India has been rapidly modernizing its banking and debt laws to make then in sync with Basel-II accounting norms. First there were the Debts Recovery Tribunals (DRT), then came the Securitisation Act (SRFAESI Act) that let to coming into being of Asset Management Companies, and now it is the turn of Mortgage Guarantee Companies (MGC) to set foot in India. The central bank of India - Reserve Bank of India (RBI) , has issued notification permitting setting up of MGC.
The notification issued on 15-1-2008 places MGCs on par with Non-Banking Finance Companies and exempts them from the certain provisions of RBI Act relating to registration, liquidity and transfer of profits. With MGCs coming into existence the Banks in India would be relieved of their paper works and associated legal hazels in lending monies against mortgages. The MGC would be doing all the paper works to evaluate the asset being mortgaged and the credit worthiness of the borrower and then underwrite the deal. Once the MGC guarantees the deal, the bank would simply lend the money to the borrower without as much a bating an eyelid. Should the borrower default on the payment of installments, the bank would raise a demand on the MGC and not on the borrower. The MGC would pay up the bank and then recover the amounts from the borrower. While this would certainly increase the comfort level of the Banks in lending money to the borrowers against mortgages, there is huge scope for new entrepreneurs to enter India and do business in an area where the western countries are already light years ahead.
I think the borrowers and house hunters are also not going to grudge either. All said and done, the loan bazaar is sure to get further heated up. Housing loans may be marketed like chocolates and pepper-mints – hitherto an unknown concept in these parts of the world. After a over doze of these high calorie fad foods you are ‘advised’ to go on a crash diet course under the guidance of a ‘doctor’. Some thing similar can be expected in this field too. Those looking for a 2 bed room apartment may be ‘persuaded’ to go in for a 3 or 4 bed room apartment, and those looking for a 3 bed room house may be tempted to go in for a penthouse. Then one fine day find that the installment simply too steep to keep pace with. This is what led to thousands of mortgages being foreclosed and the consequent cascading sub-prime effect. But that will have to wait till the MGCs start to function.
One has to wait and see who are early birds!!!
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