Amitava O Mehra, CEO of IMGC, told FE that the RBI should lower the capital adequacy ratio requirement for the sector from the current 10% (of its aggregate risk- weighted assets of on-balance sheet and of risk-adjusted value of off-balance sheet items) to make it more efficient.
He said the more capital mortgage guarantee companies are required to hold, the more expensive their product becomes, which, in turn, affects their viability at this stage of infancy. He pointed out that in other countries such as the US, Canada and Australia, the CAR for such companies is much lower at 4%, 1.7% and 1.8%, respectively.
IMGC is a joint venture in which National Housing Bank has a shareholding of 38%, Genworth has a 36% stake while Asian Development Bank and IFC, a member of the World Bank Group, have a 13% stake each.
Currently, the CAR requirement for banks in India is lower at 9%. Mortgage guarantee product covers the lender/investors for losses arising out of any default in retail mortgage loan credit. The product generally used when loan-to-value (LTV) is over 60-80% gives the lender capital relief while making home ownership possible for borrowers with lower down payment.
Also, as per the current norms, lender cannot increase LTV even if they have the backing of a mortgage guarantee company. We will be asking the RBI to increase the LTV for those loans with a mortgage guarantee product backing. This will incentivise lenders and also help in the growth of the mortgage guarantee segment, Mehra said.
IMGC is also taking up with the RBI the issue of a high contingency reserve requirement. The RBI stipulates that every mortgage guarantee company shall appropriate each year at least 40% of the premium or fee earned during that accounting year, or 25% of the profit (after provisions and tax), whichever is higher, to the Contingency Reserve. Mehra said this requirement would effectively mean that IMGC will have nothing to distribute to shareholders unless it makes profit over 40%.
We understand that we have to have enough reserves. But this is too high. Contingency reserve can be kept at 25-30% (of the premium/fee earned in an accounting year) to ensure that it is attractive enough for investors in mortgage guarantee companies as well as to make sure that we can price our products better. The greater the reserve and capital requirements, the higher the price of the product,Mehra said.
In addition to the contingency reserve requirement, there are other reserve requirements, including on loss provisions and on losses incurred but not reported. All these reserve requirements jack up our costs, Mehra said.
Noting that the home mortgage market in the country is around R6.5 lakh crore, which is just 10% of the overall bank lending worth R65 lakh crore, Mehra said even if IMGC manages to achieve 2-3% penetration of the R6.5- lakh-crore home mortgage market, it will be a major achievement.