Collateral

SME Artha 2022 | Video: With surety bonds, MSMEs will not need collateral for bank credit, expert says

Credit and financing for MSMEs: Traditionally, loans were secured by collateral, with MSMEs pledging assets as collateral to secure credit, so underwriting followed by lenders was usually based on collateral. However, over the years the landscape has evolved with the change in the way business is conducted. As collateral runs out and joint families split into nuclear families, banks have re-examined the need for large amounts of collateral. Combined with digitization and the cash flow-based type of lending, surety bonds are emerging as an alternative for taking out loans to MSMEs.

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According to Finance Minister Nirmala Sitharaman’s budget speech this year, the use of surety bonds as a substitute for bank guarantee will be made acceptable in public procurement to reduce indirect costs for suppliers and works contractors.

Vikash Khandelwal, who heads the surety company Eqaro Surety, has been involved in the effort to introduce the concept of sureties in the country for the past 6 years and led advocacy efforts to get surety bonds approved as accepted security for infrastructure projects. Khandelwal recently spoke to FE Aspire at the SME Artha event about the overall opportunity in the surety bond market, its role in facilitating access to credit for MSMEs, and more.

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