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RBI Guidelines for Mortgage Guarantee Company

The Mortgage Guarantee Company is registered to provide mortgage guarantee for the repayment of an outstanding housing loan and interest accrued thereon up to the guaranteed amount to a creditor institution.

What is Mortgage Guarantee Company?

Mortgage Company means a Company registered with the Bank as Company which has primarily the business of providing mortgage guarantee. The company provides guarantee 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;

What is the procedure of Registration of Mortgage Guarantee Company?

• Every companies shall make an application for registration to the Reserve Bank in such form as may be specified by the Reserve Bank for the purpose.
• Following conditions shall be fulfilled by mortgage guarantee company:
• Shall have a net owned fund of one hundred crore rupees or such other higher amount, as may be satisfied by Reserve Bank.
• Shall primarily transact the business of providing mortgage guarantee.
• At least 90% of the gross income or business turnover shall be from mortgage guarantee business.
• Shall pay its liabilities arising from the contracts of guarantee it may enter into.
• Shall have an adequate capital structure as stipulated below in this article.
• The general character of the management of the mortgage guarantee company shall not be prejudicial to the public interest.
• The Board of Directors of mortgage guarantee company shall not consist more than half of its total number of directors who are a nominee of shareholders who have a substantial interest or associated in any manner with such shareholder or if a shareholder is a company than a subsidiary of such shareholders.
• Shall have a well-diversified shareholding.
• Shall not be a subsidiary of any other company including a company registered or incorporated under any law in force outside India.
• 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
• FDI policy is applicable to Mortgage Guarantee Companies for any FDI. However, if foreign entity has a substantial interest in the applicant mortgage guarantee company, it should be regulated by a home country financial regulator and should itself preferably be a company and have a good track record of operating as a mortgage guarantee company. The above clause is not applicable if the investor in the equity of a mortgage guarantee company is an international financial institution.
• On satisfaction of Conditions, the mortgage guarantee company shall be granted a certificate of registration to commence or to carry on the business in India subject to such conditions which it may consider fit to impose.
• Grant of a certificate of registration shall not stop to operate and growth of the housing finance sector of the country.

Cancellation of Certificate:

• Reserve Bank can cancel a certificate of registration granted to a mortgage guarantee company if company:
• ceases to carry on the business of providing mortgage guarantee in India
• has failed to comply with any condition subject to which the certificate of registration has been issued to it;
• has failed to honor, in a timely manner, the claims arising from the contract of guarantee it has entered into or may enter into;
• fails to comply with any direction issued by the Reserve Bank;
• fails to 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;
• fails to submit or offer for inspection its books of account or other relevant documents when so demanded by the Reserve Bank.

Mortgage Guarantee Contract:

Mortgage guarantee contract means a tri-partite contract between the borrower, the creditor institution and the mortgage guarantee company, which provides the mortgage guarantee. The contract shall comply following:

• The Contract of Guarantee shall be contracted under Section 126 of the Indian Contract Act, 1872^[1].
• The Contract of Guarantee 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.
• The contract shall contain provisions of the repayment of the principal and interest outstanding in the housing loan account of the borrower, up to the amount of guarantee.
• The guarantor shall pay the guaranteed amount on invocation without any adjustment against the realizable value of the mortgaged property.

Funding Options:

• Acceptance of public deposits:

Mortgage guarantee companies shall not accept public deposits.

• External Commercial Borrowings:

Mortgage guarantee companies shall not avail External Commercial Borrowings.

• Insurance Business:

Company shall not carry on insurance business.

Capital Requirement:

• A 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.
• A company shall maintain capital adequacy ratio at all time.

Investment Policy:

A mortgage guarantee company shall invest only in the following instruments:

• Government Securities;
• Securities of corporate bodies / public sector undertakings guaranteed by Government;
• Fixed Deposit / Certificate of Deposits/bonds of Scheduled Commercial banks / PFIs;
• (listed and rated debentures/bonds of corporates;
• fully debt oriented Mutual Fund Units;
• unquoted Government securities and Government guaranteed bonds.

No other investment including investment in subsidiaries and joint ventures would be permitted.

A company can hold investments in equity shares of any company which may be quoted or unquoted or other unquoted investments acquired in satisfaction of its debts which shall be disposed of by the mortgage guarantee company within a period of three years or within such period as extended by the Bank, from the date of such acquisition.

Compliances:

• company shall keep registers in which shall be entered the particulars of guarantee provided by the company.
• Before offering to provide a guarantee for the repayment of a housing loan, the mortgage guarantee company shall be required to conduct due diligence.
• Company shall communicate to Reserve Bank of India, not later than one month from the occurrence of any change in details of director’s name, address or change in director.
• A 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.
• The policy for the company for providing mortgage guarantee to credit institutions shall be duly approved by the BOD.

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