With the robust Indian economy and consequent increase in housing loans vis-a-vis the ambivalent stand of the Government of India ("GOI") on recognizing mortgage insurance and related products to protect the creditors on the occurrence of default by borrowers, the Reserve Bank of India ("RBI") has finally introduced the model of Mortgage Guarantee Companies ("MGC") in India.

A Mortgage guarantee company is essentially a company which primarily transacts the business of providing Mortgage guarantee.

A Mortgage guarantee is basically a guarantee provided by a mortgage guarantee company for repayment of an outstanding housing loan and interest accrued thereupon to the guaranteed amount to a creditor institution on the occurrence of a default by the borrower.

All mortgage guarantee companies are subject to the regulatory supervision of the RBI

The highlights of the latest mortgage guarantee guidelines released by RBI vide its notification dated 15th February, 2008 are as follows:

  1. Mortgage guarantee contracts are required to be tri-partite among the borrower, the creditor and the mortgage guarantee company in the nature of contracts of guarantee as per Indian Contract Act, 1872 and are also required to be irrevocable and unconditional. The guarantee obtained must be free from coercion, undue influence, fraud and misrepresentation.
  2. Mortgage guarantee contracts guarantee the repayment of the principal and interest outstanding in the housing loan account of the borrower, up to the amount of guarantee.
  3. Mortgage guarantee companies are not allowed to carry on insurance business of any nature.
  4. Every foreign investor intending to set-up a mortgage company requires prior approval of the Foreign Investment Promotion Board (FIPB).
  5. A mortgage guarantee company must have a minimum net owned fund of Rs. 1 Billion (US $ 25 Million) before commencing the business of providing mortgage guarantee and the same is subject to be reviewed for enhancement every 3 years.

Mortgage Guarantee Companies are also required to maintain a capital adequacy ratio of (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 RBI for this purpose, from time to time.

Mortgage guarantee companies prior to offering mortgage guarantees are required to conduct a detailed due-diligence in order to satisfy itself :

  1. The validity of the security on the guaranteed loan.
  2. The credit worthiness of the borrower, title to the property and marketability of the property.
  3. That the creditor has verified the use of the land on which a house or residential property is constructed or proposed to be constructed.
  4. That the creditor 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; and
  5. That the loan granted by the creditor is not more than 90% of the value of the property.

It would be interesting to see how the Indian market accepts and adopts the RBI mortgage guarantee guidelines / regulations and whether similar insurance products would be introduced or not by the Indian Insurance Regulator in the near future.

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