CHAPTER -1 INTRODUCTION

1.1 Introduction
The concept of reverse mortgage, although new in India, is very popular in countries like the
US. National Housing Bank (NHB) is a 100% subsidiary of RBI and is established under an
Act of parliament (NHB Act 1987). Recently, NHB, a subsidiary of the RBI, released draft
norms of reverse mortgage. Main role of NHB is to develop Indian Housing Finance System
by promoting a sound, healthy, viable and cost effective housing finance. As per Guidelines
of NHB Reverse mortgage loan works in India.
The concept of reverse mortgage was introduced in India in early 1990s, but the growth of
reverse mortgages has increased over the past decade. Reverse mortgages have been actively
promoted in India by few Nationalized banks and LIC of India. In certain overseas markets
the reverse mortgage product has been accepted due various reasons.
To understand the concept of reverse mortgage, first let us understand what a regular
mortgage is. In a regular mortgage, a borrower mortgages his new/existing house with the
lender

in

return

for

the

loan

amount

(which

in

turn

he

uses

to

finance

the property); the same is charged at a particular interest rate and runs over a predetermined
tenure. The borrower then has to repay the loan amount in the form of EMIs (equated
monthly instalments), which comprise of both principal and interest amounts. The property is
utilized as a security to cover the risk of default on the borrower's part. In
the reverse mortgage, senior citizens (borrowers), who own a house property, but do not have
regular income, can mortgage the same with the lender (a scheduled bank or a housing
finance company). In return, the lender makes periodic payment to the borrowers during their
lifetime. In spite of mortgaging the house property, the borrower can continue to stay in it
during his entire life span and continue to receive regular flows of income from the lender as
well. The borrower then has to repay the loan amount in the form of EMIs (equated monthly
instalments), which comprise of both principal and interest amounts. The property is utilized
as a security to cover the risk of default on the borrower's part.
In the reverse mortgage, senior citizens (borrowers), who own a house property, but do not
have regular income, can mortgage the same with the lender (a scheduled bank or a housing
1

finance company). In return, the lender makes periodic payment to the borrowers during their
lifetime. In spite of mortgaging the house property, the borrower can continue to stay in it
during his entire life span and continue to receive regular flows of income from the lender as
well.
The reverse mortgage allows an older person to retain ownership and access some of the
previously inaccessible capital without selling, but mortgaging their property. The actual loan
period is unknown as the commencement of the reverse mortgage.Due to increased longevity
rates, India is experiencing a demographic shift with an aging of the population. A reverse
mortgage is a home loan that provides cash payments based on home equity. Homeowners
normally defer payment of the loan until they die, sell, or move out of the home. To be
eligible for a reverse mortgage, a borrower must be 60 years of age or older, own the home
outright and have no other liens against the home. Upon the death of homeowners, their heirs
either give up ownership to the home or must refinance the home to purchase the title from
the reverse mortgage company.

Old age comes with its own share of problems. As a person grows older, and
hisregular source of income dries up, his dependency on others can increase
significantly.With health care expenses on the rise and little social security, living
thegolden years respectfully can be quite a challenge for senior citizens. In such ascenario, a
regular income stream that can help them meet their financial needs andmaintain their current
living standards becomes important. One typical feature with most senior citizens is that their
residential property accountsfor a significant portion of their total asset pie. And, given its
illiquid nature, propertyfails to aid senior citizens on the liquidity front.

1.2 Need & Relevance of the Study

It is beneficial for the senior citizens of the India by providing clear information of the
Reverse Mortgage Scheme regarding important aspects like, Eligible Amount of Loan,
Nature of Payment,and Period of Loan etc.The study is also beneficial for the senior citizens
to motivate them by showing how actively they can convert their substantial house equities
into loans in the form of cash advances requiring no repayment until a future time. At the
same time they will allow the borrowers to remain in their houses until their death, sale of the
2

house property or until they move out permanently. The senior citizens who are interested in
reverse mortgage will also get benefited by going through the study and can easily take the
decision whether to take reverse mortgage loan or not. The purpose of this study is to get a
deeper understanding of perceptions regarding reverse mortgage held by potential borrowers.
Due to increased longevity rates, India is experiencing a demographic shift with an aging of
the population. The new knowledge contributes to create a deeper understanding of potential
reverse mortgage borrowers perceptions.
1.3 Objective of the Study
Primary Objectives of the Study Analyse the future prospects of this lending scheme in
India.
The objective decides where we want to go, what we want to achieve and what is our goal or
destination. The objective of Study of Reverse Mortgage in India is to

To find out the welfare gain to senior citizens from Reverse Mortgage Scheme.
To study of available banks Reverse Mortgage Scheme.
To analyze the future prospects of this lending scheme in India.
Find out the Risks associated with it in current scenario.
To find out the welfare gain to senior citizens from Reverse Mortgage Scheme.
To study the concept of Home Loan /Housing Finance in todays scenario.
To study government policy regarding to the Housing Finance in India.
To understand about policies and practices of banks for home loan.

1.4 Organization of Research Project

Chapter -1 Introduction included Introduction under which past work & past trends, present
and future are indicated with paragraphs. After that need & relevance of the study which
includes a paragraph containing statements based on past literature / studies and present
trends. Primary and secondary objectives were also discussed in the chapter.Chapter -2
Literature Review covers all the literatures pertinent to the present research study. In some
cases where there is a deficit / lack of literature, related reviews were indicated. Chapter -3
Methodology includes Research Statement which is based on need and relevance of the
study. Sample in general, refers to primary data (number of respondents) responses taken to
conduct the proposed research study. However, for secondary data authentication of results
should be reliable and needs to be justified in accordance with the proposed research study.
Tools for Data Collection and Variables were also discussed.Chapter -4 Results & Discussion
were represented under tables / figures in support of tables had interpreted accordingly and
3

discussed under discussions in accordance with appropriate literature citations. Chapter -5

Limitations & Implications were specific, for instance, gaps / bottlenecks faced in the winter
project study and time constraints .Implications comprised of suggestive measures for future
researchers, policy measures, inclusions of result based suggestions, etc. Chapter -6 Summary
& Conclusions includes the summary of results .Conclusion is drawn out of these major
findings in the present winter project study.

CHAPTER -2 LITERATURE REVIEW

The Union Budget 2007-2008 has introduced a novel product for senior citizens called as
'Reverse Mortgage' and has asked the National Housing Bank (NHB) to draft Guidelines. The
Guidelines have now been framed and issued by NHB and many banks / financial institutions
are slated to introduce the 'Reverse Mortgage Scheme' in the coming months. The Budget
Speech Para, 89 says: "The National Housing Bank (NHB) will shortly introduce a novel
product for senior citizens: a 'reverse mortgage' under which a senior citizen who is the owner
of a house can avail of a monthly stream of income against the mortgage of his/her house,
while remaining the owner and occupying the house throughout his/her lifetime, without
repayment or servicing of the loan."
Relatively a new concept for the Indian financial services industry, introduction of this
scheme is expected to give scope for financial innovation and an opportunity to bank upon
the Senior Citizens by making their physical asset i.e. property, a hen laying golden eggs.
I have reviewed the under noted literatures to get the insight of the scheme. I have gone
through the various books, journals, magazines and websites. Some of the data from which
will be quoted in the project.
The book Reverse Mortgages: Cash for the rest of your life has been written by Mr. Greg
Patti, which was published in 2005. In his book Mr. Patti has explained how Reverse
Mortgage Scheme spread in western world as Seniors want live their life comfortably
without losing their hard earned and constructed homes.
In Modern Banking Theory & Practices D. Muralidharan, the author of the book has clearly
stated that what is the present aspect and future prospect of the reverse mortgage in India. He
has stressed on the point that why the reverse mortgage is not so popular in India as in
western countries.
Numerous websites have also been referred for up to date progress and data collection
regarding the scheme. Especially the www.wikipedia.org has played an imminent role in
defining the basic term related to the reverse mortgage and therefore enabling me to
understand the pros and cons of the same.
A research article entitled Housing Problem and Public Action: Continued
Incompatibility Experience from a South Indian State by M. Mahadeva (2004).
5

In this article, the author has analysed the nature and distribution of the housing problem in
Karnataka and examined how the state has addressed this issue. In particular, it considers the
strategies adopted during the 90s and identifies a number of failures including the task force
on housing. Some of the major weaknesses, pertaining to incidence by type and by ruralurban areas, on approaches, on financial requirements and issue of development and
redevelopment are examined to propose alternative policy strategies to effectively address the
housing problem in the state. From the analysis it is found that Karnataka is not an exception
to the general rule that housing strategies, which were evolved over decades, have not taken
the direction expected. By and large, the sectoral policies pursued were only ad hoc without a
clear focus. Lack of comprehensive policy to guide housing development on equity principle
together with ad hoc approaches, have failed to deliver housing benefits and develop critical
housing inputs on a sound footing with equal opportunities for all need based policy
interventions hasslefree input delivery mechanism existing housing shortage and rural-urban
disparities substantially. Unfortunately, this did not happen. Thus, policy issues like what
policies are needed for the state of Karnataka to guide housing development, increasing the
housing supply to the poorer and marginalized sections, mobilizing the needed financial
resources and a host of other issues in addressing the housing problem emerge.
A study entitled Performance of Housing Finance Companies by BrarJasmindeep
et.al. (2005)
The objectives of this study were: to study the operational performance, and the financial
performance of the selected institutions. The study covers three institutions viz. HDFC, LIC
& PNB. The study is based on secondary data that have been collected from the annual
reports and web sites of the institutions selected under study. It covers the period from 199091 to 2002-03. The performance of the selected institutions has been studied by using
percentages, compound growths rates and various ratios.
Findings of the study are:

HDFC comes at the top among all the institutions as far as loan sanctioned,
disbursements and the loan outstanding are concerned, PNB has the last rank for both
loans sanctioned and disbursed. However, the compound growth rate for the loan
sanctioned, disbursement and outstanding has been highest in the case of LICHF. It
stood at 26.49%, 30.89%, 36.16%. Against PNB showed the lowest compound growth
rates of 18.62% and 19.90%, for the loan sanctioned and disbursement over the same

period. However, the compound growth rate of the loan outstanding in the case of

PNBHF was higher than the growth rate of HDFC.

The ratio of loan disbursed to loan sanctioned shows that the ratio of PNBHF showed
the highest variations from 53.37% to 96.52 % over the given period, followed by
LICHF for which the ratio varied from 56.88% to 95.65%. On the other hand, the
ratio for HDFC showed the lowest range of variation from 81.07% to 88.19 in the

same period.
Number of housing units assisted by the selected institutions and its percentage to the
total units financed during the year showed that HDFC and PNBHF financed more
than 64% and less than 3% of the total units financed during the entire period of the

study, respectively.
HDFC has provided the highest proportion of loans to individuals. The highest
variation in the composition of loan outstanding has been in the PNBHF. The loan
outstanding to individuals in the case of HDFC ranged from 66.89% to 81.99%

whereas it ranged from 89.58% to 100% for LICHF for the same period.
HDFC has been a major market share holder among the HFIs selected under study.

PNBHF has disbursed less than 4% of the total loan disbursed by HFIs.
It is found that during almost all the years under study, all the HFCs earned more than

80% of their interest income from the interest on housing loans.

LICHF earned the maximum proportion of total income from the interest on housing

loans. It was followed by PNBHF and HDFC.

As far as ratio of interest expense to total expenses is concerned, it ranged from
89.15% to 93.13% for HDFC over the period 1990-91 to 2002-03. It ranged from
65.74% to 92.45% for PNBHF and from 83.39% to 94.31% in case of LICHF over

the same period.

PNBHF spent in the range of 0.63% to 4.57% of the total expense on establishment
over the period of the study which was the highest among all the institutions. LICHF
spent the lowest proportion ranging from 0.42% to 0.89% on establishment expenses
during the same period and the ratio showed a declining trend in the case of HDFC

cover the same period.

The interest paid to loans funds showed much variation in the case of PNBHF. The
ratio for HDFC increased in the initial period but decreased later on. Among all the

institutions under study PNBHF paid the highest cost for raising loan funds.
The assets of LICHF constituted the highest proportion of outstanding housing loans
followed by PNBHF and HDFC.

During the period, investments comprised less than 25% of the total assets for all the
institutions. LICHF has a comparatively low ratio of investments to the total assets the
ratio of HDFC has been the highest over the same period. PNBHF showed a

considerably increasing trend in the earlier years but it declined in the later years.
The net profit margin of PNB was higher than that of LICHF in the initial years, but
the ratio of LICHF shows improvement over PNBHF in the later period. In the case of
HDFC the net profit margin was in the range of 11.32% to 23.20% over the period of

study.
Return on net worth: - The ratio had considerable variation in the case of PNBHF
from 49.23% to 40.26%. The ratio also showed a comparatively little variation and
was at a reasonable level for both HDFC and LICHF during the period of the study.

.
A Paper entitled Is Housing Finance Safe as House? Or Delinquency in Housing
Finance Authored by Srinivas S.P. (2006)
The study revealed that disbursement of home loan increased at increasing growth rate during
the growth rate of disbursement in 2000-01 compared to the earlier year was 13.7% which
increased up to 76% in 2002-03. The reasons behind the growth in housing loans are,
i.
ii.
iii.
iv.
v.
vi.
vii.
viii.

Easy availability of housing loans

Growing population
Nuclear family system
Newer segments for finance
Urbanization of Indian economy
Shortage of dwelling units
Declining of cost of house to income ratio etc and,
Tax benefits.

The study revealed that banks have also concentrated on housing loans because the housing
loans are totally secured as the mortgage on the property securities the loan. Also the capital
adequacy requirement for general lending is at 100% for housing loans. The processing and
documentation of housing loan is very easy due to extensive utilization of technology. But
there are also some common frauds occurring in housing finance like an individuals inflate
their income statement, manipulate the income tax returns, inflate the value property, lack of
appraisal & follow up etc. The researcher has also explained the new concept of NPL (Nonperforming loan). The housing finance has been associated very low risk. But empirical
evidence suggest that non-performing loan in the Indian housing finance sector are much
higher than in a developed market. NPL rise in India because of willing defaulters and an
emerging population of fraudsters. This is also a reflection of industrys aggressive marketing
8

and some inadequacies in appraisal standards and system. Such high NPL have two-fold
impact i.e. they depress yield and entail a credit cost in the form of provisioning and writeoff. The researcher also found that the NPL of housing finance companies are higher than the
banks. The suggestion given by researcher is that if the banks have not taken the prudential
norms for housing loans they have to conduct recovery mela instead of present loan mela.
A Research Article entitled Housing Loan Frauds: Are they Avoidable? by Padhi
Manohar (2007)
This article addressed the key issues of housing loan frauds. Aggressive growth in housing
finance by the banks is for the reasons of Tax incentives on repayment of principal and
interest, rising income level of the middle class, affordable interest rate,completion amongst
banks and housing finance institutions, low returns on other investments, low incidence of
NPA, and housing as priority sector lending for banks. Housing loans as a percentage of GDP,
is 57% in UK, 54% in USA and it is only 2.5% in India. It shows vast scope for housing loans
in India. Increased focus of banks in housing finance is also not free from fraud. Fraud is one
of the reasons for turning the housing loan account to NPA. The main reason for housing loan
turning NPA are loss of job, closure of the factory/company, illness of the borrower, dispute
between builder and borrower, over-finance to the borrower, agents approaches the bank for
section of housing loans in bunches, sections of loan on fabricated documents without proper
verification (Benami A/C, submission of fake title deeds of immovable property, colored
Xerox copy of the title deed, subject of fake income certificate etc.) but the precautionary
measures prevent the frauds in housing finance like pre-sanction appraisal, documentation
and creation of charge and post-sanction follow-up. The other preventive measures like
Identification of Borrower, Guarantor and Branch should insist opening of bank A/C as per
KYC Norm, pre sanction verification report, site verification, existence of property, valuation
of property photo of the immovable property, approval of map and cost-estimate, scrutiny of
title, end-use verification of amount disbursed. Pay order
should beissued in the name of banker, cross verification with balance sheet document of title
should be in DEMAT form, in case of large value of loan bank approach subregistrars office
to verify, Bank should develop in-house expertise etc.
A Research Article entitled Reverse Mortgage - A Novel Financial Product for
Elderly People by Bhattacharjee K. (2007)

A reverse mortgage is a home equity loan offered to senior citizens that permits them to
convert home equity into cash while they retain ownership. A reverse mortgage works like a
traditional mortgage loan, only in reverse direction. A borrower does not make regular
payments to a lender; instead he/she receives payments from the lender.
The first reverse mortgage loan launched by Dewan housing in 2006. Reverse mortgage
product name was Saksham. Then ICICI and NHB launched a new product of reverse
mortgage. Reverse mortgage can provide a valuable income source for seniors who own
property but lack liquid assets. So it is mainly meant for home-rich senior citizens who are
otherwise cash-poor. This is precisely the scenario where reverse mortgage products can be a
boon to senior citizens and a business for the lenders.
A Research Study entitled Housing Advances and Commercial Banks: A Review
Authored by Vimala P. (2007)
The objectives of the study were:
1. To review the housing advances of commercial banks in Kerala.
2. To compare the performance of different bank groups in respect of housing advances.
The study covered a period of seven years from March 2000 to March 2006 and the
secondary data are used in the study. For the purpose of the study, commercial banks are
grouped into four categories. The study revealed that there is no significant difference in the
growth rate of housing advances by different bank groups in state. Kruskal Wallis (H-Test)
was applied to arrive at this conclusion. The amount of housing loan disbursed by RRB
which was ` 6.09 crore in 1999-2000 rose to 236.35 crore in 2005-06 showing a CGR of 85%
which was the highest amount of all categories.

A Paper entitled Housing Finance Sector in India An Overview by Sreelaxmi P.

(2007)
The author stated that housing has always been an important agenda for the Government of
India. It generates national income by creating employment and helps the individuals in their
socio economic development. It gives impetus to the economy by enhancing capacity
utilization of related industries such as steel, cement, transportation, etc. The home loan
sector in India is on a boom. The new class of young buyers, whose affordability is high, is
spending a little more on paying EMI rather than spending huge amounts on the rents,
10

thereby owning a house. The government is also encouraging this sector by allowing tax
benefits. The housing finance sector shows an exponential growth as compared to the other
areas of credit. The annual growth rates (in %) of direct housing finance disbursals by the
Primary Lending Institution during 2001-02, 2002-03, 2003-04and 2004-05 were 25,76,29
and 32 respectively. While housing finance is experiencing exponential growths, the menace
of bad loans cannot be ignored. These loans required better monitoring, fair assessment of
property and compliance with end use principles and because of the Securitizations Act,
banks are now able to overcome the problem of non- performing Assets e.g. In 2004-05,
percentage of NPA in housing finance was only 1.4 compared to 2.80% in case of banks total
retail credit. Once the loan is sanctioned the job of the lender is not over. He has to exercise
vigilance and monitor the payments of installments by the borrowers. It is advisable to make
periodical review of the borrowers financial position to ensure his capabilities of prompt
payments of installments. The researchers suggest that the industry has been constructing
stories on a safe foundation. It will continue to thrive so long as it plays safe averting NPAs.
Necessary measures like takeover of bad loans, fair assessment of property and employee
morale may be taken by the financial institution by improving their performance and
avoiding NPAs.
A Research Paper entitled Risk in Real Estate Financing Authored by Bagchi S.
(2008)
The author has analyzed the factors affecting risk and suggests that real estate financing will
be the order of the day in a new age bank / Institution lending in the interest of the
development of the country. Real estate financing is no longer untouchable as it used to be
before 1990s. It is also a fact that this sector contains a higher order risk of default and
lower order scope of eventual recovery since the fate of real estate is interwoven with macroeconomic fundamentals and volatility of asset prices. The researcher has given the following
suggestions to avoid risk factors in real estate financing.

Land records at the land registration offices have to be streamlined and brought under

the contemporary technology support system.

Bank/Financial institutions should create a special cadre of credit investigation offices
who need to perform like private detectives to ascertain the track record of the
borrowers.

11

No loan/advance should be granted by way of equitable mortgage but a simplified

registered mortgage system can be devised with provision for low registration fee for

loans against any real estate.

Title Insurance system should be devised to enable lenders to obtain insurance cover

from any approved insurance company.

At the Corporate head quarters of each banks/financial institution there should be a
cell known as Real Estate Financing Cell which should be involved in the entire
cycle starting with sanction and disbursement of such loan to periodical monitoring
and recovery thereof.

A Paper entitled Housing Finance: Problems and Prospects Authored by Rajasekhar

D. et.al. (2008)
The objective of the study was to analyse the trend in the growth and structure of LICHFL in
Chennai city and to evaluate the relative performance of LICHFL in providing housing loans
in Chennai city. One hundred respondents have been selected on the basis of random
sampling technique. Researcher used conventional statistical tools like percentage and
average for analyzing perception of the borrowers about the LICHFL. Linkert scaling test
was used. The study revealed that in Chennai, 34% of the respondents have reported that the
institution provides loan at low rate of interest, 33% have reported easy installments, 31%
reported that they approached for simple procedure and formalities and only a negligible 2%
of the respondent represents located near to their house. The other findings of the study are:

45% of the respondents have bought loan for purchase of house, 37% of have bought
the loan for purchase of flat, 16% for construction of house and remaining 2% for

other reasons.
93% of the sample respondents preferred the flexible type rate and 7% preferred fixed

rate of interest.
The researchers suggest that the deposit of title deed is the most required document at
the time of getting loan from the institution. The study shows that 54%, 36% and 10%
of the respondents preferred the repayable period of more than 10 years, more than 15
years and more than 5 years respectively. So, the majority of the respondents

preferred more than 10 year to settle their loan amount.

53%, 27% and 14% of the respondents were paying their loan amount through ECS,
through postdated cheque and through the collecting bank respectively. So, it may be
concluded from the above result that majority of the respondents preferred to pay their
loan amount through the Electronic Clearing System.
12

A large majority i.e. 75% of sample respondents reported that there is delay in
sanction and disbursement of loan amount.

The Study entitled Housing Finance in India Problems and Prospects Authored
byChaubey M. (2009)
The objectives of the study were:
i.
ii.

To Study the customers views on housing finance offered by HDFC in Varanasi, and
To know about the relative performance of HDFC in providing housing loans in city.

The sample of the study was selected on the basis of random sampling techniques.
For analyzing the perception of the borrowers, Likert scaling test was used. The study reveals
that,

42%, 32%, 22% and 4%, opted for loans because of low interest rate, easy installment

scheme, simple procedure and other reasons respectively.

26%, 34%, 38%, and 2% respondents have borrowed loans for purchase of flats,

purchase of house, construction of house and other reasons respectively.

100% respondents made the repayment in equated monthly installments.
43% respondents knew about the interest rate.
92% respondents preferred floating interest rates and 8% respondent preferred fixed

interest rates.
72%, 18% and 10% respondents came to know about bank through print and

electronic media, friends and relatives and Builders/Developers respectively.

50%, 24%, 20% and 86% respondents have reported of mortgage of finance through
property, gold and others insurance policy equal to the loan sanctioned, deposit for the

title deed and additional collateral security respectively.

58%, 28% and 14% respondents opted for more than 15 years, 5 years and 10 year as

the term of loan, respectively.

40%, 38% and 18% respondents repaid their loan amount through postdated cheques,

through ECS and through salary deduction and 4% were paying directly to the bank.
70% respondents agreed that there is a delay of loan approval that there is a delay of
loan approval and disbursement.

The researcher suggested that,

Option of repayment of EMI in monthly, quarterly or half yearly basis should be

given.
To win the confidence of customers and bring transparency in all the transactions, it is
necessary that the details of their loans accounts should be available online.
13

Most of the customers suggested that the loan processing / sanctioning time should be

reduced.
Customers suggested that the bank should provide online approval of application.
As far as the opinion of respondents about various facilities and policies of the bank is
concerned, it is found that:-

- 72% of the respondents opined that the government is encouraging the housing sector
- Only 50% said that the officials of the institutions were helpful.
- Only 28% of them reported that they were getting entire cost of flat as a loan.
- Only 40% of the respondents felt that rate of interest changed by the institutions is
reasonable.
- Only 42% of them were satisfied with the existing facilities for obtaining loan.
- Above half of them (52%) stated that the loan also covered life or fire insurance benefit.
- Only 42% reported that repayment period is adequate.
- 48% respondents stated that they were regular in making prompt payments.
Thus, by and large, opinion of the respondent is not very much in favour of the institutions,
because except in two cases in all the remaining cases a favourable opinion was expressed by
less than 50%. Thus, majority of the respondents face most of the problems listed above.

CHAPTER 3 METHODOLOGY
Research methodology in a way is a written game plan for conducting research. Research
methodology has many dimensions. It includes not only the research methods but also
considers the logic behind the methods used in the context of the study and complains why
only a particular method of technique has been used. The basic task of research is to generate
accurate information for use in decision making. Research can be defined as the systematic
and objective process of gathering, recording and analyzing data for aid in making business
decisions.

3.1 Problem / Research Statement

The analysis of scope and present scenario of reverse mortgage loan in India, It is very
difficult to analyse the complete picture of scope and present scenario of reverse mortgage
14

loan in India. Therefore there is a need of applying different method to access the exact
present scenario of reverse mortgage loan in India. Asset ownership structure in India
suggests that housing wealth constitutes major portion of the non-pension wealth of the
elderly. The problem that many house owners face is on how to tap into this housing wealth
for consumption without selling the house and moving. The best way to tap into house wealth
is Reverse Mortgage. Some preliminary analyses are also provided to document how a large
segment of elderly citizens will benefit from such a program. The Study is focused on
analyzing the process of reverse mortgage and its awareness level in the minds of senior
citizens , to study the merits and demerits of reverse mortgage and to study the various issues
like taxation, legal formalities of reverse mortgage.

3.2 Scope of Study

This project report analyses the potential for reverse mortgage products in India by
identifying segments of the population that are most likely to utilise such a product. The
characteristics that determines the segments are
a. The lack of state-sponsored pension program
b. The ownership of defined type of house asset (with high home equity) on which the
reverse mortgage can be availed.
The study is aimed at establishing that a potential demand for reverse mortgage exists in
India and it will increase liquity in the market. It would also increase the market efficiency by
providing appropriate risk adjusted return on home property. Calculations from census of
India 2001, and other related national and international sources are considered to show that
over 10% of Indian workforce will be potential market for reverse mortgage.
3.3 Sample Size-50

3.4 Tools for Data Collection-A questionnaire will be constructed which will be
administered to 50 respondents.
The data will be collected using both primary as well as secondary sources.
Secondary Sources that I will refer are books, research papers, web sites etc.
3.5 Method of Sampling:

15

The technique used for conducting the study was Convenience Sampling Technique as
sample of respondents was chosen according to convenience.
3.6 Statistical Tools:
The tools used in this study were MS-Excel, MS-Word. MS-Excel was used to prepare piecharts and graphs. MS-Word was used to prepare or write the whole project report.

CHAPTER 4 RESULTS AND DISCUSSIONS

Reverse Mortgage in India:

The concept of reverse mortgage, although new in India, is very popular in countries like the
United States. Recently, National Housing Bank (NHB), a subsidiary of the Reserve Bank of
India (RBI), released draft norms of reverse mortgage (the final guidelines are awaited).
Following are some of the key features of the scheme from the draft norms.
Reverse Mortgage Loans (RMLs) are to be extended by Primary Lending Institutions
(PLIs) viz. Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB.

16

The PLIs reserve their discretion to offer Reverse Mortgage Loans. Prospective borrowers are
advised to consult PLIs regarding the detailed terms of RML as may be applicable to them.
Types of Reverse Mortgage Products

Home Reversion / Sale and Lease Back- The homeowner sells the house but keeps the
right to live in the house till the time it is his prime residence. The amount could be

used for home improvement, any other health need etc.

Interest-only Mortgage- The borrower takes lump sum and pays only interest during

his lifetime. The principal is recovered through the sale of the home
Mortgage Annuity/ Home Income- The loan 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

Shared Appreciation Mortgage- This provides loans at a below market interest rate..
In return, the lender gets a pre-agreed share in any appreciation in the property value
over the accumulated value of the loan.

Pricing of Reverse Mortgage Products -The various considerations which need to be taken
while pricing a product of this type of nature.
Age of the borrower-If it is a joint borrowing then the age of the younger borrower is
considered. Value of the property- Then value of the property plays a major role in
determining the price for an RM product.
Expected Interest Rate- As the product resembles the normal annuity product in some sense,
the current and expected interest also plays a major role in pricing the product
Eligible Borrowers:

Should be Senior Citizen of India above 60 years of age.

Married couples will be eligible as joint borrowers for financial assistance. In such a
case, the age criteria for the couple would be at the discretion of the PLI, subject to at
least one of them being above 60 years of age. PLIs may put in place suitable

safeguards keeping into view the inherent longevity risk.

Should be the owner of a self- acquired, self-occupied residential property (house or
flat) located in India, with clear title indicating the prospective borrower's ownership
of the property.
17

The residential property should be free from any encumbrances.

The residual life of the property should be at least 20 years.
The prospective borrowers should use that residential property as permanent primary
residence. For the purpose of determining that the residential property is the
permanent primary residence of the borrower, the PLIs may rely on documentary
evidence, other sources supplemented by physical inspections.

Determination of Eligible Amount of Loan:

The amount of loan will depend on market value of residential property, as assessed

by the PLI, age of borrower(s), and prevalent interest rate.

The table given hereunder may serve as an indicative guide for determining loan
eligibility :

Age

Loan as proportion of Assessed Value of Property

60 65
66 70
71 75
Above 75

40%
50%
55%
60%

The above table is indicative and the PLIs will have the discretion to determine the
eligible quantum of loan reckoning the no negative equity guarantee' being provided
by the PLI. The methodology adopted for determining the quantum of loan including
the detailed tables of calculations, the rate of interest and assumptions (if any), shall

be clearly disclosed to the borrower.

The PLI may consider ensuring that the equity of the borrower in the residential
property (Equity to Value Ratio - EVR) does not at any time during the tenor of the

loan fall below 10%.

The PLIs will need to re-value the property mortgaged to them at intervals that may
be fixed by the PLI depending upon the location of the property, its physical state etc.
Such revaluation may be done at least once every five years; the quantum of loan
may undergo revisions based on such re-valuation of property at the discretion of the
lender.

Nature of Payment:
Any or a combination of the following:

Periodic payments (monthly, quarterly, half-yearly, annual) to be decided mutually

between the PLI and the borrower upfront
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Lump-sum payments in one or more trenches

Committed Line of Credit, with an availability period agreed upon mutually, to be
drawn down by the borrower

Lump-sum payments may be made conditional and limited to special requirements such as
medical exigencies, home improvement, maintenance, up-gradation, renovation, extension of
residential property etc. The PLIs may be selective in considering lump-sum payments option
and may frame their internal policy guidelines, particularly the eligibility and end-use criteria.
However, these conditions shall be fully disclosed to potential borrowers upfront.
It is important that nature of payments be decided in advance as part of the RML covenants.
PLI at their discretion may consider providing for options to the borrower to change.
Eligible End use of funds
The loan amount can be used for the following purposes:

Up gradation, renovation and extension of residential property.

For uses associated with home improvement, maintenance/insurance of residential

property
Medical, emergency expenditure for maintenance of family
For supplementing pension/other income
Repayment of an existing loan taken for the residential property to be mortgaged
Meeting any other genuine need

Use of RML for speculative, trading and business purposes shall not be permitted
Period of Loan: Maximum 15 years.
Interest Rate: The interest rate (including the periodic rest) to be charged on the RML to be
extended to the borrower(s) may be fixed by PLI in the usual manner based on risk
perception, the loan pricing policy etc. and specified to the prospective borrowers. Fixed and
floating rate of interest may be offered by the PLIs subject to disclosure of the terms and
conditions in a transparent manner, upfront to the borrower.
Security:

The RML shall be secured by way of mortgage of residential property, in a suitable

form, in favour of PLI.

Commercial property will not be eligible for RML.
19

Valuation of Residential Property:

The residential property should comply with the local residential land-use and
building bye laws stipulated by local authorities, with duly approved lay-out and
building plans.

The PLI shall determine the Market Value of the residential property through their
external approved valuer(s). In-house professional valuers may also be used subject to
adequate disclosure of the methodology.

The valuation of the residential property is required to be done at such frequency and
intervals as decided by the PLI, which in any case shall be at least once every five
years. The methodology of the revaluation process and the frequency/schedule of such

revaluations shall be clearly specified to the borrowers upfront.

PLIs are advised not to reckon expected future increase in property value in
determining the amount of RML. Should the PLIs do so in their best commercial
judgment, they may do so under a well defined Policy approved by their Board and
based on professional advice regarding property prices.

Provision for Right to Rescission:

As a customer-friendly gesture and in keeping with international best practices, after the
documents have been executed and loan transaction finalized, Senior Citizen borrowers may
be given up to three business days to cancel the transaction, the right of rescission,.
If the loan amount has been disbursed, the entire loan amount will need to be repaid by the
Senior Citizen borrower within this three day period. However, interest for the period may be
waived at the discretion of the PLI.
Loan Disbursement by Lender to Borrower:

The PLI will pay all loan proceeds directly to the borrower, except in cases pertaining
to retirement of existing debt, payments to contractor(s) for the repairs of borrower's
property, or payment of property taxes or hazard insurance premiums from the
borrower's account set aside for the purpose.

In case the residential property is already mortgaged to any other institution, the PLI
may, at its discretion, consider permitting use of part proceeds of RML to
20

prepay/repay the existing housing loan. The loan amount will be paid directly to that
institution to the extent of the loan outstanding with that institution with a view to
release the mortgage.
Periodicity: The loan will be extended as regular monthly, quarterly, half-yearly or annual
periodic cash advances or as a line of credit to be drawn down in time of need or in lump
sum.

The PLI will have the discretion to decide the mode of payment of the loan including
fixation of loan tenor, depending on the state and market value of the property, age of
the borrower and other factors. The rationale behind the decision of mode of payment
and fixation of the loan tenor shall be clearly disclosed to the borrowers.

Closing:
The PLIs will provide in writing, a fair and complete package of reverse mortgage loan
material and specimen documents, covering inter-alia, the benefits and obligations of the
product. They may also consider making available a tool kit to illustrate the potential effect of
future house values, interest rates and the capitalization of interest on the loan.
The closing costs may include the customary and reasonable fees and charges that may be
collected by the PLIs from the borrower. The cost for any item charged to the borrower shall
not normally exceed the cost paid by the lender or charged to the lender by the provider of
such service(s). Such items may include:

Origination, Appraisal and Inspection Fees. The borrower may be charged prorate

origination, appraisal and inspection fees by the PLI /appraiser.

Verification Charges of external firms
Title Examination Fees
Legal Charges/ Fees
Stamp Duty and Registration Charges
Property Survey and Valuation charges

A detailed schedule of all such costs will clearly be specified and provided to the prospective
borrowers upfront by the PLIs.
Settlement of Loan

21

The loan shall become due and payable only when the last surviving borrower dies or
would like to sell the home, or permanently moves out of the home for aged care to an
institution or to relatives. Typically, a "permanent move" may generally mean that
neither the borrower nor any other co-borrower has lived in the house continuously
for one year or do not intend to live continuously. PLIs may obtain such documentary
evidence as may be deemed appropriate for the purpose.

Settlement of loan along with accumulated interest is to be met by the proceeds

received out of Sale of Residential Property.

The borrower(s) or his/her/their estate shall be provided with the first right to settle
the loan along with accumulated interest, without sale of property.

A reasonable amount of time, say up to 2 months may be provided when RML

repayment is triggered, for house to be sold.

The balance surplus (if any) remaining after settlement of the loan with accrued
interest, shall be passed on to the estate of the borrower.

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:

The borrower(s) will continue to use the residential property as his/her/their primary
residence till he/she/they is/are alive, or permanently move out of the property, or
cease to use the property as permanent primary residence.

Non-Recourse Guarantee: The PLIs shall ensure that all reverse mortgage loan
products carry a clear and transparent no negative equity' or non-recourse'
guarantee. That is, the Borrower(s) will never owe more than the net realizable value
of their property, provided the terms and conditions of the loan have been met.

Loan Agreement: The PLIs shall enter into a detailed loan agreement setting out
therein the salient features of the loan mortgage security and other terms and
conditions, including disbursement and repayment of the loan, in addition to the usual
provisions, which are ordinarily incorporated in a mortgage loan document.
22

The loan agreement may also include a provision that the borrower shall not make any
testamentary disposition of the property to be mortgaged and even if it does so, it
would be subject to the mortgage created in favour of the lending institution. In such a
case, the borrower shall make a testamentary disposition of the mortgaged property in
favour of any of his/her relatives, subject to the discharge of the mortgage debt by
such legatee and a statement that the heirs shall not be entitled to challenge the
validity of the mortgage as also the right of the mortgagee to enforce the mortgage in
the event of death of the borrower unless the legal representative is willing to
undertake the responsibility for discharging in full the amount of loan and accrued
interest thereof.

In addition, the PLI may also consider obtaining a Registered Will from the borrower
stating, inter-alia, that he/she has availed of RML from the PLI on security by way of
mortgage of the residential property in favour of the PLI, meaning thereby that in the
event of death of the borrower (and co-borrower, if any), the mortgagee is entitled to
enforce the mortgage and recover the loan from the sale proceeds on enforcement of
security of the mortgage. The surplus, if any, has to be returned to the heirs of the
deceased borrower(s).

The PLIs may consider taking an undertaking from the prospective borrower that the
Registered Will given to the PLI is the last Will, prepared by him/her at the time
of availment of RML facility as per which the property will vest in his/her spouse
name after his/her demise. The borrower will also undertake not to make any other
Will' during the currency of the loan which shall have any adverse impact on the
rights created by the borrower in the PLI's favour by way of creation of mortgage on
the immoveable property mentioned under the loan documentation for covering loan
to be allowed to his/her spouse and interest thereon, even after the borrower's death.

The PLI will ensure that the borrower(s) has insured the property against fire,
earthquake, and other calamities.

The PLI will ensure that borrower(s) pay all taxes, electricity charges, water charges
and statutory payments.

23

The PLIs will ensure that borrower(s) are maintaining the residential property in good

and saleable condition.

The PLI may reserve the option to pay for insurance premium, taxes or repairs by
reducing the homeowner loan advances and using the difference to meet the
obligations/expenditures.

The PLI reserves the right to inspect the residential property/premises or arrange to
have the residential property/premises inspected by its representatives any time before
the loan is repaid and borrower(s) shall render his/her/their cooperation in respect of
such inspections.

Indian Market Potential

India-specific Characteristics of Relevance to RM

There are no universal old age social security related benefits. Only about 10% of the
active working population is covered by formal schemes. This would substantially
enlarge the potential target market for RM: house-rich, cash-poor.

A much lower proportion of urban households, and by implication, less scope for RM.

A much larger proportion of elders co-living with their family members of subsequent
generations and hence less scope for RM

A possibly stronger bequeath motive, reducing the scope for RM.

A possibly higher real rate of appreciation of real estate and housing prices, making
RM more attractive to the lender.

Widespread under valuation of real estate properties to accommodate transactions

involving unaccounted money and evasion of taxes on property and real estate
transactions

a.
b.
c.
d.
e.
f.

Complexity, variety and location specific variations in types of home ownership.

Benamiholdings/ Irrevocable power of attorney
Leasehold/ freehold
Land use conversion regulations
Floor space regulations
Rent/ tenancy controls
Disposal of ancestral property

24

Absence of competitive suppliers for immediate life annuity products. This, in turn, is

a consequence of
a. Lack of data on old age mortality rates
b. Lack of long-term treasury securities for managing interest rate risks of annuity
providers

The fledgling nature of the secondary markets for mortgage and securitization of

a.
b.
c.
d.
e.
f.

mortgage loans India specific legal and taxation issues

License/ Permission required under insurance/ banking regulation for offering RM
Income tax treatment for RM lender and borrower
Capital gains on property
Reporting and provisioning by the lender as per banking/ insurance regulation
Seniority of RM claims vis--vis other secured lenders
Status of RM loan in case of insolvency

Old Age Population

Though the Indian population is still comparatively young, India is also ageing.
Some demographic projections for India indicate that

The number of elderly (>60 yrs) will increase to 113 million by 2016, 179 million by
2026, and 218 million by 2030. Their share in the total population is projected to be
8.9 % by 2016 and 13.3% by 2026. The dependency ratio is projected to rise from
15% as of now to about 40% in the next four decades

The percentage of >60 in the population of Tamil Nadu and Kerala will reach about
15% by 2020 itself!

Life expectancy at age 60, which is around 17 yrs now, will increase to around 20 by
2020

How Reverse Mortgage Works:

Mr.Patil has retired after what can be called a very fulfilling career with a leading engineering
company. His only daughter is married and well settled in Bangalore. He owns a large house
in Thane -- worth about Rs 80 lakh (Rs 8 million), but he has limited savings (including PPF
and EPF) of Rs 10 lakh (Rs 1 million) to generate any major income. He is not expecting any
pension either. His worry now is to pay for his modest monthly expenses of Rs 20,000. His
financial assets can at best generate Rs 10,000 per month for him and the income thus
generated will not keep pace with inflation -- meaning that after five years, when he will

25

require Rs 30,000 per month, while his financial assets will still generate only Rs 10,000 per
month.
The only option he had earlier been to rent his house and move to a smaller house himself or
to sell his house altogether and invest the proceeds to earn a higher monthly income. Either
way, in his old age, he will be forced to look around for accommodation and keep on
worrying about the rising rents -- not a very happy prospect.
Potential Market Segments in India:
1) Age Group
Above 58 years, assuming 58 is the typical retirement age. Older the individual, more
attractive will be RM. Additional considerations will include the minimum age specified for
preferential treatment as senior citizens in matters such as income tax or the recently
introduced VarishtaBimaYojana.
2) Long Tenure at Current Home
RM is attractive to a borrower especially when he values continued stay in his current
residence and plans to do so for a long term into the future. This is likely when he has already
stayed in his current home for a relatively longer period- say a minimum of 10 years.
Additional indicators for such a desire could be a person currently resident in ones home
town/ state.
3) Lack of Other Supports
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.
4) No Significant Bequeath Motive
Literature suggests that there is a basic conflict between taking an RM loan and a desire to
bequeath property to ones heirs. If an elderly homeowner has no children, this question may
not arise. Otherwise, we need to look for attributes indicating a weak bequeath motive. For
example, in the Indian context, it could mean no sons. Or it could be that the entire next
generation of the family has migrated to another metro or abroad with no intention of coming
back. They may be much better off than the older generation and may not value bequests, if
any.
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List of Indian Banks Offering Reverse Mortgage

RBI Bank, SBI Bank, Axis Bank, Canara Bank, Citi bank, ICICI Bank, HDFC Bank, ING
Vyasa, PNB, Dena Bank, Union Bank, National Housing Bank
SBI Reverse Mortgage Loan (RML)

Periodicity of availingloan- 1.Monthly / quarterly payments, 2.Lumpsum payment

Interest Rate 10.75% p.a. (Fixed) subject to reset every 5 years.
Processing fee 0.50% of the loan.

Reverse Mortgage Loan PNB Baghban For Senior Citizens

Rate of Interest-10% p.a. (fixed) subject to re-set clause of five years (as applicable

for Housing Loan Borrowers).

Upfront fee/Documentation Charges-Upfront fee Amount equivalent to half+
months loan installment subject to Maximum of Rs.15, 000/-.

Reverse Mortgage by Union Bank

The loan carries a fixed interest of 10 per cent per annum.

Significance of Reverse Mortgage System in India

The society in India has under-gone huge changes in last 4-5 decades. Nuclear family has
replaced the joint family system. The system of family supporting the older people has gone.
As mentioned earlier the public pension system has not been able to provide an alternate
support to old people. This condition leaves the older people in jeopardy. They face following
issues

Outliving their retirement income

Depending on their children to help pay expenses

Risks to RM Lenders:
Szymanoski is a good starting point to appreciate the risks faced by an RM lender. These
risks are at the heart of the reluctance of lenders to get into RM lending, in the absence of
public policy support. The principal and unique problem facing the lender is that of
predicting accumulated future loan balances under an RM, at the time of origination. The
uniqueness is because RM is a rising debt instrument. Since RM is a non-recourse loan, the
lender has no access to other properties, if any, of the borrower. Even if the collateral
27

property appreciates in value, it might still be lower than the loan balance at the time of
disposal of the property.
There are three basic sources of this risk:
Mortality Risks
This is the risk that an RM borrower lives longer than anticipated. The lender might get hit
both ways: he has to make annuity payments for a longer period; and the eventual value
realized might decline. However, this risk is usually diversifiable, if the RM lender has a
large pool of such borrowers. Possibility of adverse selection (of predominance of relatively
healthier borrowers) is counterbalanced by the possibility that even borrowers with poor
health may be attracted by RMs credit line or lump sum options.
However, there is no literature on one possible source of systematic risk. Since RM is
projected to substantially improve the monthly income and/ or liquid funds of the RM
borrowers, would it not itself result in a systematically higher life expectancy amongst them
than otherwise? Perhaps this lacuna is due to the relatively short experience with RM so far.

Interest Rate Risks

Given that the typical RM borrower is elderly and is looking for predictable sources of
income/ liquidity, RM loans promise a fixed monthly payment / lump sum / credit line
entitlement. However, for the lender, this is a long-term commitment with significant interest
rate risks.
While fixing the above, the lender has to account for a risk premium and thus can offer only a
conservative deal to the borrower. This interest rate risk is not fully diversifiable within the
RM portfolio.
Most of the RM loans accumulate interest on a floating rate basis to minimize interest rate
risks to the lender. However, since there are no actual periodic interest payments from the
borrower, these can be realized only at the time of disposal of the house, if at all.
Property Market Risk

28

This risk may be partly diversifiable by geographical diversification of RM loans. However,

property values may be a non-stationary time series. Others have pointed out additional
aspects of these risks:

RM can be considered as a package loan with a crossover put option to the borrower
to sell his house at the accumulated value of the RM loan at the (uncertain) time of
repayment. If this option can be valued, it can be suitably priced and sold in the
market. However, unlike in the case of forward mortgages, markets for resale,
securitization and derivatives based on RMs are non-existent or non-competitive.
Small market size and predominance of government backed RM insurance may
dissuade potential entrants. This impedes the flow of funds to finance RM loans.

For the lender, both the interest and any shared appreciation component added to the
loan balance are taxable as current income even though there is no cash inflow.

RM loans found takers amongst lenders only after the availability of default insurance
under the HECM programme. Even then, in most of the RM loans, interest
accumulates at a floating rate linked to one-year treasury rates. Boehm and Ehrhardt

illustrate why. Basically they demonstrate that

o A fixed interest rate RM carries an interest rate risk several orders of magnitude
higher than a conventional coupon bond or regular mortgage. It could be especially
high at origination (as many as 100 times) and continues to be higher throughout.
o The small initial investment under an RM is very deceptive. RM creates very large
off-balance sheet liabilities, if market rates rise above the rate assumed under RM.
o If interest rate risk is also incorporated into capital adequacy norms, this will mean
disproportionate (to current asset value) additional capital commitments to support
RM lending
o This is because the typically small RM loan value at origination is essentially the
difference between the value of a relatively long duration asset (loan repayment) and a
relatively shorter duration annuity liability.
o Compared to a fixed interest RM that is non-callable by the borrower, a callable RM
carries very high risks for the lender. The fact that most of the RMs accumulate at
floating rates and that fresh RM loans involve significant upfront costs mitigate this
risk considerably.
Moral Hazard Risk

29

Once an RM loan is taken, the homeowners may have no incentive to maintain the house so
as to preserve or enhance market value. This might be especially true when the loan balance
is more or less sure to cross the sale value. Since the benefit would accrue mainly to the
lenders and the cost borne by the homeowner, it is perhaps not sensible to assume otherwise.
Miceli and Sirmans model this risk. They conclude that in a competitive market, the lenders
will respond by either reducing the loan amount or by charging a risk premium in interest or
both. However this fear of moral hazard in maintenance does not square with the findings of
Leviton discussed earlier, on the intensity of the attachment of the elderly to their homes.
The more important point is that some time during the tenure of an RM, an elderly borrower
may simply be physically incapable of maintaining the home as per loan requirements.
Though the RM loan contract provides for foreclosure under such conditions, this seems to be
impractical and sure to result in litigation and bad publicity for the lender. These problems
have begun to crop up already.
Shiller and Weiss broaden the scope in two dimensions:

In addition to RM, a range of home equity conversion products

Beyond mere maintenance, they consider incentives to improve home values, to drive
a hard bargain at the time of sale, and cheat the lender at the time of appraisal before
granting the loan (adverse selection) or through disguised or complex sale
arrangements to achieve undeclared gains at the cost of the lender.

They advise caution:

Experience to date may not be a reliable guide to the future as most of the

experimental schemes are in their infancy

Losses due to moral hazard may take many years to develop
Competitive pressures for achieving volumes in future may increase this risk

Liquidity Risks
In RM loans where the borrower draws down on his loan through a credit line, there is a risk
of sudden withdrawals.
Why is it Not Clicking in India?
The reasons for the model not taking off in India are manifold. From an emotional attachment
with ones house to real estate price correction; from an absence of clear guidance against
30

legal complications to inadequate marketing, the plan has been unable to meet the
expectations of financial institutions.
Relevance to India Market

Source-http://nhb.org.in/RML/RML_Index.php
Figure no-1: Chart showing Aged 60 + Projected Population
The share of the old persons (age 60 and above) to the total population in India is expected to
rise from 6.9 in 2001 to 12.4% in 2026. The growth of this segment of population is causing
tremendous pressure on the economic system. Government of India has already recognized
the urgency and initiated measures which can address income and security needs of the old
age persons. Pension reforms, amendments to housing policies, National Old Age Pension
scheme and Maintenance & Welfare of Senior citizens Bill, 2007 are some steps in this
direction. But, Government initiatives are sometimes constrained by disparities in income and
social characteristics of the population and the result, no one size fits all.
Social responsibility has demanded on the public sector and private sector enterprises to
launch financial products which can complement the welfare schemes of the government, so
that the Indian Diasporas have a well-orchestrated social security system. Thus, Pension,
Housing Finance and Reverse Mortgage products from financial institutions have a major
31

role in meeting the growth objectives of the business community and the welfare objectives
of the Government. Public participation in these initiatives will not only cause improvement
in the standard of life but has a large positive impact on the national economy.

Constraints for marketability of Reverse Mortgages

Indian Old parents do not want to shift from their house for reasons of proximity to
family and friends, emotional attachments to their Houses. The hope to offset need for
a regular stream of income by demanding maintenance from heirs. Heirs are promised
rights over the property in return.

Loan repayment in Term Reverse Mortgages could run into rough weather due to
variations in the paying capacity of the heirs. Conflicting interests of the heirs might
cause legal hurdles for lender to getting the loan paid off.

It will be a tall order for the lenders to provide all the guarantees to make Reverse
Mortgages attractive. For instance, inconsistency and lack of information in asset
appreciation rates and over long periods in India may hamper Crossover risk

assessment.
Variations in standard of living between urban and rural India population and its
impact on longevity, debt repayment commitment, satisfying legal requirements in
mortgage contracts etc makes it difficult for those designing Reverse Mortgage
products to strike a balance between business and welfare objectives.

Moral hazards in valuation of the property, will lead to erroneous lending. This may
either cause losses or create unfair competition among the lenders.

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

32

opportunity by the lenders and also social security measure by the borrowers and the
Government of India.
SWOT Analysis
Strengths

The senior citizens are entitled to regular cash flows at their choice - monthly,
quarterly, half yearly & annually.

No income criteria

No loan servicing or repayment required during the lifetime of borrower & spouse.

If the borrower dies during the period, the spouse will continue to get the loan amount
for 15 years.

No tax on the regular cash flows.

The borrower & their spouse can continue to stay in the house till both die.
Heirs of the borrower will be entitled to get the surplus of sale value of the property.

Borrower/heir can get mortgage released by paying loan with interest without having
to sell property at any time. Prepayment of loan is allowed.

NHB to guarantee obligation of banks/housing finance companies to pay the

committed loan amount as regular sums over a period of time.

Reassessment of property value will be done periodically or at least once every 5

years.

Borrower can cancel the mortgage within three days of approval/disbursement,

subject to return of loan amount.

Weaknesses

This loan product has a maximum tenure of only 15 years.

Basis of property valuation is not clear.

Requirement of clear title to property in the name of the borrower.

Three days period to cancel loan is too less.

33

Various fees to be added to borrowers liability, which can be quite substantial.

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.
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 spouses 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.
34

The borrower has a right to rescission for a few days even after the loan has been

processed.
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.

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.

Threats: Current Indian demographic and socio-economic can breed potential scams related
to RML. Sound mechanisms will have to be devised to tackle them.

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.

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.

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
35

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.
Companies in India:

National Housing Bank (NHB): The National Housing Bank, a subsidiary of the
Reserve Bank of India (RBI), is preparing the guidelines on reverse mortgage. This rule
applies to both stand-alone houses as well as flats. In case of inherited property, all
claimants to it will need to give their consent in writing. Sridhar says that if the property
is inherited, the lender will be guided by legal advice on the borrower's clear rights or
title. Reverse mortgage loans are to be extended by Primary Lending Institutions viz.
Scheduled Banks and Housing Finance Companies (HFCs) registered with NHB. They
reserve their discretion to offer Reverse Mortgage Loans.
NHB seeks to refinance banks/HFCs to extend reverse mortgage loan to senior
citizens. According to the NHB guidelines, senior citizens aged 60-65 can obtain loan
up to 40 per cent of the value of the property; between 66-70 up to 50 per cent;
between 71-75 up to 55 per cent; and above 75 up to 60 per cent. Equity to Value
Ratio - EVR) does not at any time during the tenor of the loan fall below 10%. A
reasonable amount of time, say up to 2 months may be provided when the repayment
is triggered, for house to be sold.
Under the existing regulatory regime, banks come under the RBI and HFCs under the
NHB. NHB plans to provide guarantee to borrowers against default by lenders by
starting a loan mortgage company. The company would also safeguard the interest of
lenders in case borrowers bungle on the terms of the agreement. NHB is also trying to
build in a mechanism where the loan amount could flow beyond 15 years. NHB has
suggested a loan to valuation ratio that varies with the age of the house owner.

State Bank of India (SBI): The loan is being offered by all branches of SBI from the
12th of October, 2007. The loan is offered at an interest rate of 10.75% pa and is subject
to change at the end of every five years along with revaluation of security. Joint loans will
be given if the spouse is alive and is over 58 years of age.

36

Dewan Housing Finance Limited (DHFL): DHFL was the first to launch the Saksham
scheme on reverse mortgage in September 2006. The loan to value for DHFL is 90% and is
offered to citizens above the age of 60. The rate of interest on reverse mortgage offered by
DHFL is 12 per cent while that for a classical home loan it is 11.75 per cent. The company
assesses the value of the property and lends about 30 per cent of the value o to a customer in
the age group of 60 years and about 60 per cent to those of 80 years and above. DHFL asks
for documentation and other upfront charges to the extent of 1.5% of the credit limit. If the
interest charged is 12% per annum and the time of tenure of the reverse mortgage is 10 years,
then the monthly payment for a 61-year old living in a property worth Rs. 60 lakh would
work out to around Rs10,000. DHFL has adopted the method of counseling their clients
through the senior citizens' association and other such forums.

Punjab National Bank (PNB): PNB is charging an interest rate of 10% per annum. The
tenure of the loan is about 15 to 20 years for the 60-70 age group and 10 to 15 years for
individuals aged above 70 years. In case of joint account, the minimum age of the spouse
for availing the loan under these two categories shall be 58 and 68 respectively. After the
death of the borrower, bank will give six months time to the legal heirs for repayment of
loan. But if this option is not exercised, bank will sell the property and liquidate the loan.
The qualifying amount of loan will depend on the realisable value of residential property,
after maintaining margin of 20% and upfront charges equivalent to half + months loan
installment subject to a maximum of Rs 15,000. The senior citizen shall be given upto 10
days time to relook into his requirements if he so wishes to cancel the transaction for any
reason whatsoever.

37

Comparative Analysis Reverse Mortgage Loan

S .no

Particulars

Bank of

Punjab

Allahabad

Canara

Oriental

Baroda

National

Bank

Bank

Bank Of

60 yrs

60 yrs

Commerce
60 yrs

Minimum age

60 yrs

Bank
60 yrs

of first borrower
Minimum age
55 yrs

55 yrs

55 yrs

55 yrs

60 yrs

of spouse
Minimum

Not

Not

20 yrs

20 yrs

30 yrs

Residual life of

specified

specified

property
Maximum Loan

on website
Rs. 1 cr

on website
Rs. 1 cr

Rs. 1 cr

Rs. 50 lacs

Rs. 1 cr

Amount
Margin as a %

Not

20%

40%

Not

For 60-70

of property

specified

specified

40%

on website

on website

For 70-80
30%
For > 80

Maximum Loan

15 yrs

20 yrs

15 yrs

15 yrs

25%
20 yrs

duration
Rate of Interest(

Prevailing

Prevailing

11%

Not

12.75%

As on 31 march

base rate +

base rate +

specified

with

2014)

1.75 %

2.50 %

on website

monthly
rest on

10

Processing Fee

Not

Half

One

0.25% of

fixed rate
0.50% of

specified

months

months

the loan

the loan

on website

pension

pension

amount

amount

(maximum

(maximum

with a

with a

limit Rs.

limit Rs.

minimum

minimum

15K)
NIL

10K)
NIL

of 5000
Not

of 1250
NIL

Pre-payment

Not

Charges

specified

specified

Facility of

on website
Yes

on website
Yes- 20%

Yes- upto
38

Yes- 40 %

No

getting lum sum

payment
Freelook period

11

15 lacs
Not

10 days

7 days

specified

Not

3 days

specified

on website
on website
Table no: 1 - Comparative Analysis Reverse Mortgage Loan
Benefits of Reverse Mortgage Loan

Figure no-2 -Figure showing Benefits of Reverse Mortgage Loan

Disadvantages of a reverse mortgage loan:

Although reverse mortgage loan can act as a source of survival during old age it can
always be called a last resort. It has few demerits which have to be noted before
planning for a reverse mortgage loan.
39

Pledge the property to loan lender means officially giving loan provider the right to
sell the house to recover the loan. If the owner of a house is willing to transfer the
ownership to someone after his/her death then this loan is not to be considered as a
source of income.

High rate of interest compared to other loans.

Variation in interest rates and loan amount during the time of valuation can turn into
serious problems at times.

The terms and conditions of the reverse mortgage loan are to be studied and taken
care of before purchasing it. Everything from factors related to title of property,
valuation of property, lending limits should be considered before choosing a particular
mortgage loan.

Data Analysis and Interpretation

1) Age wise classification of respondents
The survey is done for all age groups. But 20% respondents are the age group of 60 and
above. The eligible age group for reverse mortgage is above 60.
40

Data:

Criteria

No. of respondents

Percentage (%)

21-30

31-40

14

41-50

10

20

50-60

20

40

60 and above

10

20

Total

50

100

Table no. 2: Age wise classification

Chart:40
40
35
30
25

20

20

20
No. of respondents

20

10

10
5

Percentage

14

15
6

10

0
21-30

31-40

41-50

50-60 60 and above

Figure no. 3: Age wise classification

Analysis: The research is done by choosing the age group above 20 years. The distribution of
age is in between 20 to 70. Among surveyed population, 40% of people are between 50-60
age groups. And 20% people are above 60 years of age.
According to a survey report, In India, statistics show that number of elderly as a proportion
of population will show a 107% growth, from 113 million in 2016 and 179 million by 2026
respectively.
41

Interpretation: This implies the target population will increase in the near future. And India
will get elderly educated people by another 10 years.

2) Qualification of Respondents
Data
Criteria
Uneducated
Less than PUC
Graduate

No. of respondents
2
3
13
42

Percentage (%)
4
6
26

P.G.
25
50
Professional courses
7
14
Total
50
100
Table: 3 The table showing Qualification of Respondents
Chart:-

No. of respondents

7; 14% 2; 4% 3; 6%

Uneducated
Less than PUC
Graduate

13; 26%

P.G.
Professional courses

25; 50%

Figure no. 4-The chart showing Qualification of respondents

Analysis: As the data indicates, more than 50% of the respondents are well educated. Their
qualifications are above graduation level.
Interpretation: This show, the education level of people is good. This helps to make them
aware of Reverse mortgage loan.
3) Which would be your preferred investment instrument?
Data:Criteria
No. of respondents
Percentage (%)
Bank deposits
20
40
Insurance
10
20
Mutual funds
12
24
Stock market
8
16
Total
50
100
Table 4: The table showing investment preferences on respondents
43

Chart:

40
40
35
30
24
25

20

20

20

16

No. of respondents
Percentage (%)

12

15

10
8

10
5
0
Bank deposits

Insurance

Mutual funds Stock market

Figure no 5- The chart showing preferred investment instrument

Analysis:-Majority of the aged people want to invest in either Bank deposits or mutual fund
because of Security on their investments.
Interpretation: This shows, aged people are risk averse persons. They do not want to take
high risk. As reverse mortgage has low risk, this financial service will be widely accepted.

4) Do you own House/Houses?

Data:44

Criteria

No. of respondents

Percentage (%)

Yes

40

80

No

10

20

Table 5-The table showing number of respondents having at least one house
Chart:
80
80
70
60
50

40

Yes

40

No

30

20

20

10

10
0
No. of respondents

Percentage (%)

Chart 6-The chart showing number of respondents having at least one house
Analysis: About 80% people have their own house. Among them most of them are having
more than one houses. This shows most of the elderly people are house owner.
Interpretation: As the target clients for reverse mortgage are elderly house owners, this data
clearly give the idea that reverse mortgage has potential market in India.

5) Are you aware of the fact that, Reverse Mortgage gives the Financial support in your
Second Innings of life?
45

Data:Criteria
Yes
No
Total

No. of respondents
Percentage (%)
40
80
10
20
50
100
Table 6: The table showing awareness level on Reverse Mortgage

Chart:-

80
80
70
60
50

40

40

Yes

20

10

No

30
20
No

10
0
Yes

No. of respondents
Percentage (%)

Chart no 7-The chart showing awareness level on Reverse Mortgage

Analysis: The data clearly indicates, only 34 members are aware of reverse mortgage service.
Majority of them are unaware of the services. Among 34 members, only 6 members are using
the service.
Interpretation: From this, we can interpret that the elderly people are not much aware of
reverse mortgage service. If the financial institutions make them aware, the elderly can avail
the service.
6) The aged people feel insecure about their future
Data:

46

Criteria
No. of respondents
Percentage (%)
Strongly Agree
2
4
Agree
25
50
Disagree
13
26
Strongly Disagree
10
20
Table 7: The table showing aged people feel insecure about their future
Chart:50
50
45
40
35
30
25

25

20

20

20

Percentage (%)

10

15
10

No. of respondents

10

10

5
0

Percentage (%)
No. of respondents

Chart 8: The Chart showing the aged people feel insecure about their future
Analysis: Most elderly people feel insecure about their future.
Interpretation: As, everybody knows, future is uncertain. But for elderly people, future is
uncertainty of insecurity. So they are very careful in taking any decision about their future.

7) The people have more sentiment on their house:

Data:Criteria

No. of respondents
47

Percentage (%)

Strongly Agree
10
20
Agree
25
50
Disagree
10
20
Strongly Disagree
5
10
Table 8: The table showing people have more sentiment on their house
Chart:
50
50
45
40
35
30

25

25

20

20

20
15

No. of respondents
10

10

10

10

Percentage (%)

5
0

Chart no 9-The chart showing the people have more sentiment on their house
Analysis: Majority of the people say that they are more sentiment towards their house.
Interpretation: Indians are more sentimental about their family and property.

CHAPTER 5 LIMITATIONS & IMPLICATIONS

5.1 Limitations of the Study
All the research projects are hindered in their smooth flow by some unforeseen problems. In
addition to the above, the due weightage which is given by the Government for the growth of

48

reverse mortgage and the involvement of the old people .All research studies also have
limitations and a finite scope.
In spite of this there have been few limitations to the study.

The limited knowledge of the respondents and sample size is small.

Research work was carried out on some people but the finding may not be applicable
on all other consumers because of social and cultural differences.

Shortage of time is also reason for incomprehensiveness.

The views of the people are biased therefore it may not be reflecting true picture.

Due to time constraints for constructing this project, focus only the customer
behaviour in automobile industry has been studied in detail.

Sampling error: the research include a sample size of 50 which is not enough to
determine the brand perception of the consumers for buying the cars. Since its not a
census survey there is always a chance of error.

There are various factors which influence the old people decision regarding reverse
mortgage loan and consider all these factors are not an easy task.

5.2 Implications of the Study

In order to provide an impetus, certain improvements have been made in the scheme
like annuity linked plan assuring lifetime payments even after the completion of the
term, higher annuity without lump sum loan option etc.

Some of the reasons for the scheme not being as successful as envisaged could be due
to lack of awareness of the product, inadequate marketing, disputed title deeds, etc.
Hopefully, these bottlenecks will be removed paving the way for a better and brighter
future for the senior citizens of our country.

CHAPTER 6 SUMMARY & CONCLUSIONS

6.1 Summary of Findings

49

Majority of the aged people want to invest in either Bank deposits or mutual fund

because of Security on their investments.

As, everybody knows, future is uncertain. But for elderly people, future is uncertainty

of insecurity. So they are very careful in taking any decision about their future.
The data clearly indicates, only 34 members are aware of reverse mortgage service.
Majority of them are unaware of the services. Among 34 members, only 6 members
are using the service.

Variation in interest rates and loan amount during the time of valuation can turn into
serious problems at times.

6.2 Conclusion

Reverse mortgage, if available, offers an attractive option to the elderly to finance

their consumption needs on their own, without the necessity of moving out or

worrying about indebtedness or repayment.

If designed properly and offered by an empathetic lender, RM might turn out to be the

vanguard product to build up brand equity for the lender in this niche segment.
Demographic projections indicate that this segment is the fastest growing segment all

over the world.

RM, if widely available, might in fact encourage more people in the working

population to increase the proportion of their savings invested in housing.

This segment is likely to attract increasingly favorable public policy attention, given
the projected importance of this segment in the electoral politics of all democratic

countries.
However, the actual size of the RM markets is nowhere near its estimated potential,

for a variety of reasons from the demand, supply and regulatory considerations.
Any interested RM lend lender in the Indian market must proceed with caution.

Reverse mortgage in simple terms is a rather unconventional retirement tool. Even in

countries where it has been around for quite a while, acceptance has been very cautious. It is
a boon for the asset rich and the income poor population.
However, a point to note is that some time during the tenure of the loan, an elderly borrower
may simply be physically incapable of maintaining the home as per loan requirements.
Though the loan contract provides for foreclosure under such conditions, this seems to be
impractical and sure to result in litigation and bad publicity for the lender.

50

Experience to date may not be a reliable guide to the future as most of the experimental
schemes are in their infancy. Losses due to moral hazard may take many years to develop.
Competitive pressures for achieving volumes in future may increase this risk.
At the macro level, implementation of reverse mortgage schemes could reduce the burden on
the Government and employers who are paying pensions, whether in the public or in the
private sector, and would thus be an indirect measure to bring in pension reforms. It spurs
economic activity, provides security and retains the principal flavour of a defined-benefit
scheme. It can bring about a great degree of regulation and transparency in the Indian market,
which as of now is missing.
Instead of merely capping loan amount as a percentage of value, total outstanding including
interest should be capped if the borrowers survive the term of loan. The borrower must
undertake to pay the difference from his other sources.
A pool account may be operated by NHB or any agency promoted for this purpose which will
meet short recoveries either due to outstanding overtaking the value of property or, due to
value of property falling. Counseling to be mandatory could be free as in the US and should
be done by advisors carrying NHB certificates.

REFERENCES
References

National Housing Bank, India: Reverse Mortgage Loans (RML) Operational

guidelines from http://www.nhb.org.in/RML/operational_guidelines.php

51

National Housing Bank, India: Reverse Mortgage Loans (RML) from

http://nhb.org.in/RML/RML_Index.php
http://india-financing.com/staff-publications.html
IDBI Bank Reverse Mortgage Loans (RML)- from http://www.idbi.com/reverse-

mortgage-loan.asp
Bank
of
Baroda

http://www.bankofbaroda.co.in/pfs/bobashray.asp
Indian
Bank
Reverse
Mortgage

Loans

(RML)

from

http://www.indianbank.in/loans.php?by=8&ty=1
Canara
Bank
Reverse
Mortgage

Loans

(RML)

from

Reverse

Mortgage

Loans

(RML)

from

http://www.canarabank.com/english/Scripts/pblCanJeevan.aspx
Bibliography

R Rajagopalan: Reverse Mortgage Products for the Indian Market: An Exploration of

Issues
Purnananda Kumar Divakaruni,Sri VenkataMadhukarKanagala, Reverse Mortgages -

Features & Risks

AshishDaptardar, Dr. ChandanDasgupta(March 2014),Reverse Mortgages in the Indian
Housing Market: A Review, International Journal of Management & Business Studies .

52