It may be recalled that while announcing proposals for the Union budget 2007-08, the Finance Minister of India announced:

'Our people want housing loans. Banks and housing finance companies that lend against mortgages would have greater comfort if the mortgage can be guaranteed through a three way contract among borrower, lender and guarantor. Regulations will be put in place to allow the creation of mortgage guarantee companies'.

Accordingly, the Bank had framed and placed draft Guidelines on Registration and Operations of Mortgage Guarantee Company on the web-site www.rbi.org.in on April 2, 2007 vide DNBS No. 6625 /03.11.01/2006-07 for comments/suggestion from public/stakeholders.

The major suggestions received were regarding the minimum capital requirement, capital adequacy ratio, trigger point for acquisition of non-performing assets by mortgage guarantee company, prescription regarding tripartite agreement between MGC, creditor institution and the borrower to be replaced by bilateral agreement.

The suggestions were examined with due regard to their import and accordingly certain modifications have been made:

• The earlier requirement that 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 augmented to Rs.300 crore within three years from the date of commencement of business stands modified to state that a mortgage guarantee company shall have a minimum net owned fund of Rs.100 crore at the time of commencement of business. The issue of enhancement shall be reviewed after 3 years.

• Earlier, a mortgage guarantee company was to maintain twelve percent (12%) of its aggregate risk weighted assets as the minimum capital adequacy ratio and at least eight percent (8%) of its aggregate risk weighted assets as Tier 1 capital. On a review, the capital adequacy prescription has been aligned with that prescribed for NBFC-ND-SI and CRAR has been stipulated at 10% with Tier I stipulation reduced to 6%.
• The NPA related trigger point provisions have been formulated keeping in mind the extent to which institutions are to be effectively covered by the product from the risk. In view of the special status of the banking institutions in the country, the criticality of banks for the economy and the recent global experiences of interaction between banks and non-banking financial institutions even in advanced countries, it was considered appropriate to retain this provision.

• The tripartite agreement has been provided as desired in the budget announcement with inbuilt provision for operational convenience/ transparency.