Reverse Mortgage Facilities in India For Cash Poor Home Rich Senior Citizens

Transcription

1 BANKING AND FINANCE 468 Reverse Mortgage Facilities in India For Cash Poor Home Rich Senior Citizens There has been a limited academic debate on the prospects and problems attributable to reverse mortgage facility (RMF) in India. Still, there is a scope of improvement in the RMF market. The market may be developed and promoted, if all the constituents like governments, lenders and other intermediaries design and implement favourable policy guidelines. In view of low uptake of the product, this paper examines reverse mortgage as one of the ways of unlocking housing equity to supplement retirement income if any for cash poor elderly citizens and provides in-depth review and analysis of reverse mortgage programme in India. It briefly explains the salient features of Reverse Mortgage Scheme, 2008, and operational guidelines issued by the National Housing Bank. It also describes available home equity conversion product in India and abroad. Some of the suggested key policies like counselling have also been listed. An attempt has been made to enumerate emerging trends and forward-looking actions in RMF in this article. CA. Ashok K. Malhotra (The author is a member of the Institute. He can be reached at eboard@icai.org.) About Reverse Mortgage The status of parents is that of a God as per the Indian culture. Even in the ancient Indian history, we come across sayings like Matrudeo Bhava, Pitrudeo Bhava, etc. The famous Shravankumar s story which was stated in the Ramayana establishes this status. The Indian culture considers parents as the first teachers of their children. The foundation of their life is built by them. So, it should be the moral duty of children to look after their parents and support their needs. In joint-family system, all members are cared for by the family itself. But nowadays, the concept of a joint family is collapsing. Because of industrialisation, moneymindedness and an increase in market prices, children have started neglecting their parents. They have no time to look after their parents because of their busy schedule. Besides, there are many elderly childless couples. Some 92 THE CHARTERED ACCOUNTANT september 2010

2 469 BANKING AND FINANCE of these elderly people have cash poor - home rich status. Consequently, under the Maintenance and Welfare of Parents and Senior Citizens Act, 2007, the Central and State Governments have been empowered to implement various programmes for the betterment of the senior citizens. The main objective of old age security programmes is to ensure the financial independence and dignity of the senior citizens of India. In addition to this Act, financial programmes were announced to achieve old age security. Two such schemes are the reverse mortgage facility and the new pension scheme. It has been over two years since a contemporary product reverse mortgage facility (RMF) was announced by the Hon ble Finance Minister of India in his budget speech in As per the speech, some of the reputed organisations may introduce reverse mortgage facility under which house-owner senior citizens can avail of finance against the mortgage of their house equity, while still occupying and staying in the house. RMF in India is still in an infancy stage. It is yet to gain significant acceptance by senior citizens. Reverse mortgage facilities are home-loan products designed for senior citizens of over 60 years of age by converting their home equity into liquid form. It is a way of getting the benefits of the home equity by retaining the home ownership and also without having to make any repayments. The borrowers, especially after retirement will definitely find the RMF a useful financial product that provides them financial independence. In case of married couples, at least one of them should be above 60 years in a joint borrowing to avail of this product. Normally, loan is offered for a maximum period of 20 years. There are no income qualifications to avail RMF unlike regular mortgages as borrowers are not required to repay outstanding Reverse mortgage facilities are homeloan products designed for senior citizens of over 60 years of age by converting their home equity into liquid form. It is a way of getting the benefits of the home equity by retaining the home ownership and also without having to make any repayments. loan. The lender, besides scrutinising the property papers, ensures that the borrowers pay all the taxes and charges towards the property regularly. The property is free from any encumbrance and is maintained in the saleable condition with adequate insurance cover against fire and other perils. There has been a limited academic debate on the prospects and problems attributable to the RMF in India. Nevertheless, there is a great scope of improvement in its market. Its market can only be developed and patronised, if all the constituents like governments, lenders and other intermediaries design and implement favourable policy guidelines. We will examine reverse mortgage as one of the ways of unlocking housing equity to supplement retirement income for cash poor elderly citizens and provides an in-depth review and analysis of the programme in India. Design and Features of Various Reverse Mortgage Facilities Central Government, in the exercise of powers conferred by the Clause (xvi) of the Section 47 of the Income-tax Act, 1961, has come out with the Notification No. 93/2008, dated September 30, 2008, with a scheme, i.e. Reverse Mortgage Scheme, 2008, which came into effect from April 1, Currently, under the scheme, the National Housing Bank established under the Section 3 of the National Housing Bank Act, 1987, any scheduled bank included in the second schedule to the Reserve Bank of India Act, 1934, or a housing finance company registered with the National Housing Bank will be the approved lending institute. The borrower under the scheme is known as reverse mortgagor. The disbursement of loan to eligible reverse mortgagor can be in any of the following modes: (I) Periodic payments to be decided mutually between the approved lending institution and the reverse mortgagor (II) Lump sum payment in one or more trenches to the extent that the aggregate of the amount disbursed as lump sum payments do not exceed 50 per cent of the total loan amount sanctioned (III) Committed line of credit with an availability period agreed upon mutually to be drawn down by the borrower The tenure of the loan shall not be beyond 20 years from the date of signing the agreement by the borrower and the approved lending institution. The reverse mortgagors or their legal heirs or estate shall be liable for repayment of the principal amount of loan along with the interest to the approved lending institution at the time of foreclosure of the loan agreement. In US, there are three types of reverse mortgages: federally insured, lender insured and uninsured. Moreover, three distinct products are - Home Equity Conversion Mortgage (HECM), Fannie Mae Home Keeper Reverse Mortgage and Cash Account. These products differ according to the residential property to be mortgaged, payment types, loan amount, processing fees and interest on the loan balance. Another variation in the product can be the payment of annual accrued interest once in a year based on the convenience of the borrower. National Housing Bank, a subsidiary of the Reserve Bank of India (RBI) has september 2010 THE CHARTERED ACCOUNTANT 93

3 BANKING AND FINANCE 470 also announced operational guidelines for granting of the RMF. The guidelines are applicable to the housing finance companies registered with the NHB within the overall framework of the RMF. Primary lending institutes have the discretion to place suitable safeguards keeping into view the inherent risks. One of the eligibility criteria under the scheme is that the title of the residential property to be mortgaged should be free from encumbrances and mortgagor should have a clear title or ownership. This criterion is vague as it is left to the discretion of primary lending institutions (PLIs) to decide the extent of existing loan which under the normal mortgage will be treated as free from encumbrances. Moreover, most of the residential houses sold earlier by government bodies like the DDA or the GDA are on a 90-year lease. It has not been made clear in the guidelines as to whether senior citizens owning such residential properties are eligible prospects under the RMF. The maximum amount of loan that can be approved depends on the market value, age of the youngest borrower and the prevalent interest rate. However, the PLIs will have to apply prudence to determine the loan quantum reckoning the no-negativeequity guarantee being provided by the PLIs. The PLIs may consider ensuring that the equity to value ratio does not at any time during the tenor of the loan fall below 10 per cent and considering revaluing the property mortgaged at least once every five years. The quantum of loan may undergo revisions based on such revaluation of property at the discretion of the lender. The RMF can not be used for speculative, trading and business purposes. However, the document has provided a list of end use of funds as per the NHB guidelines which are: (I) Upgradation, renovation and extension of residential property (II) For uses associated with home improvement, maintenance/ insurance of residential property (III) Medical, emergency expenditure for maintenance of family (IV) For supplementing pension/other income (V) Repayment of an existing loan taken for the residential property to be mortgaged (VI) Meeting any other genuine need Counselling consideration for such a complex financial product is to be taken up seriously. The senior citizens should be treated more fairly in explaining important terms of the agreement. For example, the lenders must clarify the implication of fixed and floating rate of interest in a transparent manner, upfront to the borrowers. Similarly, the methodology of the revaluation process of mortgaged property and the frequency/schedule of such revaluations should be clearly specified to the borrowers upfront. As a customer-friendly gesture and in keeping with international best practices, after the documents have been executed and loan transaction finalised, the borrowers may be given at least three business days to cancel the transaction under the right of rescission clause. Besides, the rationale behind the decision of mode of payment and fixation of the loan tenure shall be clearly disclosed to the borrowers. A detailed schedule of verification charges of external firms, National Housing Bank, a subsidiary of the RBI has also announced operational guidelines for granting of the RMF. The guidelines are applicable to the housing finance companies registered with the NHB within the overall framework of the RMF. Primary lending institutes have the discretion to place suitable safeguards keeping into view the inherent risks. title examination fees, legal charges, stamp duty and registration charges, property survey and valuation charges should be specified and provided to the prospective borrowers upfront by the lenders without any ambiguity. The lenders are required to observe and maintain high standards of conduct in dealing with senior citizens and their families and to treat them with special care. The borrowers may be suggested to nominate their personal representatives usually a close relative. Most of the code of conducts should be observed pre & post finalisation of the loan agreement. There are many income-generating competing products consuming home equity in the markets. They include the reverse mortgage (RM), subletting, downsizing and lease buyback scheme (LBS). Since acceptability of any innovative financial product takes time and in order to make it viable, focused attention is required. Lenders, borrowers, intermediaries and even the regulators may not understand completely the implications or risks associated with it because of lack of data and experience in handling these products. That is the reason why conventional financial products are adopted without much resistance by the investors and the borrowers. Over a period of time, different variations of financial products have been evolved wherein home equity can be converted in to liquid forms that are suitable to borrowers. Some such schemes are not offered in India. Such schemes are available in advanced countries: 1. Sale and lease back of residential property: The homeowner sells the house but keeps the right to live in the house till the time that it is his prime residence. The amount could be used for home improvement or a health need, etc. The investor s return is the periodic lease money. 2. Interest-only Mortgage: The borrower takes lump sum amount 94 THE CHARTERED ACCOUNTANT september 2010

4 471 BANKING AND FINANCE and pays only interest during his lifetime. The principal is recovered at the time of sale from the proceeds of the home. 3. Mortgage Annuity: The loan against the mortgage is used to purchase an annuity for the homeowner. The advantage is that even if the homeowner moves out of the home, the annuity will continue till his death. 4. Shared Appreciation Mortgages provide interest free loan or loan at a very low rate with no repayment date. The lender gets a preagreed share in any appreciation in the property value over the accumulated value of the loan at the time of sale or death of the borrower, but does not share any decline in value. Shared Equity Mortgages (SEMs) are similar in effect to housing partnerships. SEMs are occasionally arranged among family members and sometimes with third party investors. With SEMs, there are three parties to the mortgage contract, the homeowner, an investor, and a mortgage lender. In effect, both the homeowner and the investor buy shares in the property. In some cases the investor and mortgage lender may be the same. In developed countries like USA, Europe and Australia, there are also some private reverse mortgages that are not insured by the government, e.g. Lenders, borrowers, intermediaries and even the regulators may not understand completely the implications or risk associated with it because of the lack of data and experience in handling these products. That is the reason why conventional financial products are adopted without much resistance by the investors and the borrowers. the Home Keeper for Home Purchase program recently begun by Fannie Mae under which the homeowner s price risk is shared with other investors. In nutshell, the multiple reverse mortgage products are offered with similar structural features. There are different costs involved with various degree of flexibility: Risks Associated with Various Reverse Mortgage Facilities There are diversifiable and nondiversifiable risks in RMF transactions. As noted above, borrower longevity, interest rates and future property values are the primary sources of collateral risk for the reverse mortgage lender. Diversifiable risks, based on the law of large numbers, can be pooled and managed through insurance. So far, there is no insurance product in India to cover longevity risk completely. This is managed by the lender to a limited extent. Longevity: The lenders have to evaluate the risk of the individuals outliving the agreement of reverse mortgage, as the borrowers are not required to vacate the house. Only the annuity payments will stop. This is one of the scenarios in the decisionmaking process for the lenders. As stated above, longevity as a risk can be managed through insurance. This is one of the reasons for not having life-time annuity product in India under the reverse mortgage scheme. Central Bank of India has signed up a strategic alliance with Star Union Dai-ichi Life Insurance for a life-long annuity. One of the problems attributed to longevity risk is that of adverse selection of the borrowers. Adverse selection is a problem of asymmetric information. Normally, life insurance contracts take care of the risk of adverse selection by medical examination carried out on the individuals. Reverse Mortgage Facilities are primarily meant for old age security. The problem of adverse selection can not be completely mitigated as there is no provision of medical examination in the scheme. Longevity risk is to be managed by the lenders in collaboration with insurance companies who have knowledge and experience in dealing with the risk. Interest Rates: The lenders of RMF are responsible for managing non-diversifiable interest rate risk that is appearing on the balance sheet, by adopting Asset-Liabilities matching techniques. Most of the lenders normally manage interest risks in two ways. If the RML is at fixed rate facilities, the lenders may incorporate interest rate reset clause in the reverse mortgage documents. A reset clause permits banks to review rates at the end of certain number of years. The lenders should formulate the Reset Clause policy as the policy depends on the quantum and tenure of the loan as well as on shape and level of the interest yield curve. The implications of the reset clause are shared with the borrowers. Effectively, this makes the fixed rate loans equivalent to floating rate ones. The guidelines on the subject published by the Corporation Bank cover both fixed and floating rate of interest. In either case, it is not beneficial to the borrower, hence the risk. The second way to manage the risk is to reduce the loan commitment or annuity amount. Alternatively, loan margin can be adjusted in such a manner that the impact of interest rate risk on the outstanding loan is reduced. Nevertheless, the NHB, in order to promote the RMF, should absorb losses in extreme cases eventually. As such, the insurers of reverse mortgages are partially hedged from interest rate risk by the security interest that the lenders have in the property. The insurers are hedged to the extent that property appreciation is positively correlated with interest rate changes. september 2010 THE CHARTERED ACCOUNTANT 95

5 BANKING AND FINANCE 472 Property Value: Value of the property is exposed to two kinds of risks. Diversifiable risk can be considered through large number of mortgage cases. But non-diversifiable risks like economy recession at the national level can be mitigated through reinsurance. Variation of individual property values around the average, or expected value increases over time. In other words, the likely error of estimation of the property value is greater if the period of prediction is longer. Aforementioned risks are being managed in developed countries mainly through insurance and with the terms of the agreement with borrowers. The viability of managing risk through insurance may not be feasible as of now in India for the simple reason that the number of reverse mortgage borrowers is limited and pooling of the risk may not be adequate to sustain insurance business. We examine how far the risks borne by the lenders in India are managed through different techniques. The PLIs are able to minimize the risks in the RMF transactions by adopting the following techniques: (I) PLIs compute eligible amount by an overall cap of loan amount. (II) PLIs estimate the loan to value ratio in such a way that there is no negative equity guarantee. (III) Equity to value ratio is always greater than 10 per cent during the tenor of the loan in the RMF. (IV) The maximum lump-sum payment is restricted to 50 per cent of the total eligible amount of loan subject to a cap of R15 lakh. (V) The borrowers do not have the discretion to use funds beyond the specified applications. Moral Hazard in Reverse Mortgage Agency Issue: The valuation of the residential property is required to be done at such frequency and intervals as decided by the PLIs, which in any case shall be at least once every five years. The PLIs shall determine the market value of the residential property through their external/in-house valuers. Also, there will be agency problems in getting appraisers to give unbiased appraisals when they know that their appraisal feeds directly to a disadvantage for the homeowners. But these appraisals of the real value of a home are subject to substantial errors, 10 per cent, 20 per cent, or, even more are quite common. Renovation and Maintenance of the Property: In most of the reverse mortgage transactions, the owners equity in percentage terms gradually keeps on reducing over time unless the rate of appreciation in value is higher. There is no incentive to maintain the house properly after the owners home equity is reduced below, say, 10 per cent. To overcome this category of moral hazard, the RML may be foreclosed as per the guidelines of the NHB. Alternatively, the primary lending institute may reserve the option to pay for insurance premium, taxes or repairs by reducing the eligible loan advances and using the difference to meet the obligations/expenditures. In practice, it may be very difficult to enforce such contract provisions. Reverse Mortgage borrowers may undertake upgradation, renovation and extension of residential property in such a manner that has deteriorated the value of the house. The borrowers will undertake only those improvements, the lack of which causes a lot of inconvenience. Consider a case, a borrower constructs a balcony in an unconventional manner to get sun during winter and the value of the property may go down. Another source of moral hazard on the part of the borrowers is to utilise loan amount for a purpose where the legitimacy is debatable. Subjectivity about the genuineness of expenditure can not be ruled out. This may have an effect on the interest of the lenders. Central Bank of India has signed up a strategic alliance with Star Union Dai-ichi Life Insurance for a life-long annuity. One of the problems attributed to longevity risk is that of adverse selection of the borrowers. Adverse selection is a problem of asymmetric information. Normally, life insurance contracts take care of the risk of adverse selection by medical examination carried out on the individuals. Off-the-Contract Transactions: Instead of renovation or proper maintenance, the owners have incentive to sell the expensive branded electrical and sanitary fittings of the property with the intention to replace the same with cheaper ones. Such an off-the-contract deal may not even come to the knowledge of the official valuators. Likewise, the evidence of subletting of the property during the tenure of the loan is most difficult task to establish by the lenders. Demand Side of RMF The NHB, the regulator for home finance institutions in India, has estimated home finance to grow to nearly $100 billion ( R4.52 lakh crore) by 2015 from the current $39 billion. The Registrar General of India forecasts the share of senior citizens (age 60 years and above) in the total population to rise from 6.9 per cent in 2001 to 12.4 per cent in According to Reverse Mortgage Market: Early Days for India report released by a Boston-based consulting firm for financial institutions, the current market size for reverse mortgage of 3 million homesteads is expected to grow to 6 million by Unfortunately, only 5700 have availed of the reverse mortgage scheme. This can be gauged from the fact that 20 home lenders together 96 THE CHARTERED ACCOUNTANT september 2010

6 473 BANKING AND FINANCE have disbursed only around R1050 crore worth of loans up to December 2008, since the scheme was launched. The poor response on the demand side is because of a number of reasons. First, unlike USA, Europe, or, Australia, where reverse mortgage facilities are very much understood and welcomed as a product, awareness and understanding of the product in India is less and complex in nature. People in India have to really work hard to buy or construct their own house. Because of difficulty in having one s dream home there is a very strong bonding between owner and their property. They avoid the RMF as they can not move out the current house for more then one year. As per the guidelines, the borrowers or co-borrowers cannot move out of the house for more than one year continuously. If they move out of house, the loan dues are to be settled immediately. Senior people like to go and stay with their children for long periods especially if the children live overseas. Moreover, there is a social stigma attached to a home mortgaged. We may rename the product other than RMF. Another very important reason for lukewarm response to the RMF is the saving habits of Indians in general. Many Indians retire with sufficient funds to lead a comfortable life after retirement. Despite the fact that the system of nuclear family is evolving in urban regions, bonding amongst family members is so strong that senior citizens who are not able to amass significant wealth, are taken care of by other members of the family. There may be reason for low demand if the potential borrowers have powerful bequest motives. Basically, the psyche of the Indian does not make them comfortable with the very idea of selling their home. On the other hand, there are people who would like to stay put in their own home. Once they enter in to a reverse Reverse Mortgage borrowers may undertake upgradation, renovation and extension of residential property in such a manner that has deteriorated the value of the house. The borrowers will undertake only those improvements, the lack of which causes a lot of inconvenience. Consider a case, a borrower constructs a balcony in an unconventional manner to get sun during winter and the value of the property may go down. mortgage transaction, it would be quite difficult to move out and shift to a new and better house. One may understand the insight on the demand by studying the actual trend of mobility of home owners. The awareness drive may be necessary especially for senior citizens without any heir, who suffer due to low level of consumptions during their later part of life. The means for bringing awareness about the benefits of the RMF to people are negligible. Some bankers are of the opinion that, at this stage, the RMF is not very compatible with the social environment of India. Even if senior citizens apply for an RMF, their sons/daughters may come forward and convince them to withdraw their application as, in the Indian society, children (especially sons) are supposed to take care of their old parents. Also, a tradition of keeping the property for children free from any encumbrance in addition to unclear laws and regulations relating to reverse mortgage are the stumbling block for the market to pick up. The idea of taking over the possession of the home by the bank or the insurance at the end of the contract does not gel in the minds of the borrowers. Current Market Status Mainly, the RMFs providers are the banks and housing finance companies in India. The implications of the scheme and the operational guidelines have not been well understood by the other lenders yet. NHB has already held one round of meeting with insurance companies including Life Insurance Corporation of India to design an annuity product so that the funds can be invested and a monthly income is obtained for the borrowers. With the limited number of borrowers, quantum of loan sanctioned and disbursed are not quite satisfactory. The scheme has been adopted by 23 scheduled banks and two housing finance companies in the country. Except the Central Bank of India, other PLIs have not shown any significance initiative to promote or patronise the RMF. The Central Bank of India has tied up with Star Union Dai-ichi Life Insurance to launch a unique product that assures life-time annuity for senior citizens opting for an RMF. In December 2009, the improved version CENT Swabhiman Plus was launched. One of the improvements is the availability of lifetime regular income as against the maximum of 20 years in the existing reverse mortgage loans offered by various banks. It is estimated annual business of R30-40 crore. This is a good model wherein insurance companies are also participating in the business of reverse mortgage. Many more life insurance companies may have strategic alliances with housing finance institutions and banks. This is the first time in the country that an annuity product assuming life-time payments is being made available to senior citizens under reverse mortgage loans. Senior citizens are likely to get higher monthly payments as the Star Union Dai-ichi Life Insurance Company will be in a better position to assess life risk and provide better terms through annuities. Broadly speaking, the response of the banks has not been satisfactory september 2010 THE CHARTERED ACCOUNTANT 97

7 BANKING AND FINANCE 474 to the potential customers when they visited the branch to inquire about the product. The staffs are not in a position to clarify some of the doubts that a prospect may ask relating to an RMF. The lenders should have indepth knowledge about the product. In the absence of understanding about the product, customers can not be convinced to go for the scheme. Clearly, a lack of understanding of lenders about the importance of training their staffs is a matter of concern. Government & NHB Initiatives With effect from April 1, 2008, as per the Section 47(xvi) of the Incometax Act, 1961, any transfer of a capital asset in a transaction of reverse mortgage under the announced scheme will not be regarded as transfer for the purpose of capital gain tax. Another issue as to the loan received, either in lump sum or in instalments, under a reverse mortgage scheme has been addressed under the Income-tax Act. The amount received under the scheme by the borrower is not treated as income under the Section 10(43). However, currently annuity payment for life time is taxable. The government should discontinue tax on an annuity under reverse mortgage-backed annuity schemes. unlike USA, Europe, or, Australia, where reverse mortgage facilities are very much understood and welcomed as a product, awareness and understanding of the product in India is less and complex in nature. People in India have to really work hard to buy or construct their own house. Because of difficulty in having one s dream home there is a very strong bonding between owner and their property. The provisions of Transfer of Property Act, 1982, Registration Act, 1908 and Stamp Duty Act are applied when absolute ownership in the property is transferred to a lender or to a prospective purchaser at the time of the death of the borrower and the coborrower. However, there is no direct implication on the borrowers. As stated earlier, senior citizens are to be treated with special care. PLIs should go extra mile to explain fine points of the RMF. In reverse mortgage facilities, great deal of counselling is needed. A positive step has been taken by a non-profit organisation registered under the Societies Registration Act of 1860, and National Housing Bank jointly with an opening of counselling centres in Delhi, Hyderabad, Kolkata and Chandigarh and a training of their staffs to provide details about the scheme of reverse mortgage. Another admirable initiative taken by Consumers Association of India (CAI) in association with the NHB is the commencement of a counselling centre in Chennai in April The NHB should plan a dedicated fund to refinance reverse mortgage loans provided by the PLIs. It may issue a secondary market product by offering bonds to public in reverse mortgage market. The investors of such bonds should get exemption under the Section 80 C of the Income-tax Act, With this proposition, confidence level of the market players will get heightened. The market for reverse mortgage should be augmented with support of the Central and State Governments as the social security program is inadequate in the country. A recent World Bank study found that only 10 per cent of the population had any sort of social coverage. Since there no effective social security scheme in India, it is necessary to refinance the RML to promote the financial product. In the Union budget , the announcement of the introduction of mortgage guarantee companies was a welcome step in the right direction. Such a move is all the more important as the guarantee firm will enhance comfort level to the PLIs. It is recommended to form a joint venture with any reputed risk guarantee company. The NHB may seek equity participation from the World Bank and the Asian Development Bank. World Bank has been promoting projects for development of the RMF. In 2002, the World Bank undertook a housing project in Latvia. One of the project s objectives was to provide guarantees to financial institutions that issue reverse mortgage loans to the elderly for home improvements. Like in the USA, the Central Government should sponsor reverse mortgage program by announcing pilot program wherein at least first 5000 RMLs should be provided by the National Housing Bank. With the pilot program, the risk of lenders and mortgagees will have to be absorbed ultimately by the government. A suitable budgetary support is to be provided by the government. Promoting the pilot project bring about awareness in general and boost confidence of the elderly, as it displays commitment of the government in the RMF scheme. The joint venture may also scale up overall increase the size of the market as with guarantee features bank may be able to offer the RMF at a lower interest. The NHB has launched a new reverse mortgage loan-enabled annuity (RMLEA) scheme in December As per the scheme, borrowers may opt for an annuity for a lifetime, compared with 20 years cap on the old scheme. The bank has already approached the State Governments to sponsor insurance schemes to expand the scheme to people who are covered under the government s housing projects. 98 THE CHARTERED ACCOUNTANT september 2010

8 475 BANKING AND FINANCE Emerging Trends 1. The role of counsellor should not be underestimated. Extensive explanatory and advisory work should be carried out by the government to provide the necessary counselling to the elderly in understanding the scheme. There is a need and desire to develop policy guidelines for a much broader and deeper publicprivate partnership (PPP) in the area of counseling. It generates interest, willingness and understanding about RMF in lending institutions and encourages them to adopt new approaches to RMF. Counseling to the borrowers is another area that requires additional efforts. The scope of PPP can be increased to cover many functional area such as: Offering certificate programme for training to the prospective counselors by B-schools Considering possibility of using office premises of non-profit organisation as the counseling centre Utilising resident welfare associations as important vehicles for counseling as they are in better position to discuss features and benefits of the RMF in community gatherings and lenders can also seek help of resident welfare associations to bring about awareness about RMF 2. As per the present guidelines, RMF With the limited number of borrowers, quantum of loan sanctioned and disbursed are not quite satisfactory. The scheme has been adopted by 23 scheduled banks and two housing finance companies in the country. Except the Central Bank of India, other PLIs have not shown any significance initiative to promote or patronise the RMF. is available for a maximum period of 20 years. Market for RM loans can be developed, if life insurance companies start providing annuity payment beyond 20 years. The product becomes attractive and is comparable with international product. The NHB has been talking to insurance companies on providing annuities on reverse mortgage. The RM products are quite popular in the developed countries, wherein the senior citizens are able to earn income from their property till death. 3. The NHB should propose to the government to create appropriate institutional framework to design and promote measures like guarantee support schemes wherein adverse movement of the property value is protected and guaranteed. Likewise, the NHB is working on title indemnity, wherein lenders and buyers get protection against defective titles. 4. Most of the reverse mortgage contracts are of long duration loans funded by banks in India. The banks are not encouraged to go ahead with the RMF because of possibilities of asset-liability mismatch in the balance sheet. The RBI should come out with take-out financing scheme. It is a method of providing finance for longer duration reverse mortgage loans by banks by sanctioning medium term loans. Under the scheme, the loan will be taken out of books of the financing bank within pre-fixed period by another institution thus preventing any possible asset-liability mismatch. After taking out the loans from the banks, the institution could offload them to another bank or keep it. The scheme needs to be designed very carefully in view of complexity of an RMF especially considering the issues of risks, pricing of product, etc. The NHB has launched a new reverse mortgage loan-enabled annuity (RMLEA) scheme in December As per the scheme, borrowers may opt for an annuity for a lifetime, compared with 20 years cap on the old scheme. The bank has already approached the State Governments to sponsor insurance schemes to expand the scheme to people who are covered under the government s housing projects. 5. Though it has been made quite clear in the guidelines that PLIs will not earn profit from the closing cost of the agreement and the costs should be collected from the borrowers rather than adjusting the same from eligible agreed amount. This may be suggested that cash strain on account of the cost on the part of the borrowers can be removed if the costs are adjusted from the loan amount instead of collecting them. 6. Real estate agents are completely unorganised sector in India. Their public image is not very encouraging and the quality of their service is non-satisfactory, as there is no control on their shady transactions. In order to change this, the State Governments should bring about a Code of Conduct for the real estate agents. If this works out effectively, real estate agents may effectively promote the RMF as they operate in an around the residential colonies. 7. The provisions of Transfer of Property Act, 1982, Registration Act 1908 and Stamp Duty Act should be amended to incorporate treatment of reverse mortgage transactions at the time of loan and at the time of termination of contract. n september 2010 THE CHARTERED ACCOUNTANT 99