100% FDI likely for mortgage guarantee firms

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14 FDI proposals worth Rs 826 crore cleared

New Delhi, Dec 18: The government may treat mortgage guarantee companies as non-banking finance companies (NBFCs). This would enable foreign firms to set up wholly owned subsidiaries in India as there is no foreign direct investment (FDI) cap for NBFCs. The rules governing this are expected to be unveiled soon, according to sources.

The finance ministry favoured the inclusion of mortgage guarantee companies in the relatively relaxed NBFC norms rather than the stricter insurance sector guidelines.

The move would help overseas companies like Genworth Financial, PMI Group, Mortgage Guaranty Insurance Corporation and Radian set up wholly owned mortgage guarantee subsidiaries in India. It will also allow joint ventures such as India Mortgage Guarantee Company Ltd and ICICI Lombard General Insurance start local operations.

Though mortgage guarantee companies usually fall under the non-life insurance sector overseas, in India they want to be governed by rules similar to NBFCs, an industry insider said requesting anonymity. This is because only 26% FDI is allowed in the insurance sector.

Mortgage guarantee companies charge their customers a premium in the form of a monthly, annual or one-time payment, which is generally capitalised in the loan amount. These institutions helps consumers with low credit rating and high risk-profile borrow funds. “These companies provide access to credit to borrowers such as non-salaried qualified professionals and self-employed people, which are generally outside the target profile of lenders,” an analyst said.

In the last Budget, the finance ministry had asked RBI to frame guidelines related to mortgage guarantee companies. RBI then issued draft norms in April 2007, stipulating a minimum net-owned funds criteria of Rs100 crore, among other qualifications. However, this draft did not mention whether NBFC norms or insurance sector regulations would be applicable to mortgage guarantee companies.