Final rules for mortgage guarantee firms

The Reserve Bank of India (RBI) has released the final guidelines for registration and operation of mortgage guarantee companies (MGCs) in India.

MGCs will be registered as non-deposit-taking NBFCs and should have a minimum net-owned fund of Rs 100 crore, which shall be reviewed for enhancement after three years.

According to RBI regulations, the foreign direct investment (FDI) to be eligible for investment in the equity of an MGC should have prior approval of the Foreign Investment Promotion Board (FIPB).

If the foreign entity that has received FIPB approval is having substantial interest in the applicant mortgage guarantee company, it should be regulated by a home country financial regulator, and should itself preferably be an MGC with a good track record.

However, this rule will not apply if the shareholder of an MGC is an international financial institution.

Housing regulator National Housing Bank (NHB) is partnering US-based AIG United Guarantee Company, Asian Development Bank (ADB), International Finance Corporation Washington (IFC) to set up India's first mortgage guarantee company.

According to the agreement arrived among the partners a few months ago, the NHB will hold 43 per cent stake in the mortgage guarantee company, followed by 41 per cent by United Guarantee Company, and 8 per cent each by ADB and IFC.

"The shareholding requires internal approvals from each partner company. We will be approaching the RBI for registration after it releases the final guidelines for mortgage guarantee companies," a senior NHB official told Business Standard last month.

At least 90 per cent of the business turnover of the MGCs should be mortgage guarantee business or at least 90 per cent of the gross income should be from mortgage guarantee business (which includes the income derived from reinvesting the income generated from mortgage guarantee business), said the guidelines.

According to the guidelines, an MGC shall not be a subsidiary of any other company including a company registered or incorporated under any law in force outside India.

The prescribed capital adequacy ratio is 10 per cent of its aggregate risk weighted assets of on-balance sheet and of risk adjusted value of off-balance sheet items.

Such a company should maintain at least 6 per cent of its aggregate risk weighted assets of on-balance sheet and of risk adjusted value of off-balance sheet items as tier-I capital.

Also, no single guarantee of an MGC should exceed 10 per cent of the company's tier-I and tier-II capital. The MGC will have to hold not less than 25 per cent of its total investment portfolio in central and state government securities.

The remaining investments may be invested as the board considers prudent, but with a ceiling of 25 per cent in listed and rated corporate bonds and debentures or debt-oriented mutual fund units.

The MGCs will not be allowed to invest in subsidiaries and joint ventures.