Reserve Bank of India revises Guidelines on Mortgage Guarantee Companies (MGCs)
a) Capital Adequacy
While calculating the capital adequacy of the MGC, the mortgage guarantees provided by the MGCs may be treated as Contingent Liabilities and the credit conversion factor applicable to these Contingent Liabilities will be fifty percent as against the present applicable credit conversion factor of hundred percent.
b) Contingency Reserve
i. The extant guidelines provide for a lower appropriation to Contingency Reserves if provision made towards losses exceed 35% of the premium or fee earned during a financial year. It does not specify the exact level of Contingency Reserves to be created. It is now clarified that in such a case, the Contingency Reserves could go to a minimum of 24% of the premium or fee earned, such that the aggregate of Provisions made towards Losses and Contingency Reserves is at least 60% of the premium or fee earned during a financial year.
ii. As per the extant instructions, a MGC can utilize the Contingency Reserves only with the prior approval of the Reserve Bank of India. The instruction is now modified to the extent that Contingency reserve can be used without the prior approval of RBI for the purpose of meeting and making good the losses suffered by the mortgage guarantee holders. Such a measure can be initiated only after exhausting all other avenues and options to recoup the losses.
c) Classification on Investments
As per the extant instructions, MGCs may invest in Government securities, securities of corporate bodies / public sector undertakings guaranteed by Government, Fixed Deposit / CDs / bonds of SCBs / PFIs, listed and rated debentures / bonds of corporate, fully debt oriented Mutual Fund Units and unquoted Govt. securities and Govt. guaranteed bonds. It has now been decided that investments made towards Government securities, quoted or otherwise, government guaranteed securities and bonds not exceeding the MGC’s capital may be treated as “Held To Maturity (HTM)” for the purpose of valuation and accounted for accordingly. Investment classified under HTM need not be marked to market and will be carried at acquisition cost, unless it is more than the face value, in which case the premium should be amortised over the period remaining to maturity. The book value of the security should continue to be reduced to the extent of the amount amortised during the relevant accounting period. However, if any security out of this HTM category is traded before maturity, the entire lot will be treated as securities held for trade and will have to be marked to market.
d) Provision for Loss on invoked Guarantees
In case the provisions already held for loss on invoked guarantees are in excess of the contract wise aggregate of ‘amount of invocation’ (after adjusting the realizable value of the assets held by the company in respect of each housing loan), the excess may be reversed; as against the extant instruction which states that the excess cannot be reversed. However, the reversal can be done only after full recovery /closure of the invoked guarantee amount or after the account becomes standard.