ICRA expects the recent measures announced by the Finance Minister for contractors – primarily extension of the timeline for project execution by up to six months, and a partial release of bank guarantees (BGs) – to provide some respite to construction companies. As per an ICRA note, in particular, the Finance Ministry’s directive to government agencies to partially release the BGs (to the extent contracts are complete) is a positive step and can help release some liquidity for contractors that is blocked in the margin money against these guarantees.“BGs play an essential role in contract execution and a sizeable quantum of BGs are required by contractors, therefore non-availability of adequate BGs can constrain a contractor’s ability to bid for projects or efficiently execute projects,” says Shubham Jain, Senior Vice-President and Group Head, Corporate Ratings, ICRA. “Over the past few years, the enhancement in BG limits has remained challenging for many contractors and some had to avail of the BG against 100 per cent margin, significantly blocking their capital. The provision of a partial release of BGs can help reduce the overall requirement of contractors, and consequently enhance their ability to take up projects.”According to ICRA, depending on the stage of the order execution, the partial release of the BG can have a significant positive impact on the liquidity of construction companies. For the sample set, a release of 10 per cent of the BGs could boost liquidity by 14 per cent from current levels by freeing up the margin money. The impact could be much higher for companies which, in the absence of adequate BG limits, had to avail of BGs against a 100 per cent margin. “Total outstanding BGs for the construction and infrastructure sectors are estimated to be in the range of Rs.4-5 trillion,” adds Jain (BGs towards the construction sector are estimated at Rs.1-1.5 trillion, while BGs towards the infrastructure sector are estimated at `3-3.5 trillion.) “A release of 5 per cent of these guarantees can provide contractors a liquidity of `2,000-3,000 crore and increase their ability to take up new projects worth Rs.2 trillion.”On the flipside, there will be operational challenges in getting the partial release of BGs as in most cases, the existing BG issued must have been in a single tranche. Hence, for availing a partial release, a new BG of a lower amount will need to be provided, after which existing BGs can be returned.