The Reserve Bank of India (RBI) has cleared the proposal of National Housing Bank (NHB) to bring down the risk weight associated with the mortgage assets from 100 per cent to 75 per cent.
The housing finance companies had been demanding a reduction in the risk weight to 50 per cent in accordance with the international standards but NHB felt that India is still not prepared for those levels due to lack of foreclosure norms and mortgage insurance companies.
Internationally, housing loans are also backed by insurance whereby the insurance company underwrites the risk arising out of non-payment of loans.
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The 25 per cent reduction in risk weightage will enable the HFCs to increase their business by another 25 per cent without a need to raise fresh additional capital.
A company with a net worth of 60 crore, thus, would be able to increase its housing loan portfolio to Rs 800 crore instead of Rs 600 crore with a 100 per cent risk weightage and with a capital adequacy ratio of 10 per cent.
The HFCs contention was that since the mortgage assets do not depreciate and are therefore secure, the Basle risk weight should be brought down from 100 per cent to 50 per cent.
NHB had amended the NHB Act so as to put foreclosure laws in place on June 12, 2000. Under the changes, a recovery officer under each HFC will be appointed by the NHB to ensure recovery. The changes have been sent to the government for notification through the gazette and the notification is expected to come out soon.
In order to introduce mortgage insurance in India, NHB is getting technical assistance from the Canada International Development Agency (Cida). Under the arrangement, NHB had recently gone to Canada to study the mortgage insurance model in Canada.
In order to solve the problem of long term availability of funds in the sector, NHB is also contemplating setting up of a mortgage backed securitisation fund which will take care of the HFCs problem of asset-liability mismatch, he felt. The reduction in stamp duties by five state governments including Tamil Nadu, Karnataka, Gujarat, Maharashtra and West Bengal to 0.1 per cent will further enhance funds available for securitisation.