What changed
RBI finalised the Guidelines on Registration and Operations of Mortgage Guarantee Companies under Section 45L(1)(b) of the RBI Act, 1934, effective February 15, 2008. Separate notifications (Nos. 4 and 5) also prescribe prudential and investment norms for MGCs. MGCs are now formally classified as NBFCs under Section 45I(f)(iii).
What it means for you
Banks and HFCs can now rely on a regulated MGC sector for credit enhancement on housing loans, potentially reducing their risk weights. MGCs must comply with RBI’s registration, prudential, and investment norms, ensuring a standardised framework. Lenders should update their credit policies to recognise MGC guarantees as per the new guidelines.
What you must do
- Review the final MGC guidelines and prudential norms for compliance alignment.
- Update internal credit policies to recognise MGC guarantees as per RBI framework.
- Ensure any MGC you partner with is registered with RBI under the new process.
- Train credit and risk teams on the definition of default and guarantee contract under these rules.
Who it affects
Mortgage Guarantee Companies, Banks (including cooperative banks), Housing Finance Companies, Borrowers of housing loans
What is the effective date of these MGC guidelines?
The guidelines came into force with immediate effect from February 15, 2008.
Do MGCs need to apply for registration with RBI?
Yes, companies desirous of operating as MGCs must apply to RBI in duplicate using the prescribed format available on the RBI website.
Which institutions are considered 'creditor institutions' under these guidelines?
Creditor institutions include banks (as defined in the guidelines) and housing finance companies.