The India Mortgage Guarantee Corporation (IMGC) is a first-of-a kind entity set up in the country. Its primary function would be to offer mortgage guarantees on housing loans. Amitava Mehra,the CEO of IMGC in an interview to L Ramakrishnan says that in the years to come,the aspiring home owner will be able to buy a home earlier and with significantly lower down payments. Excerpts:
What is a mortgage guarantee company and why is there a need for it in India?
A mortgage guarantee company is a non-banking financial company formed under the Mortgage Guarantee Company (Reserve Bank) Guidelines,2008. A mortgage guarantee companys primary business shall be to offer mortgage guarantees against borrower defaults on housing loans from mortgage lenders.
The residential mortgage industry is an important pillar for economic growth of the country. Mortgage guarantee will be able to add significant value to the Indian mortgage sector over the long term through efficient use of capital,risk transfer and risk mitigation,which will also translate to early home ownership for first time home buyers and help expand access to housing in India.
What is the role of the IMGC? What is its structure? How will it function?
IMGC will provide credit guarantees to banks and housing finance companies on behalf of the borrowers. The lending institutions,having taken guarantee cover from a mortgage guarantee company,can benefit from capital relief against such guaranteed loans through lower risk weights.
IMGC has been registered by the Reserve Bank of India (RBI) as the first mortgage guarantee company in India. The company is a joint venture between the National Housing Bank (NHB),Genworth,Asian Development Bank (ADB),and International Finance Corporation (IFC),a member of the World Bank Group. NHB has a shareholding of 38 per cent of IMGC,Genworth has a stake of 36 per cent,while ADB and IFC,have a 13 per cent stake each in the joint venture company.
IMGC will operate under the mortgage guarantee guidelines of the RBI. As per the guidelines,a mortgage guarantee company is required to maintain a minimum capital of Rs 100 crore at all times. One of the key factors for a mortgage guarantee company is its rating. ICRA has assigned an issuer rating of IrAA (Stable),and CARE has issued an in-principle rating of AA+ (Is).
How do you plan to raise capital? What are your short-term and long-term plans?
The joint venture partners have infused the initial capital and will contribute further funds in the form of equity capital,as and when required to meet the capital adequacy requirements as per RBI regulations. Our short-term capital needs will be met by investments from existing partners,and over time we will have to look at alternate sources of funding to meet long-term growth requirements.
The corporations primary clients will be housing finance companies and banks that are presently responsible for the majority of mortgage lending in India. The product will be initially offered on the existing books of lenders to enable both IMGC and the lender partners to smooth out the operating processes before offering the same on new mortgage loans.
How will the formation of the IMGC benefit the aspiring home owner?
As the product matures and regulations evolve,lenders will be able to improve product offering in terms of lower interest rates or higher loan to value (LTV) ratio on the underlying property. For example,an originator may be willing to offer an LTV of 90 per cent loan with guarantee cover as opposed to 80 per cent LTV on a standalone basis,resulting in greater affordability for the buyer (lower equity contribution),thereby stimulating demand. This will lead to early home ownership for a first time home buyer with a lower down payment.
What is the impact the corporation expects to make in the housing finance market?
The mortgage guarantee product will help reduce the quantum of credit risk in lenders portfolio (as some proportion of risk would stand transferred to the company),release capital which can be further deployed in business resulting in higher business volumes and improved profitability,improving return on equity and diversify sources for high quality equity capital for the lender.
The product can also provide greater impetus to the securitisation market,as the requirement of credit enhancement to be provided by the lender would come down if the underlying loans included in the securitised pool have guarantee cover,thereby making such transactions more attractive. Over time,usage of mortgage guarantees by lenders will lead to standardisation of definitions,practices and processes across the industry just like evolution of credit bureaus has led to standardisation of data used for credit appraisals.
This product will provide an alternative equity source and help mortgage lenders maintain prudent capitalisation levels even in unfavourable market conditions,without having their growth prospects curtailed or compromising on shareholder returns.
Is this an Indian version of Fannie Mae? If not,how does it differ?
No,IMGC is not the Indian version of Fannie Mae. The charter of the two institutions is very different,while Fannie Mae is a US government sponsored enterprise to help develop the market; IMGC is a private limited company operating on a commercial basis providing guarantee cover to lenders.
Fannie Mae is formed with the primary purpose to expand the secondary mortgage market by securitising mortgages in the form of mortgage-backed securities. Their business model is to borrow at low rates by selling bonds with implied government guarantee and lending by creating mortgage backed securities. Fannie Mae also assumed credit risk on mortgage loans underlying these assets for a fee,providing guarantee that principal and interest will be paid in case of borrower default.
IMGC is a private limited company,which cannot be a subsidiary of any other company as per the RBI guidelines. The primary business of a mortgage guarantee company is to provide mortgage guarantee on residential mortgage loans for a fee,guaranteeing the repayment of outstanding principal and interest upto the guaranteed amount to a creditor institution,on the occurrence of a trigger event (which is the classification of an account as a non performing asset as per RBI guidelines).
Further,each loan guaranteed will have to pass through the credit screens of the company improving the quality of the portfolio.