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RBI/2013-14/51
DNBS (PD-MGC) C.C. No. 14/23.11.001/2013-14
DNBS (PD-MGC) C.C. No. 14/23.11.001/2013-14
July 1, 2013
The Chairman/CEOs of all Mortgage Guarantee Companies
Dear Sir,
Notification as amended upto June 30, 2013 – “Mortgage Guarantee Company (Reserve Bank) Guidelines, 2008”
As you are aware, in order to have all current
instructions on the subject at one place, the Reserve Bank of India
issues updated circulars / notifications. The instructions contained in
the notification No.DNBS (MGC) 3/ CGM (PK) - 2008 dated February 15, 2008 updated as on June 30, 2013 are reproduced below. The updated Notification has also been placed on the RBI web-site (http://www.rbi.org.in).
Yours faithfully,
(N.S.Vishwanathan)
Principal Chief General Manager
Principal Chief General Manager
Reserve Bank of India
Department of Non-Banking Supervision
Central Office, Centre 1
World Trade Centre
Cuffe Parade, Colaba
Mumbai - 400 005
Department of Non-Banking Supervision
Central Office, Centre 1
World Trade Centre
Cuffe Parade, Colaba
Mumbai - 400 005
Guidelines on Registration and
Operations of Mortgage Guarantee Company under Section 45L(1)(b) of
the Reserve Bank of India Act, 1934
The Reserve Bank of India, in terms of Notification No. DNBS. (MGC) 1 /CGM (PK)- 2008 dated January 15, 2008,
issued in terms of Section 45I(f)(iii) of the Reserve Bank of India
Act, 1934 (2 of 1934) and on being satisfied that it is necessary so to
do, in exercise of the powers conferred under Section 45 L(1)(b) of
the said Act, 1934 (2 of 1934) and of all the powers enabling it in
this behalf, hereby issues these guidelines for compliance of the same
by every non-banking financial company undertaking the business of
Mortgage Guarantee as defined herein.
1. Short title, commencement and
applicability of the directions:
(i) These guidelines shall be known as the "Mortgage Guarantee Company (Reserve Bank) Guidelines, 2008".
(ii) These guidelines shall come into force with immediate effect.
Scope
(iii) These guidelines provide a framework for the registration and operation of mortgage guarantee companies in India.
Definitions
2. (1) In these guidelines unless the context otherwise requires,
(a) "bank" means-
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a banking company; or
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a corresponding new bank; or
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the State Bank of India; or
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a subsidiary bank; or
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such other bank which the Reserve Bank may, by notification, specify for the purposes of these guidelines; and
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a cooperative bank as defined under the Banking Regulation Act, 1949 (10 of 1949);
(b) "banking company" means a banking company as defined in Section 5(c) of the Banking Regulation Act, 1949 (10 of 1949);
(c) "borrower" means any person or any entity who has been
granted a housing loan by any creditor institution or any other
entity which may be specified by Reserve Bank of India from time to
time;
(d) “creditor institution” means a bank or housing finance company;
(e) "company" means a company registered under Section 3 of the Companies Act, 1956;
(f) "corresponding new bank" means as defined in clause (da) of Section 5 of the Banking Regulation Act, 1949;
(g) "default" means non-payment on the due date of any
principal debt or interest thereon payable by a borrower to any
creditor institution ;
(h) "guarantee" means a contract of guarantee as defined in the Indian Contract Act, 1872 (9 of 1872);
(i) "housing finance company" means a company which
primarily transacts or has as one of its principal objects, the
transacting of the business of providing finance for housing, as
defined in the National Housing Bank Act, 1987;
(j) "housing loan" means any loan or advance granted to an
individual or any other entity which may be specified by Reserve Bank
of India from time to time for the purpose of construction / repairs/
upgradation of a house or
residential property or acquisition of a house or
residential property or both i.e. house and residential property;
Explanation:- 'Other entities' would include housing
societies and housing co-operatives in the above definition of 'housing
loan'.
(k) "mortgage guarantee" means a guarantee provided by a
mortgage guarantee company for the repayment of an outstanding housing
loan and interest accrued thereon up to the guaranteed amount to a
creditor institution, on the occurrence of a trigger event;
(l) "mortgage guarantee company" means a company which primarily transacts the business of providing mortgage guarantee;
(m) “mortgage guarantee contract” means a tri-partite
contract among the borrower, the creditor institution and the mortgage
guarantee company, which provides the mortgage guarantee;
(n) "National Housing Bank" means the National Housing
Bank established under the National Housing Bank Act, 1987 (53 of
1987);
(o) “net owned fund” is as notified in the Prudential Norms for Mortgage Guarantee Companies;
(p) "non-performing asset" means account of a borrower,
which has been classified by a creditor institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by the Reserve Bank or the
National Housing Bank as the case may be;
(q) "Reserve Bank" means the Reserve Bank of India constituted under the Reserve Bank of India Act, 1934 (2 of 1934);
(r) "substantial interest" means holding of a beneficial
interest by an individual or his spouse or minor child, whether singly
or taken together in the shares of a company, the amount paid up on
which exceeds ten percent of the paid up capital of the company; or the
capital subscribed by all partners of a partnership firm;
(s) “trigger event” means classification of the account of a
borrower as non-performing asset in the books of the creditor
institution;
(t) ‘turnover or business turnover’ means the total
mortgage guarantee contracts entered during the year together with the
volume of business arising out of other activities (specially permitted
by RBI), undertaken during the year;
2. (2) Words or expressions used but not defined herein
and defined in the Companies Act, 1956 (1 of 1956) or Accounting
Standards issued by the Institute of Chartered Accountants of India,
shall have the same meaning as assigned to them in that Act / Accounting
standards.
Registration with the Reserve Bank of India
3. A mortgage guarantee company shall commence the business of providing mortgage guarantee after -
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obtaining a certificate of registration from the Reserve Bank of India; and
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having a net owned fund of one hundred crore rupees or
such other higher amount, as the Reserve Bank of India may, by
notification, specify.
4. Every mortgage guarantee company shall make an
application for registration to the Reserve Bank of India in such form
as may be specified by the Reserve Bank of India for the purpose.
5. The Reserve Bank of India, for the purpose of
considering the application for registration, shall require to be
satisfied that the following conditions are fulfilled:-
(a) that the mortgage guarantee company shall primarily
transact the business of providing mortgage guarantee. A mortgage
guarantee company shall be deemed to comply with the above when at
least 90% of the business turnover is mortgage guarantee business or at
least 90% of the gross income is from mortgage guarantee business
(which includes the income derived from reinvesting the income
generated from mortgage guarantee business);
(b) that the mortgage guarantee company is or shall be in a
position to pay its liabilities arising from the contracts of
guarantee it may enter into;
(c) that the mortgage guarantee company has adequate
capital structure as stipulated in paragraphs 11 to 13 below and
adequate earning prospects from mortgage guarantee business;
(d) that the general character of the management or the
proposed management of the mortgage guarantee company shall not be
prejudicial to the public interest;
(e) that the Board of Directors of such mortgage guarantee
company does not consist of more than half of its total number of
directors who are either nominees of any shareholder with substantial
interest or associated in any manner with the shareholder with
substantial interest or any of the subsidiaries of the shareholder with
substantial interest if such a shareholder is a company;
(f) (i) Mortgage guarantee company shall have a well diversified shareholding;
(ii) Mortgage guarantee company shall not be a subsidiary
of any other company including a company registered or incorporated
under any law in force outside India;
(iii) No individual, association or body of individuals
whether incorporated or not, partnership firm, company or company
registered or incorporated under any law in force outside India shall,
directly or indirectly, have any controlling interest in mortgage
guarantee company;
(g) the Foreign Direct Investment to be eligible for
investment in the equity of a mortgage guarantee company should have
prior approval of FIPB. If the foreign entity which has received FIPB /
FED 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 a mortgage guarantee company
and have a good track record of operating as a mortgage guarantee
company. However, the above clauses would not be applicable if the
investor in the equity of a mortgage guarantee company is international
financial institution;
(h) that the public interest shall be served by the grant
of certificate of registration to the mortgage guarantee company to
commence or to carry on the business in India;
(i) that the grant of certificate of registration shall
not be prejudicial to the operation and growth of the housing finance
sector of the country;
(j) that the mortgage guarantee company is compliant with the applicable norms for foreign investment in such companies; and
(k) any other condition, fulfillment of which in the
opinion of the Reserve Bank of India, shall be necessary to ensure that
the commencement of or carrying on the business in India by a mortgage
guarantee company shall not be prejudicial to the public interest and
the housing finance sector in India.
6. The Reserve Bank of India may, after being satisfied
that the conditions specified in sub paragraphs of paragraph 5 are
fulfilled, grant a certificate of registration subject to such
conditions which it may consider fit to impose.
7. The mortgage guarantee company shall be under the regulatory and supervisory jurisdiction of the Reserve Bank of India.
8. The Reserve Bank of India may cancel a certificate of
registration granted to a mortgage guarantee company, if such company-
(a) ceases to carry on the business of providing mortgage guarantee in India; or
(b) has failed to comply with any condition subject to which the certificate of registration has been issued to it; or
(c) has failed to honour, in a timely manner, the claims
arising from the contract of guarantee it has entered into or may enter
into; or
(d) at any time fails to fulfill any of the conditions referred to in paragraphs 5 and 6; or
(e) fails to -
-
comply with any direction issued by the Reserve Bank of India; or
-
maintain accounts, publish and disclose its financial
position in accordance with the requirements of any law or any
direction or order issued by the Reserve Bank of India; or
-
submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank of India.
Essential features of a mortgage guarantee
9. The essential features of a mortgage guarantee contract shall be as follows:
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it shall be a contract of guarantee under Section 126 of the Indian Contract Act, 1872;
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the mortgage guarantee contract shall be unconditional
and irrevocable and the guarantee obtained shall be free from coercion,
undue influence, fraud, misrepresentation, and/or mistake under Indian
Contract Act, 1872 ;
-
it shall guarantee the repayment of the principal and
interest outstanding in the housing loan account of the borrower, up to
the amount of guarantee;
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the guarantor shall pay the guaranteed amount on
invocation without any adjustment against the realisable value of the
mortgage property;
-
it shall be a tri-partite contract among the borrower,
the creditor institution and the mortgage guarantee company, which
provides the mortgage guarantee.
10. The mortgage guarantee company shall not carry on insurance business.
Minimum Capital requirement
11. A mortgage guarantee company shall have a minimum net
owned fund of Rs.100 crore at the time of commencement of business,
which shall be reviewed for enhancement after 3 years.
Capital Adequacy
12. A mortgage guarantee company shall maintain a capital
adequacy ratio of ten percent (10%) of its aggregate risk weighted
assets of on balance sheet and of risk adjusted value of off-balance
sheet items or any other percentage that may be prescribed by the
Reserve Bank of India for the purpose, from time to time.
13. A mortgage guarantee company shall maintain at least
six percent (6%) of its aggregate risk weighted assets of on balance
sheet and of risk adjusted value of off-balance sheet items as Tier I
capital.
Prudential and accounting norms
14. The mortgage guarantee company shall be required to
comply with various prudential guidelines including those relating to
income recognition, asset classification, provisioning, classification
and valuation of investments and prudential exposures that are issued
by the Reserve Bank of India from time to time.
15. The mortgage guarantee company shall also comply with
all the relevant Accounting Standards and Guidance Notes issued by the
Institute of Chartered Accountants of India from time to time.
16. No single guarantee shall exceed 10% of the company's Tier I and Tier II capital.
Funding options
17. (1) Acceptance of public deposits - Mortgage guarantee companies shall not accept public deposits.
17. (2) External Commercial Borrowings - Mortgage guarantee companies shall not avail External Commercial Borrowings.
Creation and maintenance of Reserves
Contingency Reserves:
18. A mortgage guarantee company shall create and maintain a
“Contingency Reserve” on an ongoing basis. The mortgage guarantee
company:
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Shall appropriate each year at least
forty percent (40%) of the premium or fee earned during that
accounting year or twenty five percent (25%) of the profit (after
provisions and tax), whichever is higher, to the Contingency Reserve;
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In case of inadequate profits, such appropriation shall either result in or increase the amount of carry forward loss;
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May appropriate a lower percentage of the premium or
fee earned during any accounting year when the provisions made each
year towards losses on account of settlement of mortgage guarantee
claims exceeds thirty-five percent (35%) of the premium or fee earned
during that accounting year;
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Shall ensure that the Contingency Reserve is built up to at least five percent (5%) of the total outstanding mortgage guarantee commitments;
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Shall retain the amounts appropriated each year to the
Contingency Reserve for a minimum period of seven (7) subsequent years
which shall be eligible for reversal only in the eighth year subject
to the condition in 18(d) above;
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Shall utilize the Contingency Reserve only with the prior approval of the Reserve Bank of India;
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Shall show the amount of ‘Contingency Reserve’ as a
separate line item on the liability side of the balance sheet; however,
Contingency Reserve may be treated as 'free reserve' for the purpose
of net owned fund.
Accounting of Unearned Premium
19. A mortgage guarantee company shall account the premium
or fee on the mortgage guarantee contracts as an income in the profit
and loss account in accordance with the Accounting Standards issued by
the Institute of Chartered Accountants of India. The amount of unearned
premium shall be shown as a separate line on the liability side of the
balance sheet.
Provision for losses on invoked guarantees
20. A mortgage guarantee company is exposed to a potential
loss when its guarantee is invoked. Mortgage guarantee companies shall
hold provisions for losses in respect of such invoked guarantees
pending recovery of assets. The amount of provisions required to be
held shall be equal to the contract-wise aggregate of ‘amount of
invocation’ after adjusting the realisable value of the assets held by
the company in respect of each housing loan where the guarantee has
been invoked. In case the realisable value of the assets held in respect
of any invoked guarantee is more than the amount of invocation, the
excess shall not be adjusted against the shortfall in other invoked
guarantees. In case the amount of provisions already held is in excess
of the amount as computed above, the excess shall not be reversed. The
amount of provisions made each year shall be shown as a separate line
item in the Profit and Loss Account. The amount of provision held for
losses on settlement of invoked guarantees shall be shown as a separate
line item on the liability side of the balance sheet.
Provision for ‘Incurred But-Not-Reported (IBNR) losses’
21. A mortgage guarantee company is exposed to a potential
loss when there is a default in a housing loan guaranteed by it.
Mortgage guarantee companies shall hold provisions in respect of such
defaulted housing loans where the trigger event is yet to occur or the
guarantee is yet to be invoked. The potential loss to which the
guarantee company is exposed to is referred to as
‘Incurred-But-Not-Reported (IBNR) losses’. The amount of provisions
required to be held shall be arrived at on an actuarial basis depending
upon the estimates of loss frequency and loss severity for incurred
but not reported losses which are derived from historic data, trends,
economic factors and other statistical data in relation to paid claims,
the provisions held for claims settled, risk statistics, 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 amount of
provisions made each year shall be shown as a separate line item in the
Profit and Loss Account. The amount of provision held for Incurred
But-Not-Reported (IBNR) losses shall be shown as a separate line item
on the liability side of the balance sheet.
Requirement of maintaining Register of guarantees
22. Every mortgage guarantee company shall keep one or
more registers in which shall be entered the particulars of guarantee
provided by the company, namely,
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name and address of the borrower/co-borrower,
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date and amount of loan sanctioned to the borrower,
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brief description of the property including the site/location of the property,
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the nature of security available for the loan,
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tenure of the loan,
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amount of each installment and due date for the payment of each installment,
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name and address of the bank or housing finance company to whom the guarantee has been provided,
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date and amount of the guarantee, and
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duration of the guarantee.
Mortgage guarantee company's obligations
23. The liability of the mortgage guarantee company in
respect of a secured housing loan granted by a creditor institution
where the mortgage guarantee company has provided a guarantee shall be
as stipulated in the contract of guarantee entered into by and between
the mortgage guarantee company, the creditor institution and the
borrower.
24. On any day after a trigger event, the creditor
institution, which has obtained a mortgage guarantee from a mortgage
guarantee company, shall be entitled to invoke the guarantee against
the mortgage guarantee company.
25. The mortgage guarantee company shall make good the
guarantee liability without demur as and when a notice of demand for
the payment of the guarantee liability in respect of the mortgage
guarantee provided by it in favour of a bank or a housing finance
company is received by it.
26. If a housing loan turns into a non-performing asset
and the creditor institution prefers first to realize the loan by
resorting to speedy recovery procedures prescribed in the
Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 and the creditor institution, realizes
some amount of the loan from the borrower, the liability of the
mortgage guarantee company in respect of the loan, will stand reduced
to that extent.
27. As scheduled commercial banks are expected to seek
mortgage guarantee for their housing loans, it has been decided to
align the regulatory prescription of LTV ratio for mortgage
guarantee companies with that of commercial banks and revise it
downwards from 90% to 80% for housing loans exceeding Rs. 20 lakhs.
However for small value housing loans i.e housing loans up to Rs. 20
lakh (which get categorized as priority sector advances), LTV ratio
should not exceed 90%.1
Due diligence to be exercised by a mortgage guarantee company
28. Before offering to provide a guarantee for the
repayment of a housing loan, the mortgage guarantee company shall be
required to be satisfied, amongst others, with the following;
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that the loans are secured by a valid mortgage;
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that the creditor institution has verified title to
the property, marketability of the property and credit worthiness of
the borrower;
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that the creditor institution has verified the use of
the land on which a house or residential property is constructed or
proposed to be constructed out of the loan obtained from it;
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that the creditor institution has verified and
obtained a copy of the permission obtained by the borrower from the
proper authorities for the purpose of construction of the house or
residential property; and
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that the loan granted by a creditor institution to a borrower is not more than 90% of the value of the property.
Prohibitions
29.(1) A housing loan which is not secured by a valid
mortgage of the house / residential property that is or is proposed to
be acquired by such loan shall not be eligible for a mortgage guarantee
from a mortgage guarantee company.
No commissions, rebates or inducements
29.(2) A mortgage guarantee company shall not pay
commissions, rebates, or other inducements for referral of mortgage
guarantee business to any person.
Prohibition on guaranteeing mortgage originations of Related Party
29.(3) A mortgage guarantee company shall not provide
guarantees on mortgage originations of promoters, its / their
subsidiaries, associates and related parties or subsidiaries,
associates and related parties of mortgage guarantee company including
companies where the mortgage guarantee company has a material investment
or interest of five percent (5%) or more of the shareholding.
Investments
29.(4) A mortgage guarantee company shall not invest in
notes or other evidences of indebtedness secured by a mortgage or other
lien upon real property. This section shall not apply to obligations
secured by real property, or contracts for the sale of real property,
which obligations or contracts of sale are acquired in the course of
the good faith settlement of claims under policies issued by the
mortgage guarantee company, or in good faith disposition of real
property so acquired.
Constitution of Audit Committee
30. A mortgage guarantee company shall constitute an Audit
Committee consisting of not less than three non-executive Directors of
the Board of the company, at least one of whom will be a Chartered
Accountant.
Policy for grant of guarantee
31. The Board of Directors of a mortgage guarantee company
shall frame a policy for the company for providing mortgage guarantee
to creditor institutions. Such policy shall, inter alia, stipulate the
following:-
-
the fee or premium chargeable for providing a mortgage
guarantee based on specific identified criteria including the quantum
of loan; LTV ratio; credit quality of the borrower; and credit
appraisal / credit risk management skills of the bank or housing
finance company,
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delegation of power for providing a mortgage guarantee and to enter into a contract of guarantee,
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delegation of power for taking a decision to make good the claims received from banks and housing finance companies, and
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delegation of power for initiating proceedings for the recovery of its dues from the borrowers.
Scheme of Mortgage Guarantee
32. For the purpose of providing mortgage guarantee, the
mortgage guarantee company shall prepare a detailed scheme duly
approved by its Board of Directors. The scheme shall contain, amongst
others, the following matters:
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the quality of a housing loan,
-
the maximum portion of a housing loan granted by a
bank or a housing finance company to a borrower, that may be covered
under the contract of guarantee,
-
the minimum and the maximum LTV ratio of a housing loan proposed to be covered under the contract of guarantee,
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the fee or premium or charge indicating the manner for
the payment there of, payable by a borrower to the mortgage guarantee
company in consideration for the contract of guarantee,
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the liability of the mortgage guarantee company as to
whether the liability will be co-extensive with that of the borrower or
otherwise, and
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the conditions governing the issue as to which party
of the mortgage guarantee company or a bank/ housing finance company
will be required to effect recoveries from the borrower after the
mortgage guarantee is invoked and the guarantee liability is made good
by the mortgage guarantee company to the bank or housing finance
company.
Counter-guarantee
33. Whenever a mortgage guarantee company obtains
counter-guarantee cover in respect of the housing loans guaranteed by
it from another mortgage guarantee company, the mortgage guarantee
company and the counter-guarantee company shall establish and maintain
the reserves required for a mortgage guarantee company in India in
appropriate proportions in relation to the risk retained by the original
mortgage guarantee company and ceded to the assuming counter-guarantee
company so that the total reserves established shall not be less than
the reserves required under Indian law for a mortgage guarantee
company. In case the counter-guarantee company is not regulated by the
regulator(s) in India, the mortgage guarantee company guaranteeing the
claim shall hold relevant reserves and provisions in respect of all
outstanding mortgage guarantee contracts issued by it.
Exemptions
34. The Reserve Bank of India may, if it considers
necessary for avoiding any hardship or for any other just and
sufficient reason, grant extension of time to comply with or exempt any
mortgage guarantee company or class of mortgage guarantee companies or
all mortgage guarantee companies, from all or any of the provisions of
these guidelines either generally or for any specified period, subject
to such conditions as the Reserve Bank of India may impose.
35. The Reserve Bank of India can give any clarification
in respect of the above guidelines and such clarification shall be
treated as part of these guidelines. The guidelines can be amended by
the Bank from time to time.
(P. Krishnamurthy)
Chief General Manager-in-Charge
Chief General Manager-in-Charge
Ozg NBFC Consultant
Ozg Center | Delhi | Mumbai | Chennai | Bangalore | Kolkata
Back Office Phone # 09811415831-37-61-72-84-92-94