Bank guarantee vs surety bond: which should a contractor use?
Every tender asks for bid security and, once you win, performance security. Most contractors give bank guarantees, which lock up FDs and use up bank limits. Since 2022, government buyers can accept an insurance surety bond instead. Here is how the two compare.
Updated 2026-10-27 · Funding Desk credit panel
Side by side
| Bank guarantee | Surety bond | |
|---|---|---|
| Issued by | Your bank | A general insurance company |
| Cash margin / FD | Usually 10% to 100% | Usually none |
| Uses your bank limit | Yes | No |
| Yearly cost | Commission about 0.5% to 2%, plus the cost of the blocked FD | Premium about 0.5% to 2% |
| Accepted by | Everyone | Central ministries, CPSEs, NHAI and many others; state bodies tender by tender |
| What is checked | Your bank limits and security | Profit, net worth, past work and the client |
Why it matters
Take a contractor with five running works and ₹5 crore of guarantees. With bank guarantees, ₹1–2 crore may sit as FD margin and the full ₹5 crore uses non-fund limits. With surety bonds, that money and those limits are free for materials and labour.
Who can get a surety bond
- Profitable in the last 2–3 years
- Positive and growing net worth
- Completed similar works of a decent size
- Clean record – no invoked guarantees or disputes
- Works for central government, PSUs and NHAI are the easiest to bond
Common questions
Is a surety bond accepted in government tenders?
Yes. The General Financial Rules were amended in 2022 to accept insurance surety bonds for bid and performance security in central government procurement. State bodies decide tender by tender, so check the clause.
Who issues surety bonds in India?
General insurance companies registered with IRDAI, under the IRDAI surety insurance guidelines.
Is a surety bond cheaper than a bank guarantee?
The premium is similar to the bank commission, but there is no FD margin and no use of bank limits, so the real cost is usually lower.
Can a new contractor get a surety bond?
It is harder. Insurers want a track record of profit and completed work. A newer contractor usually starts with bank guarantees.