The MSME sector is well catered for in all aspects of law and tax in India. In the Union Budget of 2022-23, the Finance Minister announced that the surety bonds will now be made acceptable in government procurements as a substitute for bank guarantees.

Watch now #LawWiser explainer video on “Use of surety bonds as a substitute for Bank Guarantees for MSMEs” featuring Sujjain Talwar, Partner, Economic Laws Practice (ELP) sharing key insights on this.

Sujjain shares that this announcement has been made with an aim to reduce the indirect cost for suppliers and work contractors. MSMEs are the strength of India’s entrepreneurial economy and the contractors are the assets. They depend heavily on payments coming on time, for their salaries and goods that have to be paid further. Their margins are also quite less. If in addition, MSMEs have to get a bank guarantee, it takes away from them high collateral margins, money commissions and puts the risk of NPA on them. This costs almost 10% of their tender cost that goes into procuring a bank guarantee, which is not allowed to be used elsewhere. On the other hand, insurance companies also seek to insure the risk.

There is a need for such products by the Insurance Companies that are less rigid in terms of commissions and premiums and therefore more palatable and acceptable to the MSME sector.

The MSME sector has also been asking for a reduction of the amount by the Government Financial Rules or GIFR on the procurement of contracts. This requires that there should always be performance security which is ranged from 5 to 10% of the contract value.

Learn more about the Use of surety bonds as a substitute for bank guarantees for the MSMEs by watching the full video.

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