Mortgage Guarantee Companies Prudential Norms Updated till June 2012

RBI/2012-13/17 DNBS (PD-MGC) C.C. No. 12/23.11.001/2012-13 July 2, 2012 The Chairman/CEOs of all Mortgage Guarantee Companies Dear Sir, Notification as amended upto June 30, 2012 – “Mortgage Guarantee Companies Prudential Norms (Reserve Bank) Directions, 2008” As you are aware, in order to have all current instructions on the subject at one place, the Reserve Bank of India issues updated circulars / notifications. The instructions contained in the notification No.DNBS (MGC) 4/ CGM(PK) - 2008 dated February 15, 2008 updated as on June 30, 2012 are reproduced below. The updated Notification has also been placed on the RBI web-site ( http://www.rbi.org.in ). Yours faithfully, (Uma Subramaniam) Chief General Manager -in-Charge RESERVE BANK OF INDIA DEPARTMENT OF NON-BANKING SUPERVISION CENTRAL OFFICE CENTRE I, WORLD TRADE CENTRE CUFFE PARADE, COLABA MUMBAI 400 005 Notification DNBS(PD) MGC No.4 /CGM (PK) - 2008 dated February 15, 2008 The Reserve Bank of India, having considered it necessary in the public interest, and being satisfied that, for the purpose of enabling the Bank to regulate the credit system to the advantage of the country, it is necessary to issue the directions relating to the prudential norms as set out below, in exercise of the powers conferred by Section 45JA of the Reserve Bank of India Act, 1934 (2 of 1934) and of all the powers enabling it in this behalf, gives to every Mortgage Guarantee Company the directions hereinafter specified. Short title, commencement and applicability of the directions 1. (i) These directions shall be known as the "Mortgage Guarantee Companies Prudential Norms (Reserve Bank) Directions, 2008". (ii) These directions shall come into force with immediate effect and shall apply to every Mortgage Guarantee Company which has been granted Certificate of Registration under the scheme of Registration of Mortgage Guarantee Companies by the Reserve Bank of India. Definitions 2. (1) For the purpose of these directions, unless the context otherwise requires: (i) “doubtful asset” means an asset which remains a sub-standard asset for a period exceeding 12 months; (ii) “hybrid debt capital instrument”  means capital instrument which possesses certain   characteristics of equity as well as of debt; (iii)  “loss asset” means: an asset which has been identified as loss asset by the mortgage guarantee company or its internal or external auditor or by the Reserve Bank  of India, to the extent it is not written off by the mortgage guarantee company; and an asset which is adversely affected by a potential threat of non-recoverability for reasons like erosion in the value of security or non availability of security or due to any fraudulent act or omission on the part of the borrower, etc.; (iv) “Mortgage Guarantee Company” means as defined in paragraph 2(1)(l) of the Mortgage Guarantee Company (Reserve Bank) Guidelines, 2008; (v) (I)  For the purpose of these directions ‘net owned fund’ means: (a) the aggregate of the paid-up equity capital and free reserves as disclosed in the latest balance sheet of the company after deducting therefrom- accumulated balance of loss; deferred revenue expenditure; and other intangible assets; and (b) further reduced by the amounts representing- (1) investments of such company in shares of- its subsidiaries; companies in the same group; all other non-banking financial companies; and (2) the book value of debentures, bonds, outstanding loans and advances (including hire-purchase and lease finance) made to, and deposits with- subsidiaries of such company; and companies in the same group, to the extent such amount exceeds ten per cent, of (a) above. (II) "subsidiaries" and "companies in the same group" shall have the same meanings assigned to them in the Companies Act, 1956 (1 of 1956).] (vi) ‘non-performing asset’ (NPA) in respect of mortgage guarantee asset means, an asset acquired from the credit institution on the happening of trigger event which is straight away classified as non-performing asset and shall thereafter be classified according to the age of NPA; (vii) “owned fund” means paid up equity capital, free reserves including contingency reserves maintained as per paragraph 18 of the Guidelines on Registration and Operations of Mortgage Guarantee Company, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any; (viii) “standard asset” means the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business; (ix) “sub-standard asset in respect of mortgage guarantee asset” means an asset which has been classified as non-performing asset for a period not exceeding 12 months; (x) "subordinated debt" means an instrument, which is fully paid up, is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the mortgage guarantee company. The book value of such instrument shall be subjected to discounting as provided hereunder: Remaining Maturity of the instruments                  Rate of discount (a) Upto one year                                                       100% (b) More than one year but upto two years                    80% (c) More than two years but upto three years                60% (d) More than three years but upto four years               40% (e) More than four years but upto five years                  20% to the extent such discounted value does not exceed fifty per cent of Tier I capital; (xi) “substantial interest” means holding of a beneficial interest by an individual or his spouse or minor child, whether singly or taken together in the shares of a company, the amount paid up on which exceeds ten per cent of the paid up capital of the company; or the capital subscribed by all the partners of a partnership firm; (xii) “Tier I Capital” means owned fund as reduced by investment in shares of other non-banking financial companies and in shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, ten per cent of the owned fund; Note;- Investment in shares of subsidiaries, companies in the same group and other NBFCs refers to that which has been acquired by the mortgage guarantee company in satisfaction of debt; (xiii) “Tier II Capital” includes the following:- preference shares; revaluation reserves at discounted rate of fifty five percent; general provisions and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses and provisions made on standard assets, to the extent of one and one fourth percent of risk weighted assets; hybrid debt capital instruments; and subordinated debt, to the extent the aggregate does not exceed Tier I capital; (xiv) ‘Turnover or business turnover’ means the total mortgage guarantee contracts entered during the year together with the volume of business arising out of other activities undertaken during the year; (2) Other words or expressions used but not defined herein and defined in the Reserve Bank of India Act, 1934 (2 of 1934) or Mortgage Guarantee Company (Reserve Bank) Guidelines, 2008 contained in Notification DNBS(PD)MGC)No.3 /CGM (PK) - 2008 dated February 15, 2008 shall have the same meaning as assigned to them under that Act or that Directions. Any other words or expressions not defined in that Act or that Directions, shall have the same meaning assigned to them in the Companies Act, 1956 (1 of 1956). Income recognition 3. (i) Income including interest/discount or any other charges on an asset which is NPA or on an asset which is NPA and is taken over from creditor institution on happening of trigger event shall be recognised only on cash basis. (ii) A mortgage guarantee company shall account the premium or fee on the mortgage guarantee contracts as an income in the profit and loss account in accordance with the Accounting Standards issued by the Institute of Chartered Accountants of India. The amount of unearned premium shall be shown as a separate line on the liability side of the balance sheet. (iii) In respect of any other business undertaken by the mortgage guarantee company as specified in Section 45 I (c) of the RBI Act, 1934 within the permitted limit, income shall be recognised as per income recognition norms prescribed for such assets as contained in the "Non-Banking Financial (Non - Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007". Accounting standards 4. Accounting Standards and Guidance Notes issued by the Institute of Chartered Accountants of India (referred to in these directions as “ICAI”) shall be followed insofar as they are not inconsistent with any of the provisions of these directions. Asset Classification 5.  (1)  Every mortgage guarantee company shall, after taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realisation, classify its assets, loans and advances and any other forms of credit into the following classes,  namely: Standard assets*; Sub-standard assets; Doubtful assets; and Loss assets. * Assets acquired under guarantee obligations will not be classified as standard assets. (2) The class of assets referred to above shall not be upgraded merely as a result of rescheduling, unless it satisfies the conditions as stipulated by the Bank from time to time, required for the upgradation. Provisioning requirements 6. (1) Provision for losses on invoked guarantees: A mortgage guarantee company is exposed to a potential loss when its guarantee is invoked. Mortgage guarantee companies shall hold provisions for losses in respect of such invoked guarantees pending recovery of assets. The amount of provisions required to be held shall be equal to the contract-wise aggregate of ‘amount of invocation’ after adjusting the realisable value of the assets held by the company in respect of each housing loan where the guarantee has been invoked. In case the realisable value of the assets held in respect of any invoked guarantee is more than the amount of invocation, the excess shall not be adjusted against the shortfall in other invoked guarantees. In case the amount of provisions already held is in excess of the amount as computed above, the excess shall not be reversed. The amount of provisions made each year shall be shown as a separate line item in the Profit and Loss Account. The amount of provision held for losses on settlement of invoked guarantees shall be shown as a separate line item on the liability side of the balance sheet. (2) Provision for ‘Incurred But-Not-Reported (IBNR) losses’ : A mortgage guarantee company is exposed to a potential loss when there is a default in a housing loan guaranteed by it. Mortgage guarantee companies shall hold provisions in respect of such defaulted housing loans where the trigger event is yet to occur or the guarantee is yet to be invoked. The potential loss to which the guarantee company is exposed to is referred to as ‘Incurred-But-Not-Reported (IBNR) losses’. The amount of provisions required to be held shall be arrived at on an actuarial basis depending upon the estimates of loss frequency and loss severity for incurred but not reported losses which are derived from historic data, trends, economic factors and other statistical data in relation to paid claims, the provisions held for claims settled, risk statistics, etc. In case the amount of provisions already held is in excess of the amount as computed above, the excess shall not be reversed. The amount of provisions made each year shall be shown as a separate line item in the Profit and Loss Account. The amount of provision held for Incurred But-Not-Reported (IBNR) losses shall be shown as a separate line item on the liability side of the balance sheet. (3) Subject to what has been mentioned above, every mortgage guarantee company shall, after taking into account the time lag between an account becoming non-performing, its recognition as such, the realisation of the security and the erosion over time in the value of security charged, make provision against each class as provided hereunder :- (4) Mortgage guarantee assets The provisioning requirement in respect of mortgage guarantee assets shall be as under: (i) Loss Assets

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2012-13/17 · issued 02 Jul 2012. The plain-English explanation above is BankPulse’s own independent summary.

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