The Registration and Operations of Mortgage Guarantee Company in India is governed under the Mortgage Guarantee Companies (Reserve Bank) Guidelines, 2008.
Definition of Mortgage Guarantee Company
As defined in Para No. 2(1)(l) of the Mortgage Guarantee Company (Reserve Bank) Guidelines, 2008, a 'mortgage guarantee company' means a company which primarily transacts the business of providing mortgage guarantee.
Important Related Definitions
Para No. 2(1)(h) "guarantee" means a contract of guarantee as defined in the Indian Contract Act, 1872 (9 of 1872).
Para No. 2(1)(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.
Para No. 2(1)(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.
Registration with the Reserve Bank of India
Para No. 3. A mortgage guarantee company shall commence the business of providing mortgage guarantee after -
(a) obtaining a certificate of registration from the Reserve Bank of India; and
(b) 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.
Para No. 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.
Para No. 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.
Para No. 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.
Para No. 7. The mortgage guarantee company shall be under the regulatory and supervisory jurisdiction of the Reserve Bank of India.
Para No. 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 -
i) comply with any direction issued by the Reserve Bank of India; or
ii) 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
iii) submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank of India.
Minimum Capital requirement
Para No. 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.
Para No. 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.
Para No. 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
Para No. 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.
Para No. 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.
Para No. 16. No single guarantee shall exceed 10% of the company's Tier I and Tier II capital.
Extra Notes for Readers
For detailed guidelines/conditions - please refer the Mortgage Guarantee Companies (Reserve Bank) Guidelines, 2008.