The Assocham has approached the Defence Ministry, seeking relaxation for stringent bank guarantee norms required for the private sector shipyards which want to bid for construction of ships for the Indian Navy.
 
As per the latest policy changes brought in June this year, the shipyards to whom the contract is awarded are required to furnish Performance cum Warranty Bank Guarantee (PWBG) of 10% of the value of the Contract. Besides, the shipyards also need to furnish Advance Bank Guarantee (ABG) for all milestone payments and Integrity Pack Bank Guarantee (IPBG).
 
These Bank Guarantees (BGs) remain in force till delivery of the vessels.  While this is a measure to safeguard the interest of the Government of India, it puts an unsustainable burden on the shipbuilding companies, which will make the projects unviable, the Assocham has written to the Defence Secretary, Sanjay Mitra.
 
The letter said the Defence Shipbuilding is possibly the only industry wherein Government contracts require all milestone payments to be backed by equivalent amount of ABG as well as PWBG.  In all other industries in India such as infrastructure, the BG requirement is restricted to a PWBG of about 5 % and / or an ABG for the first advance.
 
''Given the programme size, this is a very challenging task for any shipyard. ..... There are restrictions imposed through RBI guidelines on the maximum credit exposure that a bank can take on a single entity or a single group.....The total amount of Bank Guarantees issued by all schedule commercial banks in India across all industries in India and outside India as of March 31, 2016 was Rs 10,581.16 billion. The Total value of Naval Defence contracts awarded and to be awarded in the next few years is in several lakhs of crores.  Hence, the requirement of Bank Guarantees for Defence shipbuilding alone would be a substantial percentage of the total Bank Guarantees issued by the banks in India.''
          
Presently, the Defence PSUs in case of orders on a nomination basis from the MoD are allowed to submit indemnity bonds in lieu of BGs. ''It is recommended that similar provision may be made applicable in case of Private Sector Shipyards.''