost transparency and help create a sustainable and inclusive rental housing market in the country.

                   

                  However, there is a flip side as well. The model tenancy act provides for 2 months of rental as security deposit. The landlords today who do not have any means at their disposal to verify the credibility of the prospective tenant may find the 2 months security deposit inadequate to inspire confidence in letting out their property. The two months security deposit is also inadequate to cover for the lock in period in the event of the tenant vacating the property prior to the expiry of the lock in period.

                   

                  This is where rental guarantees can help in the institutionalising the residential rental market in India. Rental Bonds help address the friction points in the process of tenancy thus promoting trust between the landlord and the tenant.

                   

                  Rental Bonds protect the landlord by providing him with credit verified and assessed tenants and protect him against default of the tenant in the payment of rent, damages to the property, unpaid utility bills and unpaid rent for the lock in period. Rental bonds will also help the tenant carry forward the benefits of his good tenancy track record to his subsequent tenancy agreements which may help him obtain preferential tenancy terms.

                   

                  The rental yield in India is amongst the lowest in the world. The Act once adopted and enforced by states promises to create a sustainable and inclusive rental housing market in the country. It would also attract a plethora of institutional & individual investors willing to invest in the real estate segment in order to earn consistent and hassle-free revenues by renting their properties.

                   

                  Topics: Model Tenancy Act & Rental Bonds

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                    Backed by the financial strength and global expertise of Ion Insurance Company Inc (USA), Southern Pacific Insurance Corporation(USA) & Northern Light Surety Company SRL, Eqaro’s bonding solutions offer financial security to project owners, supplier principals and brand owners alike, protecting them from financial exposure to their contractors, clients, dealers, or franchisees.

                    CONTACT US

                      (C) EQARO GUARANTEES 2020. All Rights Reserved

                      Surety Bonds: Bringing Credibility to the table


                        Surety Bonds: Bringing Credibility to the table

                        Posted by Chetan Thakkar on May 4, 2021 12:03:17 PM

                        The recent recommendations of the working group set up by the IRDA outlined the benefits of surety guarantees as “The Surety Bonds are proven risk management mechanisms with a long history that help ensure public and private owners execute their construction projects following the plans and  specifications and ensure subcontractors and suppliers are paid. Surety bonds help provide owners of construction projects with guarantees of success and enhanced reputations.”

                        The recommendations go on to mention that “The Surety Bond for road/civil infrastructure projects market need has been felt since the Indian Banks are now not providing any waivers on collaterals for granting Bank Guarantees. The big corporate failures resulting in the events of Non-Performing Assets have driven the Banks to exercise tighter controls in issuing Bank Guarantees. National Highways Authority of India (NHAI) received representations from contractors, developers because obtaining Bank Guarantees are becoming very difficult. The Banks have increased two components, i.e. margin money as well as the commission. Under these circumstances, an alternative option was required.”

                        Coming from a working group which comprises of some of the senior-most and accomplished insurance professionals of the country, this is indeed a strong attestation of the role and the need of sureties in India.

                        Contractors are a critical part of the construction & the infrastructure industry and its heartening to see their woes of the availability of bank guarantees being the focus of the Government and the Regulatory bodies. There is no doubt that access to guaranteeing solutions which do not entail collaterals and margin money will help infuse a significant amount of liquidity. This resultant liquidity can be utilized in a far more efficient manner to spur economic growth for the entire industry.

                        However, the current narrative around the need for sureties in India only because

                        ► the contracting community is strapped for liquidity and
                        ► unable to participate in new projects because of their choked banking lines or
                        ► the need to find an alternative as the banks have started exercising tighter controls

                        Would be equivalent to looking at it in a one-sided manner. It also creates a perception that the need for sureties is being felt to provide support to otherwise weak industry.

                        I have often been asked the question – How can sureties do away with the need for collaterals and margin money in a market like India? Or Aren’t Sureties aware of the moral risks involved primarily in the Infrastructure Industry where even the conservative Indian banks have burnt their fingers?
                        Therefore it becomes vital to understand how sureties have been able to build a thriving business model globally without the guarantees being necessarily indemnified by collaterals & margins.

                        A surety conducts a holistic assessment of the company which is not restricted to just the financial underwriting but also extends to capability (team, equipment etc.) to execute as well as the past performance of the contractor. The 3Cs of surety underwriting – Capital, Character & Capacity help a surety accurately assess the principal’s ability to perform the obligation as required under the contract.

                        As such Sureties by their effective surety risk selection process ensure that only capable and competent contractors are permitted to undertake public projects. No wonder that a study by the Canadian Centre for Economic Analysis found that a non-bonded construction enterprise is 10 times more likely to default than a bonded company.


                        The Surety risk selection process is all about getting right, competent parties to the contract, thus minimizing the probability of default. This approach is visible across all lines of guarantees issued by the surety, including bonds as small as rental guarantees where the tenant undergoes a detailed underwriting process before the surety agrees to extend guarantees on his behalf.

                        Sureties also help contractors participate in project opportunities. The current pandemic has had a ravaging impact on the Indian economy. The contracting community has been hit very severely as well. The Government has announced a slew of measures to spur economic growth which includes increased investments in critical infrastructure projects. However, a large part of the contracting segment irrespective of their execution strength is unable to participate in these projects. This is because the banks do not differentiate between high performing and marginal contractors. If two companies have the same level of financial assets, they would have a similar ability to furnish contract guarantees. Moreover, a large part of the contractors’ assets is already locked in with the bank to support their existing banking lines. In such a situation, Sureties with their ability to look beyond just the financials and to do away with the need for collaterals and margin money can act as an enabler for the contractor to participate in the new projects thus hastening the pace of economic recovery.

                        Did someone say, “Fast Forwarding India”.

                        Topics: Surety Guarantees, Eqaro Guarantees, Rental Bonds, margin money, surety bond, Contractor Rating, bank guarantee

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                          Backed by the financial strength and global expertise of Ion Insurance Company Inc (USA), Southern Pacific Insurance Corporation(USA) & Northern Light Surety Company SRL, Eqaro’s bonding solutions offer financial security to project owners, supplier principals and brand owners alike, protecting them from financial exposure to their contractors, clients, dealers, or franchisees.

                          CONTACT US

                            (C) EQARO GUARANTEES 2020. All Rights Reserved

                            Surety Bonds – An Underwriter’s Perspective


                              Surety Bonds – An Underwriter’s Perspective

                              Posted by Umeshpratap Singh on Dec 22, 2020 5:55:51 PM

                              Although well-established worldwide, Surety Bond is a relatively new concept in India. Essentially, a guarantee is issued by a Surety guarantor, whenever there is a need for assurance of a performance of obligations under a contract. In the event of a default by the Contractor, the obligee (the project owner) invokes the surety guarantee to recover its loss. After paying out, the surety attempts to recover its loss from the defaulting principal through the indemnity obtained from the Contractor.

                               

                              As per the prevailing practice in India currently, an obligee takes partial performance Bank Guarantees to compensate against such a loss. However, Bank Guarantees as a tool for risk mitigation is a sub-optimal one for the reasons outlined below:-

                               

                              1. Bank Guarantees are mostly issued based on overall Client/Contractor creditworthiness with an underlying assumption that all projects have the same project risk if they are executed by the same Contractor. As a result, the pricing and security of Bank Guarantees remain the same for all the projects undertaken by the Client.

                               

                              2. Bank Guarantees are offered as a part of much wider product offerings (like Cash Credit, Term Loan, Letter of Credit Etc) by banks and hence the risks are not adequately priced /evaluated most of the time.

                               

                              3. Banks try to cover their risk via collaterals/security and possess very limited expertise with respect to project underwriting and monitoring.

                               

                              4. In case of default, the obligee/project owner can recover a maximum of 5 -10 % of the cost by way of invocation of the Bank Guarantee. The banks proceed for recovery against the Contractor and may approach IBC which impacts the Contractor’s performance across all other projects as well. As a result, in the entire process of invocation & recovery, the underlying projects are stalled and/or infinitely delayed which is counterproductive to the initial intent.

                               

                              To sum it up, we can say that the Bank Guarantees, at best, provide some monetary compensation to the obligee but the whole process of invocation/recovery is detrimental to the timely completion of the project.

                               

                              Surety bond providers try to overcome the above issues of plain vanilla Bank Guarantees by offering holistic customized guaranteeing solutions based on robust credit evaluation and project monitoring mechanisms.

                               

                              Surety Underwriting: A two-pronged credit evaluation system:

                               

                              The traditional credit risk assessment followed by the banks gives huge weightage to Contractor creditworthiness and specific project risks are either generalized and/or get a very limited evaluation. However, the ground reality is that many projects fail /are delayed or have a huge cost overrun due to project-specific risks like Right of Way (ROW), geo-political risk, change of scope, and/or technical difficulties of the project. It is not uncommon to find projects being delayed/surrendered by an otherwise good Contractor.

                               

                              In order to offer comprehensive protection to the obligee/project owner, the Surety guarantor looks beyond the traditional approach of a balance sheet-based credit approval mechanism.

                               

                              While evaluating the overall creditworthiness of a Contractor remains a key evaluation matrix, it is combined with in-depth project risk and monitoring to offer project-wise (not Contractor wise) risk solution.

                               

                              Sureties usually imbibe this philosophy and grade every proposal on a two-scale matrix as depicted below :-

                              While underwriting any proposal, a Client/Contractor credit score/grade is arrived at by evaluating

                               Promoter/Management Risk
                              • Business /operation risk of Contractor
                              • Financial risk

                              In addition to the above, each project is further evaluated minutely on the following parameters to assess the project risk

                              • Project Cash Flow Risk
                              • Complexity of project
                              • ROW/ External Risk
                              • Sponsor/Obligee Risk – payment frequencies, budget, and financial strength of Sponsor

                              Robust Project monitoring System :

                              Worldwide, Surety guarantor’s ability to monitor projects is one of the key differentiators for the Obligees to prefer Surety bonds over Bank Guarantees. A Surety guarantor keeps a tight vigil on project cost, project cash flow, and approval status on a monthly basis and helps them resolve in a timely manner by coordinating with the obligee and Contractor. The probability of completion of the project as per the schedule improves manifold if the project risks are addressed promptly and in an appropriate manner.

                              With a huge amount of investments lined up for the infrastructure sector in India, it is critical to find the right balance of awarding risk and rewards to each and every stakeholder (project owner, Contractor and lenders) of an infrastructure project. Surety guarantors are known to bring such balance by properly evaluating and pricing the risk in the system.

                              Topics: Surety Guarantees, Bank Guarantees

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                                Backed by the financial strength and global expertise of Ion Insurance Company Inc (USA), Southern Pacific Insurance Corporation(USA) & Northern Light Surety Company SRL, Eqaro’s bonding solutions offer financial security to project owners, supplier principals and brand owners alike, protecting them from financial exposure to their contractors, clients, dealers, or franchisees.

                                CONTACT US

                                  (C) EQARO GUARANTEES 2020. All Rights Reserved

                                  Security Deposits: The Tenant’s Concern


                                    Security Deposits: The Tenant’s Concern

                                    Posted by Chetan Thakkar on May 4, 2021 12:03:17 PM

                                    There comes a time in every individual’s life when he/she has to move out of his hometown and relocate to a new city for professional reasons. The first order of business for individuals relocating to a new city is finding accommodation, which comes with its fair share of challenges. Apart from finding a lovely home, the most prominent of these challenges is the security deposit which tenants have to pay to their landlords before moving into the property.

                                    What is a Security Deposit?

                                    While renting a house, a Tenant has to pay a fixed amount of security deposit to the landlord, which is returned by the landlord once the contract expires, or the Tenant vacates the property. The deposit can range from 3 to 12 months of the monthly rental amount, depending on the terms of the Tenancy Agreement a city of domicile. It can be a substantial cash outflow because in Mumbai security deposit range between 9 to 12 months whereas in North India it could be anywhere between 3 to 6 months.

                                    While the security deposit is part of the rental agreement, in the end, the onus of setting the amount lies with the landlord. The purpose of these security deposits is to protect the landlord in the event of a default by the Tenant, any breakage, or unpaid maintenance charges.


                                    Common Problems faced by the Tenants

                                    11.09 million houses remain vacant in urban areas. This is despite a massive housing shortage. Zero or no policy interventions for rental housing have been a significant deterrent for the creation of rental housing stock in the country.

                                    Landlords take advantage of the high cost of living in metropolitan cities such as Mumbai, Delhi, Bangalore, etc. to push for higher security deposit amounts, with little regard to the condition of the house, as the ratio of potential tenants to rental properties is in favor of the landlords for prime locations. The upfront deposits become a deterrent to aspirational living spaces. Else if there is no other option, one seeks financial help from friends or relatives or take a personal loan to pay for the deposit amount.

                                    After the Tenant has vacated the property, landlords often take their own time to return the security deposit. If the shift is between cities, then the Tenant is forced to forego the deposit.

                                    Landlords’ Perspective: The Importance of Security Deposit

                                    From a landlord’s perspective, the security deposit is essential for securing due performance by the Tenants, of his/her obligations under the tenancy agreement. The landlord, under the agreement, has a right to adjust the security deposit against any arrears of rents or other charges payable under the contract. Standard wear and tear of an apartment due to usage is usually not charged because he expects the Tenant will vacate the apartment in its original condition (refers to the house condition before the current tenant moved in) to the landlord.

                                    The security deposit is a safeguard against rental defaults, damages to the property, and maintenance charges. Neither it is an assurance, of the creditworthiness of the Tenant in case of unpaid rent or maintenance charges.

                                    The Solution – EQARO

                                    Getting a rental bond is simple with Eqaro. The organisation recognises the need for the protection of the landlords’ and Tenants’ interests and provides landlords with a cover far superior to that of the traditional cash security deposit.

                                    A rental bond acts as a replacement for the cash security deposit. It is a guarantee in favour of a landlord that the Tenant will fulfil his obligations under the tenancy agreement. It covers the following-

                                    ⪼ Unpaid rent
                                    ⪼ Up to 6 months of the lock-in period
                                    ⪼ Damage to the property
                                    ⪼ Unpaid bills – utility bills, maintenance charges, water bills, club charges, as set out in the lease agreement

                                    The Tenants, on the other hand, can heaves a sigh of relief as with Eqaro Rental Contract Surety Bond, their money won’t stay tied up in security deposits. Upon payment of a fraction of the security deposit, Eqaro issues a rental bond guarantee to the landlord providing him with 100% protection.

                                    ⪼ Saves precious cash flow, sometimes to the extent of 8 to 10 months rentals
                                    ⪼ Avoids follow-ups with the landlord for the refund of the security deposit
                                    ⪼ Move from one property to another without the hassles of putting up an additional security deposit while waiting for the refund of the previous one

                                    Eqaro Rental Bonds helps simplify the process of building trust between the landlord and the Tenant by taking the uncertainty out of renting.

                                    Topics: Eqaro Guarantees, Rental Bonds

                                    Leave Comment

                                      Backed by the financial strength and global expertise of Ion Insurance Company Inc (USA), Southern Pacific Insurance Corporation(USA) & Northern Light Surety Company SRL, Eqaro’s bonding solutions offer financial security to project owners, supplier principals and brand owners alike, protecting them from financial exposure to their contractors, clients, dealers, or franchisees.

                                      CONTACT US

                                        (C) EQARO GUARANTEES 2020. All Rights Reserved

                                        Surety Bonds – the solution to the Corona triggered liquidity crisis?


                                          Surety Bonds – the solution to the Corona triggered liquidity crisis?

                                          Posted by Chetan Thakkar on May 4, 2021 12:03:17 PM

                                          The Finance Minister Ms Nirmala Sitharaman announced a reduction in the requirement of performance security on construction & infrastructure contracts to 3% from the 5-10% required earlier while a bid security declaration has been permitted as a replacement for the bid security or an earnest money deposit. These announcements, a part of the Atmanirbhar 3 stimulus package announced on November 12 are expected to ease liquidity for contractors by reducing their working capital requirements.


                                          It is evident that the entire construction & the infrastructure industry is in the middle of acute stress which has been accentuated by the pandemic pushing the infrastructure companies into working capital cycles that are probably the longest in the world. Given that the entire guarantee requirements are catered to by bank guarantees which cut across banking lines, consume on productive collateral and suck out liquidity by way of margin money which at times are as high as 100%, the Finance Minister’s announcements would have come as a major source of relief to the entire Industry.


                                          While the initiatives which are currently focused towards enhancing liquidity and easing problems for the construction & infrastructure industry are commendable, they should ideally have been accompanied by measures aimed at reducing risks for the project owner. This becomes even more relevant if one were to consider the cost and time overruns already being experienced in the projects monitored by the Ministry of Statistics and Program Implementation.


                                          The announcements have possibly overlooked the risks associated with the execution of infrastructure projects where even reputed contractors have been known to fail. The guarantees required under an infrastructure project are meant to protect the project owner in the event of default by the contractor. By reducing the performance guarantees from 10% to 3% for public projects, we are in effect reducing the quantum of cover available to the project owners. Given the coronavirus pandemic and its crippling impact on the finances of the contractors, the risk has multiplied manifold.


                                          Competent Contractors -The need for a surety in the Indian economy is now more acute than ever before. A Surety Bond is a risk transfer mechanism where the surety company assures the project owner that the contractor will perform a contract in accordance with the contract documents. A surety or a specialized guarantee company helps bring capabilities to the project by way of a rigorous pre-qualification process on the contractor’s ability to fulfil the obligations of the contract. A study conducted by the Canadian Centre for Economic Analysis has concluded that a non-bonded construction enterprise is 10 times more likely to become insolvent than bonded companies thus illustrating the effectiveness of the surety risk selection process in ensuring that only qualified firms are permitted to undertake public work.


                                          “Essentially, if you have the right contractor, the probability of him defaulting on the contract is minimised”

                                          Infusing Liquidity: Sureties depend on their underwriting expertise to assess the risks associated with the project and hence do not usually require cash collaterals or margins. As such, use of surety guarantees would have also had the desired effect of releasing liquidity to the contractors without any additional risks to the project owner.

                                          Surety Guarantees help protect the interests of the taxpayer, the public & private project owners and the lenders from the potentially devastating consequences of contractor failure and are ideally suited for situations that the Indian economy currently finds itself in.

                                           

                                          Topics: Surety Guarantees

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