Académique Documents
Professionnel Documents
Culture Documents
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Gireesh Chandra Tripathi, Associate Professor, Institute of Management Technology,
Raj Nagar, Ghaziabad, India, PIN 201001, Ph 91 120 3002283, Fax 91 120 2827895, E-
mail: gctripathi@imt.edu and gireeshctripathi@gmail.com
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Dr K Chandrashekhar Iyer, Professor, Indian Institute of Technology, Delhi, Hauz
Khas, New Delhi, India, PIN 110016, Ph 91 11 26591219, Fax 91 11 26591209 Email:
kciyer@dms.iitd.ac.in, kciyer@gmail.com
Abstract
Reverse Mortgage Loan (RML), which unlocks investments in residential property and
converts into cash, is new to India. The beneficiaries are senior citizens. RML is
beneficial to the borrowers and lenders simultaneously. An attempt to gauge the potential
is made by conducting a primary survey, projecting the results of the same along with
demographic trends. Due to increasing population and proportion of old aged, India is
likely to have about 28 Million eligible borrowers by 2016. Lack of social security
measures has created a need and desire for such products, making it a promising market.
The potential is estimated to be close to USD 500 Billion by the end of the current
decade.
In addition to explaining the concept, this paper includes characteristics of beneficiaries,
regulatory mechanism, comparison of existing products, opportunities and threats,
current issues and challenges pertaining to it. It ends with summary and conclusions.
Key Words: Reverse Mortgage Loan, Senior Citizen, Home Equity, Borrowers, Market
Potential
1.0 Introduction
Reverse Mortgage Loan (RML) is a new concept in India. It was introduced in the Union
Budget of India 2007-08. Since social security measures for the senior citizen are almost
non existent, RML could be seen as a welcome gesture for the aged section of the
population. It may be explained by contrasting it with regular mortgage (housing loan).
A housing loan means that the borrower takes a loan from the lender to pay for his/her
house. The house is mortgaged by the borrower in favor of the lender. The borrower
occupies the house as he is the part owner of the same because he pays an amount in the
form of down payment out of his own funds.
If the total asset value of the house is split into debt and equity, at the time of buying the
house, the debt and equity looks like (a) of figure 1
Insert Figure 1 somewhere here
As the borrower pays his regular loan installments, the outstanding loan amount keeps on
depleting and vanishes with the payment of last installment. In this process his equity
increases with every payment. At any point before the final installment, the debt and
equity might look like (b) in figure 1. With the payment of last installment, the borrower
increases his equity to 100% of the value of the house. Hence the regular mortgage could
be said to be a process of “Falling Debt – Rising Equity”.
The process of Reverse Mortgage (RM) is set to start now. It is the reverse of a regular
mortgage. The borrower receives money (regular installments or otherwise) from the
lender in the form of loan against his equity. The borrower is getting a portion of his
home equity released and replaced by debt. While the RML scheme is running, a typical
debt equity distribution may be depicted in figure 2.
Insert Figure 2 somewhere here
In a typical Reverse Mortgage (RM), the home owner liquidates parts of his home equity
and consumes the same in the way he wants. There is no credit or income requirement to
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eligible for higher amount and the lender has lower Loan to Value (LTV) ratio, which
depicts lower risk for the lender.
2.3 Low Current Earnings
A potential RM borrower has a low level of current income which is insufficient for his
desired standard of living. Hence he might be one who had a pre-retirement income but
no substantial pension benefits, or he would have been employed in the private sector or
self-employed, where the advantage of substantial pension income is not there.
2.4 Low Bequest Motive
If an elderly homeowner has no children, he does not have any bequest motive as there is
nobody to inherit his property. Even if the RM borrower has children who are not caring
for the parents, bequest motive could be very low. Other cases could be (i) If the entire
next generation of the family has taken the citizenship of another country with no
intention of coming back, (ii) Children may be much better off than the older generation
and may not value bequests, if any.
2.5 A Desire to Stay in the Current Home
RM is attractive to a borrower especially when he values his continued stay more in his
current residence. This is likely when he has already stayed in his current home for a
sufficiently long time and in the process has generated an emotional bondage with his
house.
2.6 Lack of Other Financial Support
If a person has nil or insignificant current income and has no financial support/asset other
than his house, he can take recourse to RM borrowing. If such an individual is living
alone, as in the case of a widower or widow, RM can make a substantial contribution to
his/ her standard of living. Alternatively, the next generation may be living far away,
either in India or abroad.
2.7 Lifestyle
A potential RM borrower might be a person who values his financial independence. He
may be interested in maintaining his desired quality of life rather than curtailing
consumption for lack of current cash income. This implies that he must be mentally
prepared to consider borrowing in old age, through innovative financial products like
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RM. This implies certain minimum education and exposure to financial savings/ assets/
markets.
3.0 Opportunities and Threats
The Reverse Mortgage Scheme offers multiple opportunities or advantages to the
borrowers. These opportunities are clubbed with some associated threats as well; most of
them are related to the misuse of this novice concept.
3.1 Opportunities: The beneficiaries in this scheme may enjoy the following advantages
• The borrower or his spouse will never have to repay the loans as the same
becomes due after his or his spouse’s death whichever is later.
• The borrower will never be asked to vacate his house. Hence he can enjoy living
in his dream house which he would have built in his youth. Hence his house, not
only provides a shelter to him, but also becomes a source for his livelihood.
• A substantial amount (up to 90%) of his hard earned money gets unlocked from
his residential property which otherwise was illiquid. More importantly this
happens when he needs this money the most i.e. to take care of his health etc
which obviously deteriorates with age.
• His bequest desire can still be fulfilled even when he has availed of reverse
mortgage loan because as and when the loan becomes due, his heirs will be given
the first choice to repay the loan amount and stake a claim over his house.
• There is no penalty on early repayment of loan.
• There is a “Non Recourse Guarantee” clause in reverse mortgage loans. Hence at
no point of time the lender can trouble the borrower for repayment even if the
total loan amount has exceeded the value of the house.
• He has flexibility of managing his cash inflows from this loan i.e. he can choose
bullet point, monthly, quarterly, half yearly, yearly or revolving credit options.
Hence he can plan olden days as per his wishes.
• He has flexibility of using these funds for various purposes like home
improvement, medical expenses, repayment of an existing loan taken or meeting
any other genuine need.
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• The loan amount gets revised with every valuation of his property. If the value of
the property increases, which may generally be expected, the instalments received
by him increases.
• The borrower has a right to rescission for a few days even after the loan has been
processed.
• After stability of RM, it is possible that investment in the housing sector might
increase, as citizens (when young) might invest in this sector not only for current
living but also as a financial security measure in their old age. This way the
inflow of funds to otherwise starving housing sector will improve.
3.2 Threats: Current Indian demographic and socio-economic can breed potential
financial scams related to RML. Sound mechanisms will have to be devised to tackle
them.
3.2.1 Forgery: This has been a bane of many areas including finance. Since property
documents are involved in RML, the scope of forgery is highly pronounced as the land
and buildings records are still manually maintained in India. Land scams are common
because of poor record keeping. The ongoing automation of these records and e-
governance measure might help tackle this threat.
3.2.2 Misuse of Funds: It is possible that the children of a potential RM borrower are
forcing him/her to avail of the facility even when it is really not genuinely needed. This
way the funds through RML may be used by the children in the pretext of the senior
citizens. This might defeat the very purpose of the scheme. Strict monitoring of the use
of funds through RML is extremely important from the point of view of protecting the
borrowers from the coercion and brutality of their own kith and kin.
3.2.3 Under-pricing by the lenders at the time of disposal: One way of recovering the
loan amount is that the lenders sell the property and recover their loan from the sale
proceeds. It is the responsibility of the lenders to transfer the balance amount to the heirs
of the borrower. Since the lenders interest is only to the extent of RML amount, they may
not make enough attempts to get the best price at the time of disposing of the property.
This is a common observation in many foreclosed housing loans, where the lenders have
sold the property due to default. Hence a suitable mechanism like appointment of a
receiver etc. has to be worked out to curb this menace.
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4.0 Regulatory Mechanism:
The housing finance regulator, National Housing Bank (NHB), empowered with the
responsibility of regulating the Reverse Mortgage Loan (RML), announced the draft
guidelines. After receiving public comments and incorporating the same, came up with
final “Reverse Mortgage Loan (RML): Operational Guidelines” at the end of May 2007
and subsequently revised and notified in May 2008. The salient features of these
guidelines are split into various sections (NHB, 2008) as detailed below.
• Reverse Mortgage Loans (RMLs): Primary Lending Institutions (PLIs) viz.
Scheduled Banks and Housing Finance Companies registered with NHB have
been allowed to extend it.
• Eligible Borrowers: The borrower should be more than 60 years and the spouse
should not be less than 55 years of age. The minimum residual life of the property
should be 20 years
• Determination of Eligible Amount of Loan: Depends on the value of the property,
age of the borrower and the prevalent interest rate. The PLI should ensure that the
Equity to Value Ratio (EVR) should never be less than 10%.
• Nature of Payment: Monthly, Quarterly, Half Yearly, Yearly or Revolving Credit.
However a cap of Rs 50000/ on monthly and Rs 1500000/ or 50% of the eligible
amount have been introduced.
• Eligible End use of Funds: Allowed for the purposes beneficial to the senior
citizens and prohibited for activities like speculation.
• Period of Loan: Maximum 20 years (Revised from 15 years earlier).
• Interest Rate: The interest rate to be charged on the RML to be extended to the
borrower(s) may be fixed by PLI. Fixed and floating rate of interest may be
offered.
• Security: The RML shall be secured by way of mortgage of only residential (not
commercial) property in favour of PLI.
• Valuation of Residential Property: Periodic, compulsory in every 5 years.
• Taxation: All payments to the borrower from the PLI are income tax exempt as
the same are considered as capital payments rather than income.
• Provision for Right to Rescission: 3 working days time is given for this
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• Loan Disbursement by Lender to Borrower: PLI is expected to pay directly to the
borrowers except in certain special situations
• Title Closing: The PLIs will provide a fair and complete package of reverse
mortgage loan material and specimen documents, covering the benefits and
obligations of the product.
• Settlement of Loan: All the conditions under which the loan is due are listed.
• Prepayment of Loan by Borrower(s): The borrower(s) will have option to prepay
the loan at any time during the loan tenor. There will not be any prepayment
levy/penalty/charge for such prepayments.
• Loan Covenants, Indemnity/Insurance, Foreclosure: Option for PLI to Adjust
Payments
• Title Indemnity /Insurance: PLI will have the obligation of ensuring clarity on
title of the residential property
• Foreclosure: Several events are listed on the occurrence of which the loan would
be liable for foreclosure.
• PLI’s Option to Adjust Payments:
• Counselling and Information to Borrowers:
5.0 Issues and Challenges:
5.1 Existing Products: A Comparison
5.1.1 Saksham: Dewan Housing Finance Limited (DHFL) was the first company to
launch a product in the category of “Reverse Mortgage Loans” in India. DHFL’s product
is known as “Saksham” (DHFL, 2007). The urge to introduce these products was so
much than even before the comprehensive guidelines by the NHB were announced, this
product became operational. This reflects about the perception of the lenders about the
potential of RML.
5.1.2 Baghban: The first public sector bank to launch a similar product is Punjab
National Bank, when it launched the product “Baghban” (PNB, 2007).
5.1.3. State Bank of India and Others: There had been a number of lenders including
State Bank of India (SBI, 2009), Bank of Baroda (BOB), Central Bank of India, LIC
Housing Finance (LICHF, 2009), Allahabad Bank, Union Bank of India (UBI, 2009),
Indian Bank (IB, 2009) etc, who have started offering this product in the broad category
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of “Personal Finance”. Table 1 list some features of a few of these products (As on 10th
January, 2009)
Insert Table 1 somewhere here
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if it is reclassified, the risk weights would go down and hence the lenders could
charge lower rates to the borrowers commensurate to the risk level. This has
attained more prominence as the interest rates on regular mortgage loans up-to 3
Million Rupees have been capped at 9.75% by many Housing Finance Companies
in the Month of January, 2009.
• Valuation of the property had been made compulsory after every five years, but
the issue of who exactly would be valuing the same is yet to be clarified as who
are the professional valuers is unclear as there are no specified norms as yet for
professional valuers. This might lead to an element of subjectivity and hence
subsequent misuse of the provisions of valuation and adjustment of ROI as well
loan amount.
• Counselling and Information to the borrowers has been made as provision in the
NHB operational guidelines, but the issue of who exactly would be conducting
these counselling programs is yet to be addressed. Hence NHB should appoint
qualified counsellors for this purpose and also ensure that the borrower is not
required to pay for such services.
• Currently there is no secondary market for either for such loans or the derivatives
of such loans. Some initiation in this regard has already been done when in the
month of June 2007; SEBI issued “Draft Regulations for Public Offer and Listing
of Securitized Debt Instruments” (SEBI, 2007). Another noteworthy development
is that STRIPS are likely to be allowed in India from the end of this year. (Reddy,
2008). By these welcome steps the liquidity in debt market is likely to improve
considerably.
6 Current Positions
6.1 Young India is ageing
Currently India is young but ageing. As per 1961 census, the people with more than 60
years of age were 5.62% of the total population of 434 Millions (CMIE Database, 2009).
This proportion has maintained it’s upwards move and the same had been at 5.96% in
1971, 6.49% in 1981, 6.76% in 1991 and 7.44% in 2001. The total population has also
grown to about 1140 Million in 2008. As the chart (Fig 3), the upward movement
continues.
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Insert Figure 3 somewhere here
It is expected that the number of senior citizens would be 140 Million by 2016 and 220
Million by 2030 (Kasbekar, 2008). Their share in the total population is projected to be 9
% by 2016 and 13% by 2026 (Rajgopalan, 2006). Life expectancy at age of 60 years,
which is around 17 years now, will increase to around 20 by 2020 (IIPS, 2000 and
Irudayarajan et. al, 1999).
6.2 Current Sources of Income
A 1995-96 National Sample Survey of the senior citizen reported that about 5% of them
lived alone, another 10% lived with their spouses only and another 5% lived with
relatives/ non-relatives, other than their own children. The remaining (80%) lived with
their children (Rajgopalan, 2006). In other words, co-residence with children and other
relatives is predominant.
As of 1994, the estimated percentage among the elderly, dependent on various sources of
income is given in Table 2. The data shows that they were dependent primarily on their
own work and transfers including from their children.
Insert Table 2 somewhere here
The above factors project that Reverse Mortgage is made for India. It is a bankable
scheme that takes away the sting from the existing defined-contribution pension plans.
RML takes care of two simultaneous risks associated with these plans for the savers, first
is insufficient returns earned and the second is unpredictable longevity of beneficiaries.
6.3 A Primary Survey on RML
In order to gauge the true potential of the market, a sample survey was conducted
between the last quarter of the year 2007 and the second quarter of 2008 in Delhi and the
adjoining National Capital Region (NCR). This was a stratified sample survey as the
respondents had been chosen on the basis of their age to be at least 58 years. This was
done only because the concept of RM is likely to be appealing only at this age or later.
No of Respondents: 200.
Summary Results of the Survey:
1) Ownership:
• Nearly half (46%) of the sample has the papers of their residential property in
their name. About 33% of the respondents have their residential property in the
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name of their spouse. Hence the eligible proportion of the population for RML is
the sum of the two i.e. 79%, which is high.
• Only 4.3% have their residential property in their children’s name.
2) Bequest Motive:
Surprisingly only 42% the respondents are interested in transferring their property to their
children and rest (58%) were not keen on it. This certainly is contrary to the general
belief that Indian have high bequest motive.
3) Bequest Time:
The people who say yes for transferring in them 7% said they will transfer within 1 year,
10 % said that they will transfer after 1 or 2 year, 13% said they will transfer after 2-5
years and the rest (70%) said that they will transfer after 5 years.
4) Current Source of Income
• 56% of the respondents had their source of current income is from pension/funds
• 19% agricultural land, 12% interests on deposits, 13% had other sources of
income as their current income
5) Sufficiency of Current Income
Surprisingly three fourth of the respondents (73%) said that they are satisfied with their
current level of income.
6) Awareness about Reverse Mortgage:
A little more than two thirds (69%) of the respondents said that they had not heard about
the term “Reverse Mortgage” before.
7) Interest in Reverse Mortgage:
After having been explained about the concept of reverse mortgage, a whopping (87.1%)
of the respondents said that the concept interests them and only a few (10.5%) did not
appreciate the concept.
8) Willingness to go for RM:
• Interestingly, only 10% of the respondents said that they will definitely go for
“Reverse Mortgage”,
• 23 % liked the idea and they would go for RM in future
• 40% of the respondents were not sure of it
• 19 % rejected the concept of RML
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9) Rating of RM as a concept:
• 17 % said that it was “very good”
• More than half of the respondents (53 %) rated it to be “good”
• 28.6 % of the respondents gave average rating
• 1.4% percent rated it to be “very poor”
6.4 Market Potential
Considering the above facts in mind, if we assume that about 20% of the eligible elderly
population will take the advantage of RML, the total number of loans would be of the
order of 18 Million in 2010, 28 Million by 2016 and 44 Million by 2030. If the average
eligible amount of one loan is taken to a conservative sum equal to Rupees 1 Million per
borrower, the total RML market size will become in the range of Rupees 20 to 25 Trillion
(About half a Trillion in US Dollar terms). This is a huge market and cannot be ignored
in terms of opportunity by the lenders and also social security measure by the borrowers
and the Government of India.
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References:
1. Chidambaram, P, 2007, “Union Budget, 2007-08”, Para 89, Available on
http://indiabudget.nic.in/ub2007-08/bs/speecha.htm, Accessed multiple times,
latest on 7th January, 2009
2. Chidambaram, P, 2008, “Union Budget, 2008-09”, Para 166, Available on
http://indiabudget.nic.in/ub2008-09/bs/speecha.htm, Accessed multiple times,
latest on 7th January, 2009
3. Dey, A, 2008, “RBI to Issue Norms for Reverse Mortgage” Business Standard,
April 22, Mumbai
4. DHFL, 2007, “Saksham - Reverse Mortgage Loan”, Available on Dewan Housing
Finance Ltd website http://www.dhfl.com/products/saksham.html, Accessed on
7th January 2009
5. CMIE, 2009, Economic Intelligence Service Database (EIS) from Centre for
Monitoring Indian Economy Pvt. Ltd (CMIE), an online database.
6. ET, (Economic Times), 23rd April, 2008, “UBI set to launch reverse mortgage
scheme by April” Accessed on 23rd April 2008, from the link
http://economictimes.indiatimes.com
7. IB, 2009, “Indian Bank Reverse Mortgage Scheme For Senior Citizens”,
Available on Indian Bank http://www.indian-
bank.com/ReverseMortgageScheme.htm, Accessed on 7th January 2009
8. IIPS (Indian Institute for Population Studies), 2000, National Family Health
Survey (NFHS-2): 1998-99 India
9. Irudayarajan, S, U.K. Mishra and P Sankara Sarma (1999) “India’s Elderly:
Burden or Challenge?” Sage Publications, New Delhi
10. Kasbekar, M, 2008, “Reverse mortgages fail to take off in India”, Livemint.com,
The Wall Street Journal, Available on
http://www.livemint.com/2008/02/20005155/Reverse-mortgages-fail-to-
take.html, accessed on 30th April, 2008.
11. LICHF, 2009, “Reverse Mortgage Loan Scheme: Highlights”, Available on LIC
Housing Finance website http://www.lichousing.com/, Accessed on 7th January
2009
12. NHB (National Housing Bank), 2008, “Reverse Mortgage Operational
Guidelines”, Available on
www.nhb.org.in/Whats_new/Reverse_Mortgage_Operations_Guidelines.htm,
Accessed on 7th January, 2009
13. PNB, 2007, “Reverse Mortgage Loan – “PNB Baghban’ For Senior Citizens”
Available on www.pnbindia.com/pnbbaghbhan.htm Accessed on 24th April,
2008
14. Rajgopalan, R, 2006, “Reverse Mortgage Products for the Indian Market: An
Exploration of Issues, T.A Pai Management Institute (TAPMI), Working Paper
available on http://www.tapmi.org/paper1/rr.rtf, accessed on 27th March 2008
15. Reddy, Y, V, 2008, “Annual Policy Statement for the Year 2008-09” Governor,
Reserve Bank of India, Released on 29th April, 2008. Available on
http://rbidocs.rbi.org.in/rdocs/Notification/PDFs/84223.pdf, Page 48, Accessed on
30th April 2008
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16. SBI, 2009 , “SBI Reverse Mortgage Loan”, Available on State Bank of India
website http://www.sbi.co.in/ Accessed on 12th January 2009
17. SEBI, June, 2007, “Draft Regulations for Public Offer and Listing of Securitized
Debt Instruments”, Available on http://www.sebi.gov.in/commreport/consult.pdf,
Accessed on 24th March, 2008
18. Shah, R (2008), “Reverse Mortgage Moves Ahead”, Corporate India, March 31,
2008, pp 32-33
19. Stephenson, C, 2007, “A Tutorial on Reverse Mortgage”, Available on the
Website http://www.homefirstmortgage.com/reverse, accessed on 24th April,
2008
20. UBI, 2009, , “Union Reverse Mortgage (URM)”, Available on Union Bank of
India website http://www.unionbankofindia.co.in/ Accessed on 7th January 2009
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Appendix: Tables and Figures
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(Fig 1: Movement of Debt Equity Proportions)
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