LM: Reverse mortgages fail to take off in India: Feb 20,2008

J ust 150 and crawling.

That’s the number of loans that Indian senior citi zens, whose numbers are estimated at about 80 million, have availed under the socalled reverse mortgage scheme, according to officials of the National Housing Bank, or NHB, the regulator for home finance institutions that piloted the scheme.

Announced in the Union Budget a year ago by P.

Chidambaram with much fanfare, a reverse mortgage essentially is a loan against a home that a senior citizen in India would not have to pay back for as long as she lives in that house.

Experts and analysts say that the scheme has failed because of confusion relating to tax treatment.

Tax planners, based on the notification put out by Central Board of Direct Taxes, or CBDT, the apex policy body that decides on direct taxes, argue that it is not yet clear as to whether the monthly payments accruing to the senior citizen after mortgaging the home should be treated as an income and hence taxed, or just be treated as a loan.

At the same time, the banks are not sure how they should account for the accrued interest while giving out these loans. Banks also believe that there is a need for a complementary insurance product that will cover the borrower if they outlive the tenure of the loan.

“Insurance companies have been sensitized to the product as well, but none of them have come out with a product yet,” says an official of the Punjab National Bank who didn’t want to be named. Punjab National Bank, which was the first to offer a scheme, called PNB Baghban, in April 2007, has sold around 100 such mortgages.

When contacted by Mint, CBDT said: “Tax implications of the reverse mortgage scheme are under consideration by CBDT at this point in time”

The number of senior citizens in India is set to rise to 140 million by 2025 though it is unclear what fraction of them own homes and need such mortgages.

NHB officials say while they are not entirely satisfied with the pace at which the product has been sold, it doesn’t think the scheme has failed yet.

Says R.B. Verma, executive director of NHB: “The product needs to be seen differently and not aggressively marketed just like any other loan. It’s a balance of a social and a commercial product.”

According to Verma, there is a need to understand the psyche of the consumer since they are very sensitive about mortgaging their house.

Consider R.M.S. Chawla, a 77-year-old who resides in New Delhi and took the loan as soon as it was announced.

“I availed of the scheme because my pension was not enough, otherwise it was a very painful experience to mortgage my house that I built with my own sweat and blood,” he says.

Though he is grateful to get a monthly instalment that pays for the medical care, since both husband and wife are bedridden, Chawla complained that it was tough to raise the Rs15,000 for getting the house evaluated and prepare legal documents to get the loan.

“It is the bank’s duty to evaluate the property, I shoul dn’t be made to pay for it,” he complains.

To be eligible for a reverse mortgage in India, the homeowner has to be 60 years or older. They have to then get the property evaluated and mortgage it to get a monthly cash flow for a specific number of years. Most reverse mo-rtgage loans are being offered at a rate of 10-11%. The property is evaluated every five years and the rate of interest and monthly instalment are subject to change accordingly.

Though the lending institution owns the house, the borrower can reside there until her demise. Thereafter, the legal heirs can opt to repay the bank the entire amount and retain the property. Alternatively, the bank sells it and after debiting its share, transfers the surplus to the legal heirs.

There is also no clarity on whether institution has to pay a property gains tax on the sale as well.