Norms eased for mortgage guarantee firms

In line with Finance Minister P Chidambaram's directive to ensure housing to the lower classes, the Reserve Bank of India (RBI) has relaxed the norms for registration and operation of mortgage guarantee companies.

A mortgage guarantee company provides a guarantee on behalf of the borrower to the lender and ensures availability of housing loans to people who fail to procure them.

RBI released the modified guidelines for mortgage guarantee companies (MGC), according to which a mortgage guarantee company has to have a minimum net owned fund of Rs 100 crore at the time of commencement.

After three years of commencement of operations, the issue of enhancement of the minimum capital would be reviewed. The earlier guidelines required a MGC to augment the capital to Rs 300 crore within three years of commencement.

The second relaxation is on capital adequacy, which has been stipulated at 10 per cent, with tier I stipulation reduced to 6 per cent.

The previous guidelines required MGCs to maintain 12 per cent of its aggregate risk weighted assets as the minimum capital adequacy ratio and at least 8 per cent of its aggregate risk weighted assets as tier 1 capital. However, RBI has retained the earlier provision for incurred-but-not-reported (IBNR) losses.

The amount of required provisions shall be arrived at on an actuarial basis, depending upon the estimates of loss frequency and severity incurred but not reported, which are derived from historic data, trends, economic factors and other statistical data in relation to paid claims, the provisions held for claims settled etc.

In case the amount of provisions already held is in excess of the amount as computed above, the excess shall not be reversed. The National Housing Bank has been entrusted with launching a MGC.

RBI had earlier released guidelines on April 2, 2007, following the announcement made by Finance Minister P Chidambaram in the Union Budget.

"Our people want housing loans. Banks and housing finance companies that lend against mortgages would have greater comfort if the mortgage can be guaranteed through a three-way contract among borrowers, lenders and guarantors. Regulations will be put in place to allow the creation of mortgage guarantee companies," Chidambaram had said.

The revised guidelines have been placed on RBI's website for feedback from the public.