News: Foreign investors in India likely to become "significant" investors

(BL 03/04/2007) Mumbai - Foreign investors may be allowed as "significant" investors in the proposed mortgage guarantee company subject to approvals from Foreign Investment Promotion Board /FEMA, according to draft guidelines issues by the RBI on mortgage guarantee companies. The foreign investor should be a well diversified entity in its home country, should be regulated by its financial regulator and have a good track record of operating as a mortgage company, said an RBI notification. The RBI's guidelines come in the wake of the Finance Minister's announcement in the Union Budget that regulations would soon be put into place for the creation of mortgage guarantee companies for facilitating the growth of home 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," the Finance Minister, P. Chidambaram, said in his speech. A mortgage guarantee company primarily transacts the business of providing mortgage guarantee (repayment of a housing loan and interest accrued to the guaranteed amount to a bank or housing finance company), on the occurrence of a trigger event. Rs 100-cr floor According to the draft guidelines, a mortgage guarantee company should have a minimum net owned fund of Rs 100 crore at the time of commencement of business, which should be augmented to Rs 300 crore within three years from the date of commencement of business, said the notification. The company would also be required to maintain 12 per cent of its aggregate risk weighted assets as the minimum capital adequacy ratio. A mortgage guarantee company would also be required to maintain at least 8 per cent of its aggregate risk weighted assets as Tier 1 capital. No single guarantee for a housing project should exceed 10 per cent of the company's Tier I and Tier II capital. These companies will not, however, be allowed to accept public deposits. The guidelines stipulate that 90 per cent of the company's business turnover should be from the mortgage guarantee business.