Contractor Financing Options in India: 13 Types of Financial Instruments, Who Can Apply and Who Accepts Them
TL;DR
Definition: Contractor financing options in India are the instruments you use to win tenders, give security, fund the work and get paid.
Key difference: A line of credit gives you money. A bank guarantee or an insurance surety bond gives the owner security.
The 13 instruments: Eight give tender or contract security: the insurance surety bond, bank guarantee, EMD, Bid Security Declaration, banker’s cheque, demand draft, fixed deposit receipt and online payment. The other five are the line of credit, letter of credit, escrow, retention money and letter of undertaking.
How to choose: Compare how each option affects your cash and bank limit before you pick one.
When you win a government work order, you deal with many money documents before you get your first running bill payment. The tender asks you for EMD. The work order asks you for performance security. The contract holds back some of your payment as retention money. You also need a bank limit to buy materials.
This guide explains the different types of financial instruments and contractor financing options in India in one numbered list. For each one, you will learn what it is, who can apply, how to apply and who accepts it. You will also see the cost and the conditions to watch. If a detail changes from one tender or bank to another, the guide says so.
What Are Financial Instruments in Construction in India?
Financial instruments in construction are the money documents and facilities you use during a project. You use them to win a tender, to protect the project owner, to pay for the work and to get paid. This section explains the three groups they fall into, so you can see where each instrument fits before you read about them one by one.
Tender and contract security: These instruments protect the owner. They include the insurance surety bond, bank guarantee, EMD, Bid Security Declaration, banker’s cheque, demand draft, fixed deposit receipt and online payment. Retention money also belongs here because the owner holds it to cover defects.
Funding for contractors: These facilities give you working capital or help you get guarantees. The main example is the line of credit. Banks call it a fund-based facility because the bank gives you money, while they call guarantees and letters of credit non-fund-based because the bank gives a promise instead. The DGFT guide explains the difference in the same way.
Payment safety and cross-border tools: These protect money while it moves from one party to another. They include the letter of credit, escrow and letter of undertaking.
Different Types of Financial Instruments for Contractors in India at a Glance
The table below lists all thirteen instruments in one place. It shows the group each one belongs to, what you mainly use it for and who uses it. You can use it to find the right instrument quickly, and then read the matching section below for the full details.
No. | Instrument | Group | Main use | Who uses it |
1 | Insurance surety bond | Security | Bid and performance security | Contractor |
2 | Bank guarantee (including e-BG) | Security | Bid and performance security | Contractor |
3 | EMD | Security | Bid security | Bidder |
4 | Bid Security Declaration | Security | Used instead of EMD | Exempt bidder |
5 | Banker’s cheque | Security | Bid security | Bidder |
6 | Demand draft | Security | Bid and performance security | Bidder |
7 | Fixed deposit receipt | Security | Bid and performance security | Bidder |
8 | Online payment | Security | EMD and deposits | Bidder |
9 | Retention money (security deposit) | Security | Cover for defects | Owner holds it |
10 | Line of credit | Funding | Working capital | Contractor |
11 | Letter of credit (including standby LC) | Payment safety | Paying suppliers | Buyer |
12 | Escrow | Payment safety | Holding project money | Owner and contractor |
13 | Letter of undertaking | Cross-border | Old import credit tool | Importer |
The 13 Types of Financial Instruments in India Explained One by One
The sections below explain how each instrument works, who can apply, who accepts it, and the costs and conditions to check, starting with insurance surety bonds and bank guarantees.
1. Insurance Surety Bond
An insurance surety bond is a written commitment from an insurer to a project owner, providing security that the contractor will fulfil the obligations covered by the bond.
Three parties are involved:
Contractor (principal): Responsible for completing the work as agreed.
Project owner (obligee): Receives the protection provided by the bond.
Insurance company (surety): Issues the bond backing the contractor’s obligation.
How it works:
If the contractor fails to fulfil the covered obligation, the project owner can make a claim.
The insurer assesses the claim and pays according to the bond’s terms.
The insurer can then recover the amount paid from the contractor.
The bond provides an alternative to submitting the full security amount in cash or using a bank guarantee limit. However, the insurer may require collateral.
It is treated as a contract of guarantee under Section 126 of the Indian Contract Act. The IRDAI Surety Insurance Contracts Guidelines 2022 took effect on 1 April 2022, with subsequent relaxations under the 2024 product regulations.
Who can apply, and who accepts it?
Who can apply: Contractors bidding for or carrying out a contract that accepts an insurance surety bond can apply. The insurer assesses the business before deciding the terms, including any collateral requirement.
Who accepts it: Rules 170(i) and 171(i) of the General Financial Rules 2017 list insurance surety bonds as forms of bid security and performance security. The Department of Expenditure added them through office memorandum F.1/1/2022-PPD dated 2 February 2022.
Real example: A PIB release dated 10 November 2023 states that NHAI accepted its first bid-security bond for a TOT bundle at a premium of 0.25%, without margin money. It also reports that more than 40 bonds had been issued for NHAI contracts and that the Finance Ministry had placed e-BGs and insurance surety bonds at par with bank guarantees.
Road projects: The MoRTH HAM model agreement lists an insurance surety bond or an irrevocable e-BG as performance security.
The 0.25% premium relates to one NHAI case. It is an example, not a fixed rate for every contractor.
Bonds are issued in India, and payments are made in rupees.
Financial guarantees are not permitted.
Contact a general insurer that offers insurance surety bonds.
Share the tender or contract details and your financial documents.
Agree on the terms and pay the premium.
Receive the bond and submit it with your bid or after receiving the work order, as required.
The insurer’s proposal form specifies the documents you need. You can read more in the guide to insurance surety bonds on GeM and government tenders.
2. Bank Guarantee (Including e-BG)
A bank guarantee is a written commitment from your bank to the project owner. It provides for the bank to pay the owner up to a specified amount if you fail to meet the obligation covered by the guarantee.
How it works:
The bank issues the guarantee on your behalf, and it uses part of your sanctioned bank limit.
You do not necessarily pay the full guarantee amount upfront, but the bank usually requires margin money and charges a commission.
If the bank pays the owner under the guarantee, you remain responsible for repaying the bank.
An e-BG is the same guarantee issued digitally. Through the NeSL process described here, the bank issues it with an electronic stamp and digital signature, removing the need to carry a paper original.
Check the tender’s required bank guarantee wording, including whether it must be irrevocable and unconditional.
Who can apply, and who accepts it?
Who can apply: Contractors can approach a bank for a guarantee facility. Confirm the bank’s eligibility requirements, including the credit arrangements, margin, collateral, and documents needed for your application.
Who accepts it: GFR Rules 170(i) and 171(i) list bank guarantees as forms of bid security and performance security. Electronic bank guarantees were included through office memorandum F.1/4/2022-PPD dated 5 August 2022.
Issuing-bank requirement: Rule 171(i) requires the guarantee to come from a commercial bank. CPWD Form 8 also accepts a guarantee from a scheduled bank when releasing a security deposit.
What the bank asks for:
The bank may require margin money and a counter guarantee, which provides additional backing for its commitment. Requirements differ between banks:
Bank of India: Its contractor scheme sets the overall limit at 30% of average turnover, divided into two-thirds fund-based and one-third non-fund-based facilities. It requires at least 15% cash margin on the non-fund-based portion.
Indian Bank: Its scheme specifies a 10% margin and a counter guarantee.
Cost and validity:
Each bank sets its own commission and service charges. The IOB charges circular effective from 1 April 2025 lists:
3% per year for a performance guarantee issued to an unrated account, charged for a minimum of three months.
1% per year where the applicant provides 100% cash margin.
₹600 per SFMS message, excluding GST.
NeSL states that the issuing bank determines an e-BG’s validity period. The tender also sets requirements. CWC, for example, requires validity extending beyond 60 days after completion and a claim period of six months after the guarantee expires.
How to apply for an e-BG:
Create a challan on GeM.
Submit the challan to your bank.
The bank sends the request to NeSL, which arranges the electronic stamp and digital signature.
The owner receives the e-BG through NeSL.
The NeSL e-BG FAQs state that the signing cycle takes one to two minutes when the bank uses straight-through signing.
You can read more in the bank guarantee limit guide and the guide to bank guarantee alternatives.
3. Earnest Money Deposit (EMD)
EMD is the security you submit with a bid to demonstrate your commitment to the tender. The owner holds it as protection against specified actions, such as withdrawing or changing the bid or refusing to sign the contract after winning.
If you do not win the tender, the security is returned according to the applicable refund conditions. The Department of Expenditure order of 12 November 2020 states that bid security is also known as EMD, so both terms refer to the same requirement.
How it works:
You submit the security with your bid in a form accepted by the tender.
The owner may forfeit it if you breach the conditions covered by the security.
If your bid is unsuccessful, the owner returns it according to the tender’s refund provisions.
Who must provide it, and who accepts it?
Who must provide it: Every bidder must meet the requirement unless an exemption applies. Under GFR Rule 170, micro and small enterprises and firms registered with the concerned ministries or departments are exempt.
Who requires it: Procuring entities that ask for bid security specify its amount and accepted forms in the tender.
Exemptions vary: CWC states that EMD exemption is not available for works contracts. Check the organisation’s requirements and contract category before relying on an exemption.
Amount, refund, and forfeiture:
The CWC circular of 28 December 2023 gives the following example of how EMD is calculated:
Estimated value | EMD requirement |
Up to ₹5 lakh | No EMD |
Above ₹5 lakh and up to ₹10 crore | 2% of the estimated value |
Above ₹10 crore and up to ₹50 crore | ₹20 lakh plus 1% of the amount exceeding ₹10 crore |
Above ₹50 crore | ₹60 lakh plus 0.5% of the amount exceeding ₹50 crore |
CWC returns the EMD of unsuccessful bidders within 15 days after the award or the end of bid validity, whichever comes first. It forfeits the winning bidder’s EMD if performance security is not provided on time.
How to submit it:
Submit the EMD with your bid using a form that the tender accepts. Items 1, 2, and 5 to 8 in this guide cover the available forms: insurance surety bond, bank guarantee, banker’s cheque, demand draft, FDR, and online payment.
You can read more in Types of Bid Security in Government Tenders and the guide to EMD exemption for MSMEs.
4. Bid Security Declaration
A Bid Security Declaration is a signed commitment submitted instead of paying EMD where the tender permits it. You agree to accept suspension from future tenders if you breach specified bidding conditions.
How it works:
You submit the signed declaration without paying security money upfront.
You agree to follow the conditions covering bid withdrawal, bid changes, contract signing, and submission of performance security.
If you breach those conditions, you may be suspended for the period stated in the tender.
Who can apply, and who accepts it?
Who can apply: Bidders exempt from EMD can submit the declaration under the applicable tender provisions. CWC also uses it for tenders valued at up to ₹5 lakh.
Who accepts it: Organisations using the declaration under the relevant Department of Expenditure provisions specify this in their tenders.
Suspension period: CWC’s declaration carries a two-year suspension.
Condition to check: The 2020 order applied to tenders issued until 31 December 2021. Confirm that your current tender permits the declaration rather than relying on the earlier order alone.
How to apply:
Sign the declaration on your company letterhead and submit it with your bid. CWC states that it will reject a tender submitted without the required declaration.
Although no security money is paid upfront, the declaration still creates an obligation. Read the suspension conditions before signing.
5. Banker’s Cheque
A banker’s cheque is drawn by the bank on its own funds rather than directly on your account. You pay the amount to the bank, which issues the cheque in the tender authority’s name.
Because the issuing bank backs the payment, it gives the owner greater payment certainty than an ordinary cheque, which may be dishonoured.
Who can apply, and who accepts it?
Who can apply: Any bidder who can pay the cheque’s value and the issuing bank’s charge can apply.
Who accepts it: GFR Rule 170(i) lists banker’s cheques for bid security. They are not listed for performance security under Rule 171(i).
Acceptance varies: Some organisations, including CWC, do not accept cheques or demand drafts for EMD.
Cost and processing time:
Charges and processing times differ between banks. Confirm both with the issuing branch before arranging the cheque, especially where the tender requires physical submission by a deadline.
How to apply:
Ask your bank to issue the cheque for the EMD amount in the name specified by the tender. Check the details before issuance, then submit it according to the tender’s instructions.
6. Demand Draft (DD)
A demand draft is a payment order issued by a bank after you pay the required amount. The draft names the recipient, who deposits it through their bank to receive the money.
GFR 2017 specifies an account payee demand draft. This means the payment can be credited only to the named recipient’s bank account.
How it works:
You pay the draft’s value and the applicable bank charge.
The bank issues the draft in the beneficiary’s name.
The owner deposits it through their bank.
Your money remains committed until the security is released and the relevant return or refund process is completed.
Who can apply, and who accepts it?
Who can apply: Any bidder who can pay the required amount and bank charge can apply.
Who accepts it: GFR Rules 170(i) and 171(i) list demand drafts for bid security and performance security.
Condition to check: CWC does not accept demand drafts for EMD, so confirm the tender’s accepted forms before purchasing one.
How to apply:
Request the draft in the beneficiary’s name and at the place specified in the tender. Check these details carefully, then submit the draft using the prescribed process.
7. Fixed Deposit Receipt (FDR)
An FDR is the receipt a bank issues when you place money in a fixed deposit for a specified period. You can submit the receipt to the project owner as security where the tender permits it.
Your money stays with the bank and continues to earn interest. However, you cannot freely withdraw it while the deposit is committed as security.
Who can apply, and who accepts it?
Who can apply: A bidder with sufficient funds to keep the deposit committed for the required period can use this option.
Who accepts it: GFR lists FDRs for bid security and performance security.
Bank requirement: Rule 171(i) requires the performance-security deposit to be with a commercial bank.
Release: The tender specifies when the deposit can be released.
How to apply:
Open the deposit with a commercial bank and submit the receipt according to the tender’s instructions. Ask the bank how it must record or mark the deposit in the owner’s favour.
Before choosing an FDR, consider how keeping the money committed will affect the funds available for ongoing work.
8. Online Payment
Online payment means submitting EMD or another deposit electronically instead of providing a physical instrument. Depending on the tender, you may pay through an e-procurement portal or by bank transfer using NEFT or RTGS.
Electronic payment creates a transaction record and avoids the risk of a paper instrument being lost or arriving late.
Who can use it, and who accepts it?
Who can use it: Bidders with the bank account and banking access required for the specified payment method can use this option.
Who accepts it: GFR lists online payment for bid security and performance security.
CWC requirements: CWC accepts EMD through NEFT, RTGS, or another digital mode permitted by the portal. It also accepts security deposits electronically and requires EMD through its specified electronic methods.
How to pay:
Follow the payment instructions in the e-procurement portal or on GeM. Use the details specified for the tender and retain the transaction record so the payment can be matched to your bid or contract.
9. Retention Money (Security Deposit)
Retention money is a portion of your payment that the owner deducts from running bills and holds as security against defects that appear after completion.
You receive the retained amount after the defect liability period. Some contracts allow earlier release if you replace it with a bank guarantee.
How it works:
The owner deducts an agreed percentage from each running bill.
Deductions continue until the required security-deposit amount is collected.
The contract determines when the money is returned and whether it can be released against another form of security.
Who it applies to:
Contractors do not apply for retention money. The owner makes the deductions according to the contract’s terms.
Deduction and release conditions:
CPWD deductions: CPWD Form 8 provides for a deduction of 5% of the gross amount of each running bill. Deductions continue until the accumulated amount, together with the EMD, reaches 5% of the tendered value. The EMD therefore counts towards the required deposit.
Release against a guarantee: Once the accumulated amount reaches at least ₹5 lakh, release can be requested against a bank guarantee from a scheduled bank.
CWC deductions: For works with a defect liability period, CWC requires a security deposit of 5% of the contract value. It collects this through deductions of 10% from each running bill until the required amount is reached.
CWC refund: The deposit is returned after the defect liability period ends.
You can read more in the guide to the retention money bond.
10. Line of Credit
A line of credit is the main contractor funding option in India, a borrowing limit approved by a bank. You can draw money up to that limit when needed, such as to buy materials or pay workers before receiving payment from the owner.
You pay interest on the amount used. Because the facility provides financing, banks describe it as fund-based.
How it differs from a guarantee:
A line of credit provides working capital for the business.
It is not itself a guarantee or a listed form of tender security under the GFR provisions discussed here.
If you also need a bank guarantee, ask the bank how it will structure the guarantee facility alongside your working-capital arrangements.
Who can apply?
Contractors with a banking relationship and financial records that meet the bank’s requirements can apply.
How to apply:
Submit an application to your bank. The bank assesses the business, including its turnover, before deciding the limit. Bank of India’s contractor scheme, for example, links the limit to 30% of average turnover.
Who accepts it?
A line of credit is used for working capital rather than submitted to an owner as tender security.
You can read the full comparison in Insurance Surety Bond vs Line of Credit.
11. Letter of Credit (Including Standby LC)
A letter of credit is a commitment from the buyer’s bank to pay the seller when documents meeting the agreed conditions are presented.
It can help you buy materials or equipment from a supplier who does not know your business well. The supplier relies on the bank’s payment commitment, provided the documents comply with the credit’s terms.
How it works:
The buyer arranges the letter of credit through their bank.
The seller presents the documents required by the credit.
The bank pays when the documents meet the agreed terms.
A standby letter of credit acts as a backup payment arrangement. It is used if the buyer fails to pay and the standby’s conditions are met. The DGFT guide places both guarantees and letters of credit in the non-fund-based category.
Who can apply, and who accepts it?
Who can apply: A buyer with an appropriate bank limit can apply, including a contractor purchasing materials or equipment.
Who accepts it: Suppliers and sellers accept letters of credit as payment arrangements. The General Financial Rules do not list them as tender security.
Cost and conditions:
Charges depend on the bank, the credit period, and the applicant’s rating. IOB, for example, publishes inland LC charges by period and rating.
How to apply:
Ask your bank to issue the letter of credit in the supplier’s favour. Agree on the required documents and terms before it is issued.
12. Escrow
Escrow is an arrangement in which a neutral third party, usually a bank, holds money until agreed conditions are met. Neither the owner nor the contractor can withdraw the money freely; the agreement determines how and when it is released.
ICICI Bank describes escrow as an arrangement for holding and releasing funds under agreed conditions. In construction, it helps control the flow of project money.
Who can arrange it?
The parties to the project agreement establish the arrangement with an escrow bank.
Where it is used, and what to check:
Construction agreements: MoRTH HAM concession agreements include an article governing the escrow account.
RERA distinction: The MoHUA RERA FAQ of July 2025 states that the 70% account under Section 4(2)(l)(D) is not an escrow account requiring the Authority’s approval for withdrawals. Do not treat the two arrangements as identical.
Tender security: Escrow controls project funds rather than providing tender security.
Documents and charges: These depend on the agreement and the bank.
The parties should understand the conditions governing deposits and withdrawals before setting up the account.
13. Letter of Undertaking (LoU)
In the import trade-credit context discussed here, a letter of undertaking was a commitment from an Indian bank that helped an importer obtain short-term credit for imports.
The RBI stopped banks from issuing LoUs and letters of comfort for import trade credit through its circular dated 13 March 2018. Letters of credit and bank guarantees for import trade credit continued to be available.
Who can apply, and who accepts it?
Who can apply: Bank-issued LoUs are no longer available for this import trade-credit purpose.
Who accepts it: An LoU has no role as tender security in the construction-tender arrangements covered by this guide.
Which Financial Instrument at Which Stage
You may need bid security when submitting a tender, performance security after award, and working capital during construction. The table below shows where each instrument fits so you can plan before the requirement arises.
Stage | Instrument |
Bidding | EMD provided through an accepted insurance surety bond, bank guarantee, demand draft, FDR, banker’s cheque, or online payment; alternatively, a Bid Security Declaration where permitted |
Award | Performance security through an insurance surety bond, bank guarantee, FDR, or demand draft, subject to the tender |
Running the work | Line of credit for working capital and letter of credit for supplier payments |
Billing | Retention money deducted from running bills |
Defect liability period | Retention money, which may be released against a bank guarantee where the contract permits |
Funded projects | Escrow, where the project agreement provides for it |
How to Choose the Right Contractor Financing Option in India
If your tender accepts several options, compare their effect on your cash and bank limit before arranging one. Start with the tender’s requirements, then work through these checks:
Read the tender document first: Confirm which instruments the owner accepts and the required amount, format, validity, and submission process. Do not arrange an instrument that fails to meet those requirements.
Check the effect on your cash: A demand draft commits money upfront, while an FDR keeps funds in a deposit that cannot be freely withdrawn while held as security. A bank guarantee uses your bank limit and usually requires margin money. An insurance surety bond is issued outside that bank guarantee facility, but the insurer may still require collateral.
Check whether an EMD exemption applies: Where the tender permits a Bid Security Declaration for eligible bidders, it avoids an upfront security payment. Confirm both eligibility and the declaration’s conditions.
Compare the two main options: Insurance surety bonds and bank guarantees have different issuers and financial requirements. You can read the full comparison in Insurance Surety Bond vs Bank Guarantee.
Summary
The thirteen contractor financing options and instruments in India cover the financial requirements that can arise from bidding through to the end of the defect liability period. The first eight concern tender security and the forms or alternatives used to provide it. Retention money protects the owner through deductions from payments, while the remaining arrangements support funding and payment protection.
Match each financing option for contractors to its purpose and project stage. Check what the tender accepts, understand the applicable conditions, and compare how each option affects your cash before deciding.
Frequently Asked Questions
Does every government tender accept an insurance surety bond?
No, not every tender accepts it. The General Financial Rules say owners may accept it, so the tender document makes the final choice. Please confirm this before you apply.
What is the difference between EMD and performance security?
EMD secures your bid, and the owner returns it if you do not win. Performance security secures the contract after you win. CWC sets performance security at 5% of the contract value for works above Rs 5 lakh.
Is retention money the same as security deposit?
In CPWD and CWC documents, both names describe the same amount that the owner deducts from running bills. You should still check the wording in your own contract.
Is the 70% RERA account an escrow account?
No, it is not. The MoHUA RERA FAQ of July 2025 says so clearly.
Does an owner accept a line of credit as tender security?
No, it does not. A line of credit gives you working capital and supports your bank guarantee limit, but the General Financial Rules do not list it as security.
