The Hindu Business Line : Guarantee or insurance — Foreign investment norms make difference

Mumbai, June 27 The subtle difference in the services provided by a mortgage guarantee company and a mortgage insurance company may throw up regulatory issues.

The Reserve Bank of India had recently come out with draft guidelines for setting up mortgage guarantee companies. A mortgage guarantee company mainly provides guarantee to a lender against a default of loan given against a property, say a housing loan. This is considered a non-banking financial service and could be a tripartite agreement between borrower, lender and guarantor.

Mortgage insurance is also a cover given by an insurance company to a lender against the default of loan against property. In the case of insurance, however, there may be several incidents that are listed under which insurance will kick in. The insurer also lays down conditions that they will not be liable, if x, y or z happens. Mortgage insurance’ helps individuals buy houses with a down payment of less than 20 per cent and the insurance is bought by the lender and paid for by the borrower.

While the distinction between the products might seem subtle, the foreign investment regulation for the companies is markedly different. In the case of mortgage guarantee company — which is treated as a non-banking finance company — foreign investors can set up 100 per cent subsidiaries.

According to RBI’s draft guidelines, foreign investors may be allowed as “significant” investors in the proposed mortgage guarantee company subject to approvals from the Foreign Investment Promotion Board. But in the case of insurance ventures, foreign equity is restricted to 26 per cent.

The Insurance Regulatory and Development Authority (IRDA) is examining the distinction between these products to prescribe appropriate regulations. It is now working on regulations regarding minimum capital requirements, solvency and guidelines with respect to designing products for mortgage insurance companies.

Regulatory conflict

“There is a regulatory conflict here as mortgage guarantee is a financial product and would be a part of a non-banking finance company’s activity, which would be under RBI’s jurisdiction. But the distinction between mortgage guarantee products and mortgage insurance products offered by companies abroad is blurred,” said a senior IRDA official.

“Globally, however, mortgage guarantee companies have not come under the insurance regulator’s jurisdiction,” explains a senior IRDA official.

Jurisdiction issue

The issue came to light when the US-based Genworth Financial Inc approached the IRDA to set up a mortgage guarantee company in India but the regulator told the company that an NBFC was not within its jurisdiction. In March, Genworth received the Foreign Investment Promotion Board’s permission to offer mortgage guarantee products and invest $50 million in the venture.

However, when General Insurance Corporation of India, National Housing Bank and New India Assurance approached the IRDA to set up a mortgage insurance company, the regulator asked the companies to put their plans on hold until the regulations were framed. ICICI Lombard General Insurance has also expressed its desire to market mortgage insurance products.

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