Central bank eases norms for mortgage guarantee firms

The Reserve Bank of India (RBI) has eased norms for mortgage guarantee companies (MGC), allowing these firms to use contingency reserves to make good the losses suffered by the mortgage guarantee holders without the apex bank's approval.

However, RBI said such a measure can be initiated only after exhausting all other avenues and options to recoup the losses.

The change in the guidelines has been made in the wake of representations received from the industry, and keeping in view the long-term beneficial impact of development of the mortgage guarantee industry.

The extant guidelines provided for a lower appropriation to contingency reserves if provision made towards losses exceeded 35 per cent of the premium or fee earned during a financial year. It did not specify the exact level of contingency reserves to be created. RBI clarified that in such a case, the contingency reserves could go to a minimum of 24 per cent of the premium or fee earned. This would be such that the aggregate of provisions made towards losses and contingency reserves was at least 60 per cent of the premium or fee earned during a financial year.

While calculating the capital adequacy of MGCs, the mortgage guarantees provided by the MGCs might be treated as contingent liabilities. RBI made a change so that the credit conversion factor applicable to these contingent liabilities would be 50 per cent, against the 100 per cent now.

For loss provision on invoked guarantees, RBI said in case these were in excess of the contract-wise aggregate of "amount of invocation", the excess can be reversed. Such a revision was not allowed earlier. However, the reversal can be done only after full recovery or closure of the invoked guarantee amount or after the account becomes standard.

RBI also decided that investments made towards government securities, quoted or otherwise, government guaranteed securities and bonds not exceeding the capital of the MGC's concerned can be treated as "held to maturity" for the purpose of valuation and accounted for accordingly.