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Cover for mortgage loans soon - Mortgage guarantee corporation??

THE National Housing Bank (NHB) is giving final touches to its long-pending plan to form a mortgage guarantee corporation and is targeting to set up the new entity by end of this financial year.

"Our plans for the mortgage guarantee corporation is in an advanced stage. We are hoping that the entity would commence operations by March," RV Verma, chairman and managing director, NHB.

Verma said that the setting up of the corporation would facilitate lenders to provide home loans at cheaper rates. "The corporation would protect lenders against defaults. By doing so, it would lower their risk weights on the loans and also reduce the capital allocations requirement. This should bring down the costs of the lenders and in the process help them to extend loans at a cheaper rate," he said.

The corporation would be set up with equity participation of the Asian Development Bank and International Finance Corporation. "ADB and IFC are likely to be our partners setting up the mortgage guarantee corporation. We will be announcing the technical partners later," Verma said.

NHB is likely to be the largest shareholder in the mortgage guarantee entity.

While ADB and IFC are likely to have stake of around 10-13 per cent stake each in the company, NHB is likely to restrict its holding to below 50 per cent.

Verma informed that the corporation would have an authorised capital of Rs 750 crore and would start operations with a paid up capital of Rs 120 crore. "If needed we will revised the authorised capital upwards if required," Verma said.

Discussions for setting up the entity was initiated in 2002 to compensate banks and housing finance companies in case of defaults by the home loan borrowers.


During recent days, the regulators have expressed concern over the likelihood of rising defaults on home loans in the future.

To discourage lenders, the RBI, in its recent money policy, hike the provisioning requirement on standard loans extended on teaser scheme from 0.4 per cent to 2 per cent.

NHB's Verma, too, feels that excessive lending might be disruptive for the market in the long run and has warned HFCs to do proper assessment of the repayment capacity of the borrowers before pushing teaser loan schemes.


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