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The concept of Reverse Mortgage (RM) is gaining momentum in Indian with Finance Minister P. Chidambaram
giving his nod in the Union Budget for 2007-08. Subsequently, the National Housing Bank (NHB), a subsidiary of
the Reserve Bank of India (RBI), released the guidelines. This had led several banks to announce their intentions to
launch the scheme. Taking the lead, Dewan Housing Finance Limited (DFHL), followed by Punjab National Bank
(PNB) and Bank of Baroda (BOB), State Bank of India (SBI), etc. announced the scheme aimed at senior citizens [1]
Objectives of the research study
I.
II.
III.
IV.
To recommend best strategies for making Reverse Mortgage more acceptable in India.
V.
To describe the degree to which reverse mortgages met consumer needs and the degree to which Consumers
are satisfied with their loans
CHAPTER 2
INTRODUCTION
Banks mobilize the small savings of the people and make them available for productive purposes.
Promotes the habit of savings among the people thereby offering attractive rates of interests on their deposits.
Provides safety and security to the surplus money of the depositors and as well provides a convenient and
useful.
Banks advances exposure in trade and commerce, industry and agriculture by knowing their financial
Thus Indian banking has come from a long way from being a sleepy business institution to a highly pro-active and
dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic
reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional
streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30 banking units contributing
to almost 50% of deposits and 60% of advances.
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The banking institutions in the organized sector, commercial banks are the oldest institutions, some them having their
genesis in the nineteenth century. Initially they were set up in large numbers, mostly as corporate bodies with
shareholding with private individuals. Today 27 banks constitute a strong Public Sector in Indian Commercial
Banking. Commercial Banks operating in India fall under different sub categories on the basis of their ownership and
control over management;
Public Sector Banks
Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank
of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down
vide section42 (6) a) of the Act.
"Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of
1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a
corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the
Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank". "Non-scheduled bank in
India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of
1949), which is not a scheduled bank".
Cooperative Banks
Besides the commercial banks, there exists in India another set of banking institutions called cooperative credit
institutions. These have been made in existence in India since long. They undertake the business of banking both in
urban and rural areas on the principle of cooperation. They have served a useful role in spreading the banking habit
throughout the country. Yet, there financial position is not sound and a majority of cooperative banks has yet to
achieve financial viability on a sustainable basis.
Evolution of SBI
The origin of the State Bank of India goes back to the first decade of the nineteenth century with the establishment of
the Bank of Calcutta in Calcutta on 2 June 1806. Three years later the bank received its charter and was re-designed
as the Bank of Bengal (2 January 1809). A unique institution, it was the first joint-stock bank of British India
sponsored by the Government of Bengal. The Bank of Bombay (15 April 1840) and the Bank of Madras (1 July
1843) followed the Bank of Bengal. These three banks remained at the apex of modern banking in India till their
amalgamation as the Imperial Bank of India on 27 January 1921.
Primarily Anglo-Indian creations, the three presidency banks came into existence either as a result of the
compulsions of imperial finance or by the felt needs of local European commerce and were not imposed from outside
in an arbitrary manner to modernize India's economy. Their evolution was, however, shaped by ideas culled from
similar developments in Europe and England, and was influenced by changes occurring in the structure of both the
Establishment
The establishment of the Bank of Bengal marked the advent of limited liability, joint-stock banking in India. So was
the associated innovation in banking, viz. the decision to allow the Bank of Bengal to issue notes, which would be
accepted for payment of public revenues within a restricted geographical area. This right of note issue was very
valuable not only for the Bank of Bengal but also its two siblings, the Banks of Bombay and Madras. It meant an
accretion to the capital of the banks, a capital on which the proprietors did not have to pay any interest. The concept
of deposit banking was also an innovation because the practice of accepting money for safekeeping (and in some
cases, even investment on behalf of the clients) by the indigenous bankers had not spread as a general habit in most
parts of India. But, for a long time, and especially up to the time that the three presidency banks had a right of note
issue, bank notes and government balances made up the bulk of the investible resources of the banks.
The three banks were governed by royal charters, which were revised from time to time. Each charter provided for a
share capital, four-fifth of which were privately subscribed and the rest owned by the provincial government. The
members of the board of directors, which managed the affairs of each bank, were mostly proprietary directors
representing the large European managing agency houses in India. The rest were government nominees, invariably
civil servants, one of whom was elected as the president of the board.
Business
The business of the banks was initially confined to discounting of bills of exchange or other negotiable private
securities, keeping cash accounts and receiving deposits and issuing and circulating cash notes. Loans were restricted
to Rs.one lakh and the period of accommodation confined to three months only. The business of the banks was
initially confined to discounting of bills of exchange or other negotiable private securities, keeping cash accounts and
Nikita Jadhav (Finance)
A major change in the conditions of operation of the Banks of Bengal, Bombay and Madras occurred after 1860.
With the passing of the Paper Currency Act of 1861, the right of note issue of the presidency banks was abolished
and the Government of India assumed from 1 March 1862 the sole power of issuing paper currency within British
India. The task of management and circulation of the new currency notes was conferred on the presidency banks and
the Government undertook to transfer the Treasury balances to the banks at places where the banks would open
branches. None of the three banks had till then any branches (except the sole attempt and that too a short-lived one
by the Bank of Bengal at Mirzapore in 1839) although the charters had given them such authority. But as soon as the
three presidency bands were assured of the free use of government Treasury balances at places where they would
open branches, they embarked on branch expansion at a rapid pace. By 1876, the branches, agencies and sub
Nikita Jadhav (Finance)
The presidency Banks Act, which came into operation on 1 May 1876, brought the three presidency banks under a
common statute with similar restrictions on business. The proprietary connection of the Government was, however,
terminated, though the banks continued to hold charge of the public debt offices in the three presidency towns, and
the custody of a part of the government balances. The Act also stipulated the creation of Reserve Treasuries at
Calcutta, Bombay and Madras into which sums above the specified minimum balances promised to the presidency
banks at only their head offices were to be lodged. The Government could lend to the presidency banks from such
Reserve Treasuries but the latter could look upon them more as a favour than as a right.
The decision of the Government to keep the surplus balances in Reserve Treasuries outside the normal control of the
presidency banks and the connected decision not to guarantee minimum government balances at new places where
branches were to be opened effectively checked the growth of new branches after 1876. The pace of expansion
witnessed in the previous decade fell sharply although, in the case of the Bank of Madras, it continued on a modest
scale as the profits of that bank were mainly derived from trade dispersed among a number of port towns and inland
centers of the presidency. India witnessed rapid commercialization in the last quarter of the nineteenth century as its
railway network expanded to cover all the major regions of the country. New irrigation networks in Madras, Punjab
and Sind accelerated the process of conversion of subsistence crops into cash crops, a portion of which found its way
into the foreign markets. Tea and coffee plantations transformed large areas of the eastern Terais, the hills of Assam
and the Nilgiris into regions of estate agriculture par excellence. All these resulted in the expansion of India's
international trade more than six-fold. The three presidency banks were both beneficiaries and promoters of this
commercialization process as they became involved in the financing of practically every trading, manufacturing and
The presidency Banks of Bengal, Bombay and Madras with their 70 branches were merged in 1921 to form the
Imperial Bank of India. The triad had been transformed into a monolith and a giant among Indian commercial banks
had emerged. The new bank took on the triple role of a commercial bank, a banker's bank and a banker to the
government, But this creation was preceded by years of deliberations on the need for a 'State Bank of India'. What
eventually emerged was a 'half-way house' combining the functions of a commercial bank and a quasi-central bank.
The establishment of the Reserve Bank of India as the central bank of the country in 1935 ended the quasi-central
banking role of the Imperial Bank. The latter ceased to be bankers to the Government of India and instead became
agent of the Reserve Bank for the transaction of government business at centers at which the central bank was not
established. But it continued to maintain currency chests and small coin depots and operate the remittance facilities
scheme for other banks and the public on terms stipulated by the Reserve Bank. It also acted as a bankers' bank by
holding their surplus cash and granting them advances against authorized securities. The management of the bank
clearing houses also continued with it at many places where the Reserve Bank did not have offices. The bank was
also the biggest tendered at the Treasury bill auctions conducted by the Reserve Bank on behalf of the Government.
The establishment of the Reserve Bank simultaneously saw important amendments being made to the constitution of
the Imperial Bank converting it into a purely commercial bank. The earlier restrictions on its business were removed
and the bank was permitted to undertake foreign exchange business and executor and trustee business for the first
Imperial Bank
The Imperial Bank during the three and a half decades of its existence recorded an impressive growth in terms of
offices, reserves, deposits, investments and advances, the increases in some cases amounting to more than six-fold.
The financial status and security inherited from its forerunners no doubt provided a firm and durable platform. But
the lofty traditions of banking which the Imperial Bank consistently maintained and the high standard of integrity it
observed in its operations inspired confidence in its depositors that no other bank in India could perhaps then equal.
All these enabled the Imperial Bank to acquire a pre-eminent position in the Indian banking industry and also secure
a vital place in the country's economic life. When India attained freedom, the Imperial Bank had a capital base
(including reserves) of Rs.11.85 crores, deposits and advances of Rs.275.14 crores and Rs.72.94 crores respectively
and a network of 172 branches and more than 200 sub offices extending all over the country.
In 1951, when the First Five Year Plan was launched, the development of rural India was given the highest priority.
The commercial banks of the country including the Imperial Bank of India had till then confined their operations to
the urban sector and were not equipped to respond to the emergent needs of economic regeneration of the rural areas.
In order, therefore, to serve the economy in general and the rural sector in particular, the All India Rural Credit
Survey Committee recommended the creation of a state-partnered and state-sponsored bank by taking over the
Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. An act was
accordingly passed in Parliament in May 1955 and the State Bank of India was constituted on 1 July 1955. More
than a quarter of the resources of the Indian banking system thus passed under the direct control of the State. Later,
the State Bank of India (Subsidiary Banks) Act was passed in 1959, enabling the State Bank of India to take over
eight former State-associated banks as its subsidiaries (later named Associates).The State Bank of India was thus
AGM - Operations
Source-
[55]
Table 2.1:
mortgage
Item
Mortgage
Reverse Mortgage
Purpose of loan
to purchase a home
to generate income
Before closing
At closing
the home
the
borrower...
the lender
- equity grows
- equity declines
At end of loan,
- owes nothing
borrower...
Type of
Equity
Equity
Retain ownership of your home for life this is guaranteed as long as you maintain your home, and pay insurance
and real estate taxes
The following are the guidelines given by RBI for Reverse Mortgage:
Any house owner over 60 years of age is eligible for a reverse mortgage.
The borrower can opt for a monthly, quarterly, annual or lump sum payments at any point, as per his discretion.
The revaluation of the property has to be undertaken by the Bank once every 5 years.
The amount received through reverse mortgage is considered as loan and not income; hence the same will not
attract any tax liability.
Reverse mortgage rates can be fixed or floating and hence will vary according to market conditions depending on
the interest rate regime chosen by the borrower.
Processing or origination costs: - These are the costs which covers the banks operating expenses for making the
loan .This cost can be financed as a part of the total loan.
Mortgage Insurance: - This is the insurance charges of the insurer who guarantees that if the lender that is the
banker goes out of business for any reason, the borrower would continue to get his or her payments. The insurer
could also guarantee that the borrower will never owe more than the value of his or her home when the loan is
finally repaid.
Appraisal fee: - This fee is to be paid to an appraiser who fixes a value on the borrowers home which is to be
mortgaged. An appraiser must also make sure there are no major structural defects, such as bad foundation, leaky
roof, or termite damage. If the appraiser uncovers property defects, you must hire a contractor to complete the
repairs. Once the repairs are completed, the same appraiser is paid for a second visit to make sure the repairs
have been completed. The cost of the repair may be financed within the loan.
Other fees which include credit report fee for verifying whether any tax liabilities are there, title search fee,
document preparation fee for loan documents, mortgage recording fee, survey fee, etc. [24]
Risks to RM Lenders
There are some risks faced by a Reverse Mortgage lender. These risks are at the heart of the reluctance of lenders to
get into reverse mortgage 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 a reverse mortgage, at the time of origination.
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 reverse mortgage loan at the time of repayment which is uncertain. If this option can be
valued, it can be suitably priced and sold in the market. However, unlike in the case of traditional mortgages,
markets for resale, securitization and derivatives based on reverse mortgages are non-existent or noncompetitive. Small market size and predominance of government backed reverse mortgage insurance may
dissuade potential entrants. This impedes the flow of funds to finance reverse mortgage 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.
Reverse mortgage loans found takers amongst lenders only after the availability of default insurance. Even then,
in most of the reverse mortgage loans, interest accumulates at a floating rate linked to one-year treasury rates. A
fixed interest rate reverse mortgage carries an interest rate risk are higher than a conventional coupon bond or
regular mortgage. It could be especially high at origination and continues to be higher throughout. The small
initial investment under an reverse mortgage is very deceptive. Reverse mortgage creates very large off-balance
sheet liabilities, if market rates rise above the rate assumed under reverse mortgage.
4. Moral Hazard Risk:-
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. 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. The more important point is that some
5. Liquidity Risks:In Reverse mortgage loans where the borrower draws down on his loan through a credit line, there is a risk of sudden
withdrawals.
Risk Mitigation
Risk mitigation is the key for the success of any financial product including reverse mortgage. Some of the risk
mitigation techniques which the providers that is the banker can apply to reduce the risk on their books are as
follow:
Proper eligibility criterions
The first mitigation of risk can be done at the time of providing loans. This can be done through proper verification
of the title of the property, age of the borrower; his/her credit analysis etc. This reduces the risk of default by the
borrower
Variable interest rates loan as compared to fixed interest rate loan
To avoid interest rate risk, the lender can go for variable interest rates based on some market benchmark like
MIBOR. This will also reduce the risk of Pre-payment as the borrower will not have interest arbitrage on prepayment
of the loan.
Proper analysis of mortality trends
There are no universal old age social security related benefits. Only about 10% of the active working populations
are covered by formal schemes. This would substantially enlarge the potential target market for RM.
A much lower proportion of urban households, and by implication, less scope for reverse mortgage.
A much larger proportion of elders co-living with their family members of subsequent generations and hence less
scope for reverse mortgage.
A possibly stronger hand over motive, reducing the scope for reverse mortgage.
A possibly higher real rate of appreciation of real estate and housing prices, making reverse mortgage 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
Complexity, variety and location specific variations in types of home ownerships like Benami holdings that is
Irrevocable power of attorney, Leasehold, freehold, Land use conversion regulations, Floor space regulations,
rent, tenancy controls, Disposal of ancestral property.
Absence of competitive suppliers for immediate life annuity products. This, in turn, is a consequence of Lack of
data on old age mortality rates, Lack of long-term treasury securities for managing interest rate risks of annuity
providers.
India specific legal and taxation issues like License/ Permission required under insurance/ banking regulation for
offering reverse mortgage ,Income tax treatment for reverse mortgage lender and borrower, Capital gains on
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
Men
Women
All elderly
Pensions/Rent
9-10%
5%
7-8%
Work
65%
15%
40%
Transfers
30%
72%
52%
Of which, from
22%
58%
40%
Children
In addition, as per a survey of the National Sample Survey Organization (NSSO) in 1994, less than 4% of the elderly
lived alone. A 1995-96 National Sample Survey of the elderly reported that about 5% of them lived alone, another
10% lived with their spouses only and another 5% lived with relatives/ non-relatives, other than their own children.
In other words, co-residence with children and other relatives is predominant.
However, the following aspects are worrisome:
As incomes and life expectancy rose in the now developed countries, simultaneously there was a decline in
co-residence rates and intergenerational support. It may happen in India too
Strains due to demographic trends seem inevitable: fewer children must support parents for longer periods of
time. In a recent survey covering 30 cities, 70% of the respondents did not expect their children to take care
of them after retirement.
Now let us see specification of the potential target segment for Reverse Mortgage.
Age Group
Above 58 years, assuming 58 is the typical retirement age. Older the individual, more attractive will be reverse
mortgage. Additional considerations will include the minimum age specified for preferential treatment as senior
citizens in matters such as income tax or the recently introduced Varishta Bima Yojana.
The current monthly annuity payout by LIC under its immediate annuity product Jeevan Akshay is 844 Rs for a
single premium payment of Rs 1 lakh, for a person aged 65. The annuity will be lower in case of joint life or annuity
certain options. If we were to use a minimum of Rs 5000 as the monthly annuity that makes reverse mortgage a
worthwhile activity, we need an RM loan of around Rs 6 lakhs. Assuming a loan to home value ratio of 60%, this
implies a current market value of Rs. 10 lakhs.
Amongst such households, we are looking for those whose current levels of income are insufficient to afford their
desired standard of living. The salary replacement rates suggested in the literature, for maintaining the same standard
of living after retirement as before, is around 60%. This implies a pre-retirement take home salary or income (aftertax) of around Rs 9000-10000 a month. A potential reverse mortgage borrower would be one who had such a preretirement income but no substantial pension benefits. Therefore, he would be employed in the private sector or selfemployed.
Reverse Mortgage 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.
If such an individual is living alone, as in the case of a widower or widow, reverse mortgage 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.
It can be said that there is a basic conflict between taking an reverse mortgage 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.
A potential reverse mortgage borrower must be an elderly person who values his financial independence. He must be
interested in maintaining his desired quality of life rather than curtailing consumption for lack of current cash
income. This implies he must be mentally prepared to consider borrowing in old age, let alone through innovative
financial products like reverse mortgage. This implies certain minimum education and exposure to financial savings/
assets/ markets. [26]
Empathetic counseling from professionally competent and independent counselors- NGOs like Help Age,
Dignity Foundation, Indian Association of Retired Persons (IARP) etc., may be interested in providing such
services
Ratio of reverse mortgage Loan limit to current market value of property: This will be a function of
borrowers age, projected long term interest rates and property appreciation rates.
Flexibility in drawdown: The line of credit with interest credit for unutilized portion is the most popular
choice in the U.S context. The same might be true in India too. Cash may be withdrawn as and when needed,
especially large amounts to meet medical and other emergencies, in contrast to a regular monthly amount.
However this is vulnerable to myopic withdrawals or under pressure from relatives.
Clarity in borrowers responsibility for property maintenance and paying property taxes, insurance etc.
Strong legal protection against foreclosure and/
Clarity in tax treatment of reverse mortgage receipts, accrued interest, capital gains etc.
Lender Perspective:The major concern is with respect to the risks of longevity, interest rates and property appreciation rates. There is no
simple way to explore these except through financial modeling. Some alternatives for limiting risks in the learning
phase can be suggested as below.
Purchasing a life annuity through an insurance tie-up so that a part of the mortality risk is transferred to the
insurer with the necessary core competence. Their expertise may also be used to decide on the lump sum
reverse mortgage loan.
Based on the U.S experience so far, it seems better for the lender to assume responsibility for property
maintenance/ taxes against deduction from reverse mortgage loan limits/ annuity payments.
Though insurance against default risk is unlikely in India, an reverse mortgage lender has to charge an
equivalent additional interest spread of 2-2.5%, if not more, as a default risk premium
It seems worthwhile to explore and lobby for concessional refinance for reverse mortgage loans from
agencies like the National Housing Bank and for lower reverse mortgage related transaction taxes.
Given the requirement of property market related expertise at the micro-level, it might be worthwhile to focus
on only one or two cities in the initial phase.
There might be a need for tie-ups with agencies for various services- property valuation, title search, property
maintenance and so on. [29]
Strengths
The senior citizens are entitled to regular cash flows at their choice - monthly, quarterly, half yearly and
annually.
The loan is given without any income criteria at an age where normal loans are not available.
No loan servicing or repayment required during the lifetime of borrower and spouse.
If the borrower dies during the period, the spouse will continue to get the loan amount for 15 years.
Tax treatment of a RML will be as loan, not income, so no tax will be payable on the regular cash flows
The borrower and 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.
Reassessment
of
Weaknesses
property
value
will
be
done
periodically
say
once
every
years.
This loan product has a maximum tenure of only 15 years. If the borrower outlives this period, the regular
cash flows will stop.
Requirement of clear title to property in the name of the borrower to get the loan.
Various
fees
to
be
added
to
borrowers
liability,
which
can
be
quite
substantial.
Opportunities
Medical expenses and cost of living going up, increasing the need for additional income in old age.
Most Indians have strong preference for own home. Therefore many eligible citizens may opt for the scheme.
Threats
There is a non-recourse guarantee, which means that loan plus interest should never exceed realizable value
of property. In case of fall in property value or loan with interest exceeding assessed property value, banks
may resort to strong-arm tactics to force the borrowers to move out, if they live too long after the loan period
is over.
Rate of interest is at the discretion of lender. Any increase in the rate, if floating, will increase the burden of
the borrower.
Lender has discretion to raise loan amount on revaluation. However, if it does not do so, borrower doesn't get
loan according to proper value of property.
Lender has right to foreclose loan by forcing sale of property if borrower doesn't pay for insurance, property
taxes or maintain and repair house. [1]
The following factors are considered while determining the amount of loan.
The current value of the property and expected property appreciation rate.
The current interest rate and interest rate volatility (interest rate risk).
Whether the payment is taken as lump sum, or monthly payments or quarterly payment. Lump sum provides
the cash immediately, but the interest fees are the highest.
The location of the property and whether the maximum loan amount is subject to the maximum loan limits.
LOAN
when both the application and HUD counseling have been completed, you are ready to start processing the
loan. The next step is to order a HUD appraisal and a termite inspection. If either report reveals things that
require fixing, according to HUD guidelines the borrower can fix these within six months after the close of
escrow. If there are repairs required, a separate Repair Set Aside account is created. Fire insurance is
required. In some cases the current policy may be less than the lender requires and therefore it is necessary to
increase the insurance policy to the current value.
Termination of Reverse Mortgage Contract:The following are the cases where in the reverse mortgage contract may be terminated that is terminating the contract
of giving regular payouts to the borrower by the bank before the tenure gets over:
The borrower has not stayed in the mortgaged property for a continuous period of one year.
The borrower fails to pay property taxes, home insurance or maintain and repair the residential property.
The borrower makes changes in the residential property that affect the security of the loan for the lender. For
example, renting out a part or the entire house, adding a new owner to the house's title, changing the house's
zoning classification, or creating further encumbrance on the property either by way taking out new debt
against the residential property or alienating the interest by way of a gift or will.
The government, under legal provisions, seeks to acquire the residential property for public use.
6.
[28]
CHAPTER 3
REVERSE MORTGAGE IN SBI
Nikita Jadhav (Finance)
The following is the table showing the installments on monthly, quarterly basis for the period of 10 tears and 15
years for a loan amount of Rs 100000 at a interest rate of 10.75%. [41]
Table 3.1: Installments on monthly, quarterly basis
Loan Tenor
10 years
15 years
468
225
1,423
687
36,022
21,619
In SBI main branch recently one customer showed willingness to take up reverse mortgage. As due to the privacy
policy of the bank hence forth the name of the customer will be taken as Mr. A. Mr. A is of 64 ages and owns a house
with its title. After the e valuation of the house, the value of the house is estimated to be Rs 10, 00,000. As per the
SBI guidelines only the loan is given on 90% of the property value so in this case Mr. A can take a loan of Rs
9,00,000 (that is 90% of 10,00,000). MR .A wants to get the installment on monthly bases for a period of 15 years.
So his monthly installment for the period of 15 years for the loan amount is Rs 2,025.
No. of surviving spouses on date of sanction of loan :- Should not be more than one. Borrowers will have to
give an undertaking that they will not remarry during the currency of the loan. If the borrowers choose to
remarry, the loan will be foreclosed.
Residence :a. Borrower should be staying at self-acquired and self owned house / flat against which
loan is being raised, as his permanent primary residence.
b.
c. Borrowers will be required to inform the Bank when they cease to use this residence as
their permanent residence.
Title of the Property :a. Borrowers should have a clear and transferable title in their names
Title of the property and number of borrowers.- In case if the title in single name and loan number of
borrowers. Availed jointly with spouse. Title holder should make a Will in favor of the other spouse. The Will
should confirm that this is the last Will and that it supersedes all earlier wills, if any. The borrower to
undertake that no fresh Will shall be made during the currency of the loan
Encumbrances: - The property should be free from any encumbrances. However in case of property
purchased by availing Home Loan from SBI and mortgaged to SBI, it will be considered for RML, subject to
closure of the Home Loan account out of the proceeds of RML
Residual Life of property: - Should be at least 20 years in case of single borrower and 25 years in case of
spouse being below 60 years of age. Certificate from empanelled engineer/ architect will be required to be
obtained for this purpose, in addition to valuation of property.
3. Security
The Reverse Mortgage Loan shall be secured by way of equitable mortgage of residential property.
4. Tenor
5. Disbursement
By credit to an SB account in the joint names of the borrowers operated by E or S.
6. Periodicity of availing loan
Monthly payment.
Quarterly payment
7. Quantum of loan
The loan amount would be 90% of the value of property. Loan amount would include interest till maturity. The
maximum loan amount is kept at Rs. 1 Crores and minimum Rs.3 lacs
8. Purpose of Loan
Supplementing income, any personal expenses, house repairs, etc. Loan amount should not be used for speculative,
trading and business purposes.
9. Repayment/Settlement
The loan shall become due and payable only when the last surviving borrower dies or opts to sell the home,
or permanently moves out of the home for 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. Bank 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 or prepayment by borrowers and his next of kin.
The borrower(s) or his/her/their legal heirs/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 6 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 and expenses, shall
be passed on to the borrower or the estate of the borrower/legal heirs.
Borrowers will be required to submit annual life certificates in the month of November every year. This
certificate will also include clauses regarding marital status, and permanent residence of the borrowers, in
addition to the balance confirmation as on 31st October of that year.
List of legal heirs will be obtained at the time of sanction of loan. With a view to avoiding disputes at the
time of settlement of loan amount by legal heirs, specific instructions about inheritance of the property and
payment of balance amount, if any, of the sale proceeds after settling the Banks dues, will be required to be
part of the borrowers Will.
10. Foreclosure
The loan shall be liable for foreclosure due to occurrence of the following events of default.
If the borrower has/have not stayed in the property for a continuous period of one year
If the borrower fail to pay property taxes or maintain and repair the residential property or fail to keep the
home insured, the Bank reserves the right to insist on repayment of loan by bringing the residential property
to sale and utilizing the sale proceeds to meet the outstanding balance of principal and interest.
If the residential property so mortgaged to the Bank is donated or abandoned by the borrower.
If the borrower effect changes in the residential property that affect the security of the loan for the lender. For
example: renting out part or all of the house by creating a tenancy right; adding a new owner to the houses
title; changing the houses zoning classification; or creating further encumbrance on the property either by
way of taking out new debt against the residential property or alienating the interest by way of a gift or will.
If the Government under statutory provisions, seeks to acquire the residential property for public use.
If the Government condemns the residential property (for example, for health or safety reasons).
Any other event such as re-marriage of the borrower etc. which shall have an adverse impact on the loan
settlement prospects.
Borrowers do not accept the revised terms on revaluation of property and interest reset at the end of every 5
years from sanction.
The borrower will have option to prepay the loan at any time during the loan tenor.
12. Valuation/Revaluation of property and option for the Bank to adjust payments.
After the initial evaluation to determine the loan amount, subsequent revaluations will be done at intervals of
5 years.
The Bank shall have the option to revise the periodic/lump-sum amount every 5 years along with revaluation.
In the scenario of fall in property prices, the Bank may decide to revise the amount at any time earlier than 5
years. At every stage of revision, it should be ensured that the Loan to Value ratio does not exceed 90% at
maturity.
If the Borrower does not accept the revised terms, no further payments will be effected by the Bank. Interest
at the rate agreed before the review will continue to accrue on the outstanding amount of the loan. The
accumulated principal and interest shall become due and payable as mentioned in clauses 9 and 10.
The house property will be insured by the borrower at his cost against fire, earthquake and other calamities.
Bank reserves the right to pay insurance premium, taxes, charges etc. by reducing the loan amount to that
extent.
Type of facility: - Non-renewable Overdraft without ledger folio charges. No cheque book/debit card will be
linked to this account.
CHAPTER 4
RESEARCH METHODOLOGY
RESEARCH METHODOLOGY
Definition of Research
When you say that you are undertaking a research study to find answers to a question, you are implying that the
process;
1. Is being undertaken within a framework of a set of philosophies (approaches).
2. Uses procedures, methods and techniques that have been tested for their validity and reliability.
3. Is designed to be unbiased and objective.
A philosophy means approaches e.g. qualitative, quantitative and the academic discipline in which you have been
trained.
Validity means that correct procedures have been applied to find answers to a question.
Reliability refers to the quality of a measurement procedure that provides repeatability and accuracy.
Unbiased and objective means that you have taken each step in an unbiased manner and drawn each conclusion to
the best of your ability and without introducing your own vested interest.
CHARACTERISTICS OF RESEARCH:
Research is a process of collecting, analyzing and interpreting information to answer questions. But to qualify as
research, the process must have certain characteristics: it must, as far as possible, be controlled, rigorous, systematic,
valid and verifiable, empirical and critical.
TYPES OF RESEARCH
Research can be classified from three perspectives:
1. Application of research study
2. Objectives in undertaking the research
3. Inquiry mode employed
Pure research involves developing and testing theories and hypotheses that are intellectually challenging to the
researcher may or may not have practical application at the present time or in the future. The knowledge produced
through pure research is sought in order to add to the existing body of research methods.
Applied research is done to solve specific, practical questions; for policy formulation, administration and
understanding of a phenomenon. It can be exploratory, but is usually descriptive. It is almost always done on the
basis of basic research. Applied research can be carried out by academic or industrial institutions. Often, an academic
institution such as a university will have a specific applied research program funded by an industrial partner
interested in that program.
2. Objectives:
From the viewpoint of objectives, a research can be classified as
descriptive
correlation
explanatory
exploratory
Descriptive research attempts to describe systematically a situation, problem, phenomenon, service or programme, or
provides information about , say, living condition of a community, or describes attitudes towards an issue. Co
relational research attempts to discover or establish the existence of a relationship/ interdependence between two or
more aspects of a situation. Explanatory research attempts to clarify why and how there is a relationship between two
or more aspects of a situation or phenomenon. Exploratory research is undertaken to explore an area where little is
known or to investigate the possibilities of undertaking a particular research study (feasibility study / pilot study). In
practice most studies are a combination of the first three categories.
3. Inquiry Mode:
From the process adopted to find answer to research questions the two approaches are:
-
Structured approach
Unstructured approach
Structured approach:
The structured approach to inquiry is usually classified as quantitative research. Here everything that forms the
research process- objectives, design, sample, and the questions that you plan to ask of respondents- is predetermined.
It is more appropriate to determine the extent of a problem, issue or phenomenon by quantifying the variation. e.g.
how many people have a particular problem? How many people hold a particular attitude?
Unstructured approach:
The unstructured approach to inquiry is usually classified as qualitative research. This approach allows flexibility in
all aspects of the research process.
CHARACTERISTICS OF OBJECTIVES
Constructing hypotheses:
As a researcher you do not know about a phenomenon, but you do have a hunch to form the basis of certain
assumption or guesses. You test these by collecting information that will enable you to conclude if your hunch was
right. The verification process can have one of the three outcomes. Your hunch may prove to be:
1. Right;
2. Partially right; or
3. Wrong.
Without this process of verification, you cannot conclude anything about the validity of your assumption. Hence, a
hypotheses is a hunch, assumption, suspicion, assertion or an idea about a phenomenon, relationship or situation, the
reality or truth of which you do not know. A researcher calls these assumptions/ hunches hypotheses and they
become the basis of an enquiry.
The formulation of hypothesis provides a study with focus. It tells you what specific aspects of a research
problem to investigate.
A hypothesis tells you what data to collect and what not to collect, thereby providing focus to the study.
As it provides a focus, the construction of a hypothesis enhances objectivity in a study.
A hypothesis may enable you to add to the formulation of a theory. It enables you to specifically conclude
what is true or what is false.
A hotel chain sends observers posing as guests into its coffee shop to check on cleanliness and customer
service.
A food service operator sends researchers into competing restaurants to learn menu items prices, check
Observation can yield information which people are normally unwilling or unable to provide. e.g. Observing
numerous plates containing uneaten portions the same menu items indicates that food is not satisfactory.
Types of Observation:
1. Structured for descriptive research
2. Unstructuredfor exploratory research
3. Participant Observation
4. Non- participant observation
5. Disguised observation
Limitations: - feelings, beliefs and attitudes that motivate buying behavior and infrequent behavior cannot be
observed.
- Expensive method
Because of these limitations, researchers often supplement observation with survey research.
2) SURVEY METHOD
3) CONTACT METHODS:
Information may be collected by Mail, Telephone, and Personal interview.
Mail Questionnaires:
Advantages:
Can be used to collect large amounts of information at a low cost per respondent.
respondents may give more honest answers to personal questions on a mail questionnaire
No interviewer is involved to bias the respondents answers.
convenient for respondents who can answer when they have time
good way to reach people who often travel
Limitations:
-
not flexible
take longer to complete than telephone or personal interview
response rate is often very low
Researcher has no control over who answers.
Telephone Interviewing:
Advantages:
quick method
more flexible as interviewer can explain questions not understood by the respondent
depending on respondents answer they can skip some Qs and probe more on others
allows greater sample control
response rate tends to be higher than mail
Drawbacks:
-
Personal Interviewing:
It is very flexible and can be used to collect large amounts of information. Trained interviewers are can hold the
respondents attention and are available to clarify difficult questions. They can guide interviews, explore issues, and
probe as the situation requires. Personal interview can be used in any type of questionnaire and can be conducted
fairly quickly. Interviewers can also show actual products, advertisements, packages and observe and record their
reactions and behavior.
This takes two forms
4) EXPERIMENTAL METHOD
Also called Empirical Research or Cause and Effect Method, it is a data-based research, coming up with conclusions
which are capable of being verified with observation or experiment. Experimental research is appropriate when proof
is sought that certain variables affect other variables in some way.
Tenderizers (independent variable) affect cooking time and texture of meat (dependent variable).
The effect of substituting one ingredient in whole or in part for another such as soya
Flour to flour for making high protein bread.
Such research is characterized by the experimenters control over the variables under study and the deliberate
manipulation of one of them to study its effects. In such a research, it is necessary to get at facts first hand, at their
source, and actively go about doing certain things to stimulate the production of desired information.
The researcher must determine what type of information is needed and who is most likely to have it. How many
The Questionnaire:
Structured surveys/ interviews employ the use of a questionnaire. A questionnaire consists of a set of questions
presented to a respondent for answers. The respondents read the questions, interpret what is expected and then write
down the answers themselves. It is called an Interview Schedule when the researchers asks the questions (and if
necessary, explain them) and record the respondents reply on the interview schedule. Because there are many ways
to ask questions, the questionnaire is very flexible. Questionnaire should be developed and tested carefully before
being used on a large scale.
There are three basic types of questionnaire:
1. Closed ended
2. Open-ended
3. Combination of both
Closed ended questions include all possible answers/prewritten response categories, and respondents are
an answer.
Whereas closed ended questionnaires might be used to find out how many people use serve open-ended
questionnaires might be used to find out what people think about a service.
As there are no standard answers to these questions, data analysis is more complex.
As it is opinions which are sought rather than numbers, fewer questionnaires need to be distributed.
3. Combination of both:
-
This way it is possible to find out how many people use a service and what they think of the service in the
same form.
Begins with a series of closed ended questions, with boxes to tick or scales to rank, and then finish with a
section of open-ended questions or more detailed response.
Deciding which questionnaire to use- - closed or open ended, self or interviewer administered
Wording and structure of questions
Length and ordering of the Questions:
Keep the questionnaire as short as possible
Ask easy Qs. Which respondents will enjoy answering
Those from whom information is collected or those who are studied by a researcher become participants of
the study.
Anyone who collects information for a specific purpose, adhering to the accepted code of conduct, is a
researcher.
2. Classification- a process of arranging data in groups or classes on the basis of common characteristics. Depending
on the nature of phenomenon involved:
a) Classification according to attributes: here data is analysed on the basis of common characteristics which can
either be descriptive such as literacy, sex, religion etc. or numerical such as weight, height, income etc.
b) Classification according to class intervals: is done with data relating to income, age, weight, tariff, production,
occupancy etc.
3. Tabulation-Tabulation is the process of summarizing raw data and displaying the same in compact form for further
analysis. It is an orderly arrangement of data in columns and rows. Tabulation is essential because:
a) It conserves space and reduces explanatory and descriptive statement to a minimum.
b) It facilitates the process of comparison.
c) It facilitates the summation of items and the detection of errors and omissions.
d) It provides the basis for various statistical computations. [21]
IX.
To recommend best strategies for making Reverse Mortgage more acceptable in India.
X.
To describe the degree to which reverse mortgages met consumer needs and the degree to which Consumers
are satisfied with their loans
The data regarding consumer awareness and interest in reverse mortgages can be taken from Questionnaire
method by survey of 250 persons age above 25 years
Secondary data:
The basic features of RM, and its process can be studied based on secondary data collected from NHB.
Data collected through literature survey, journals, Internet search, company records/bulletin, company reports,
CD-ROM search etc.
CHAPTER 5
LITERATURE REVIEW
LITERATURE REVIEW
"Normally, around 50 per cent of a person's lifetime savings are spent in building a house and most old people do not
have any retirement plan or social security. If they need money, they need to sell the house. Reverse mortgage is a
Mayer and Simons point out that the majority of HECM borrowers have chosen the line-of-credit option. They
attribute this to the fact that many elderly households also have very little liquid wealth. They suggest that the
availability of a lump sum payment to protect against various financial shocks that might be related to housing,
health care, or automobile care could be very valuable to many elderly homeowners. They use data from the SIPP to
illustrate that drawing the full line of credit available in a lump sum could increase liquid wealth by 200 percent or
more for many elderly homeowners.
Weinrobe (1985) showed that the great majority of homeowners in a Buffalo reverse mortgage program chose a
lump-sum payment over an annuity, even though the lump-sum payment had a smaller expected present value.
According to Nirajbhan K Mahajan (2008) with the changing social milieu in India and the collapse of the joint
family system, introduction of reverse mortgage products could be a worthwhile experiment. Instead of being
dependent on their children for monetary support, this would be a good option for the elderly to continue with a
graceful lifestyle. Banks and housing finance companies have already started launching this product and in the near
future, they would come out with the reverse mortgage products based on American experience with features like,
fixed or floating interest, shared appreciation, interest earning credit-line and mortgage insurance. [13]
Though the product was introduced in India in 2006, it is yet to pick up. During the previous two financial years, a
total of Rs 1,500 crore was disbursed to nearly 7,500 borrowers. Many private sector banks do not offer reverse
mortgage due to the risks involved and taxation issues. "In the United States, reverse mortgage is seen as a social
security product. The property price and longevity risks are borne by the government. India is the only country to
have a market-oriented reverse mortgage product, says NHB's Jaishankar (2010). In India, cash outflows are for the
banks and the inflow is only after the demise of the borrower. [41]
Case and Schnare (1994) evaluated HECM borrower characteristics, including the determinants of product choice,
using a sample of approximately 2,500 loans. They calculated the probability of a borrower choosing each payment
option as a function of age, family composition, property value, property location, and other characteristics. Their
According to the Pak Banker. Lahore: Apr 19, 2010., RML is aimed at senior citizens when they are in need of funds
after their retirement. For people whose biggest financial asset is a home, RML provides an option to avail of
periodical payments from a lender against the mortgage of his/her house. Such a loan allows the borrower to
continue to occupy his house as long as he lives. They might be in receipt of pension but it may not be sufficient to
take care of medical or other big ticket expenses like up gradation / renovation of residential property. However, use
of RML for speculative, trading and business purposes is not permissible. [39]
Financial institutions, are not pushing reverse mortgage products with great enthusiasm. It is a very difficult product
to take to the Indian market. The main worry is the social stigma attached to borrowing, especially for individuals
aged over 60 years. Banks are currently targeting only limited segments, including those in the top bracket
(individuals or couples having premium property) or those who have not made significant pension investments, says
Sachin Khandelwal, Head (Cards Group), ICICI Bank. He thinks that changes in the social fabric will alter the
perception towards such products in the near future. [38]
Rasmussen, Megbolugbe, and Morgan (1995) analyzed the potential size of the reverse mortgage market. They note
that there are two motives for obtaining a reverse mortgage: to draw down wealth as one ages (life-cycle motive) and
to diversify illiquid housing wealth (asset management motive). They note that for many households the annuity
value may not be large, but the addition to liquid wealth is substantial. [14]
According to the traditional life-cycle model, developed first by Modigliani and Brumberg (1954), Ando and
Modigliani (1963), and Friedman (1957), individuals make their saving choices to smooth consumption over their
lifetime. Theoretically, households build savings during their working period and divest those savings to meet their
consumption needs at older ages. However, empirically, this pattern is not followed. This is specifically true of home
equity. On average, seniors citizens tend not to cash in the savings locked in their home equity. Instead,
homeownership rates remain stable until later in life. Before the advent of the reverse mortgage, selling and moving
out represented the best way to liquidate home equity. [12]
Stucky (2005) estimates the potential market for reverse mortgages at 13 million households. Although 86% of
seniors know what a reverse mortgage is, in 2007 only 1 percent of the 30.8 million seniors in the United States
closed a reverse mortgage contract. Several economists advocated strong public policy support for reverse
mortgages. The relative weakness of the demand for these financial instruments reveals that these federally-insured
loans are unable to meet retirees needs and wants. Therefore their focus was on the study of US government failure
or, in other words, of the systemic reasons that prevent the HUD (Housing and Urban Development) reverse
mortgages from becoming a common tool to finance consumption in retirement. [17]
Gourinchas and Parker (2002), Cagetti (2003), and French (2005) structurally estimate life-cycle models of
consumption, of wealth accu-mulation and of labor supply, retirement, and savings behavior. Hubbard et al. (1994),
Cocco (2005) and Yao and Zhang (2005 a,b) by explicitly modeling the housing decision and allowing households
to derive utility from both housing and other consumption goods. Meyer and Speare (1985) studies types and
determinants of senior mobility. Additionally, we build on the literature of discrete choice models. The framework
was introduced by Rust (1987,1988), and extended in Hotz and Miller (1993) and in Aguirragabiria and Mira (2002).
However, most of the theoretical papers and the empirical applications focus only on discrete choice. Given that our
sample involves both discrete and continuous data, we extend this literature by including continuous choices. [6]
Personal economic issues such as debt, foreclosures, and increase in bankruptcy can be related to unemployment or
lack of health care but are often traced back to lack of financial literacy. According to a national survey conducted by
the Networks for Financial Institute at Indiana University (2007), approximately two thirds (61%) of adults in the
United States understood financial literacy concepts including managing, spending, and saving money wisely. In
Indiana, only half of survey respondents felt they understood financial literacy concepts. Additionally, the survey
found that the financial areas U.S. adults feel they need the most help in are investing, retirement planning, and
taxes (Networks for Financial Institute, 2007, p. 3). [38]
McConaghy (2004) and Cramer (1994) are good examples of recent dissertations that deal with issues related to
reverse mortgages. Tate (1987) looked at the impact of reverse mortgages on reducing the poverty of the homeowner.
He developed cash flow models to evaluate the benefits from the reverse mortgage with life tenure compared to a
reverse mortgage without life tenure. The benefits are modeled as investment returns and the model applied to data
Leviton (1998) used interviews with elderly, low income homeowners to analyze their process of decision making
related to housing, financial options, and reverse mortgages. She studied homeowners that were counseled by a
Massachusetts non-profit agency and found that a reverse mortgage was seen as a last resort, and most homeowners
desired to leave a financial inheritance to their family. Knapp (2001) found family ties and migration patterns in the
community affected the demand for HECM. [10]
McConaghy (2004) provides a very good overview of the HECM program since its inception as a pilot program in
1989. He used the HECM data from 1989 to 1999 for a detailed empirical analysis to identify borrower
characteristics associated with repayment patterns. McConaghy also compared HECM repayment rates with
repayment rates among non-HECM elderly borrowers and analyzed whether refinancing with a HECM made sense.
While refinancing would have increased borrowing amounts for more than half of the borrowers, it also entailed
significant transaction costs and led to loss of equity. McConaghy found that over 60 percent of HECMs were rapid,
in less than 10 years, and the repayment for the HECM population was faster than the non-HECM sample studied. [11]
Rasmussen, et. al. (1995) asserted that both borrowers and lenders undertake risk in the process. Reverse mortgages
pose three main sources of collateral risk meaning that the loan balance may grow to exceed the value of the
collateral for lenders. The three risks are: 1) the borrower may live in the property so long that the continuing
payments to the borrower exceed the value of the home; 2) interest rates may raise thereby increasing the interest
There are several key factors impacting the examination of reverse mortgage use by older people in terms of possible
growth factors and the potential implications for their retirement decisions. These include understanding issues
pertaining to: Australian retirement and homeownership patterns; retirement income; the types of reverse mortgage
products available; and the economic drivers impacting the reverse mortgage market. Further, other researchers have
suggested that consumption-based spending on the home may come at the expense of the quality and future of the
housing stock, and could put the wellbeing of older homeowners at risk (Smith, Cook and Searle, 2007). [15]
The ageing of the Australian baby boom generation and the consequent concern over adequacy of retirement
planning and income has made the issue of home equity release attractive. According to the Reserve Bank Statistical
Tables, Australian housing wealth represents approximately 50 percent of the Australian economy overall (Ruthven,
2007). More importantly, the policy spotlight is squarely on equity release options as older Australians are
predominantly homeowners, making housing wealth, coupled with lack of adequate superannuation, a potential
option for care supplementation and as a means to enable ageing in place. However, the reverse mortgage market in
Australia has been slow to develop (Storey, Wilson and Kendig, 1994). This is because products can be costly and
From Business Line, March 20, 2008 This is with reference to the article 'It is still early days for reverse mortgage in
India' (Business Line, March 15), wherein it is reported that as 25 per cent of aged population will be living either
alone or with their spouses by 2015, reverse mortgage will pick up by then. Notwithstanding the statistical
calculations, reverse mortgage may not be popular. This is because every Indian has a sentimental attachment for the
property he has inherited or acquired. Even when his/her child(ren) neglect him/her for economic and other reasons,
the senior citizen is prepared to reduce his/her needs and bequeath his property to his/her child(ren). So, the scheme,
though logical, may not be as popular as expected. [37]
From Business Line, March 15, 2008 Mumbai, March 14 - India is getting ready for the reverse mortgage market,
but it could be sometime before demand for the product begins to emerge. The senior citizen population in the
country is growing and is expected to reach 117 million people in 2015. Improved healthcare and better nutrition
means rising average life expectancy. The living arrangement among senior citizens indicates a sizeable market
opportunity for RML. Eighty per cent of the senior citizens in the country live with their children, while only around
15 per cent of senior citizens live either alone or just with their spouses. This 15 per cent is expected to grow to 25
per cent by 2015. Legality of ownership A major factor that could constrict the size of the target market is the legality
of ownership. The report estimates that only 60 per cent of all households in India have clear ownership. The current
market size for RML product is 3 million households and will grow to 6 million by 2015. [36]
From BUSINESS LINE, September 23, 2007 Chennai, Sept 22 - The National Housing Bank has written to the
Income Tax department, conveying concerns of banks and their customers on a few issues relating to the treatment of
loans from reverse mortgage arrangements under the Income Tax laws. Reverse mortgage is a new product that
banks are now allowed to offer in which a homeowner borrows against the equity in his home and receives regular
CHAPTER 6
DATA ANALYSIS AND INTERPRETATION
Feasibility study
Feasibility study is the likelihood study. It is the way to determine if a business idea is capable of being achieved.
The results which we get out of this study are used to make a decision whether to proceed with the project or no. I
took out the feasibility study to see the likelihood of Reverse Mortgage offered by SBI. In order to do the feasibility
Nikita Jadhav (Finance)
Graphical Representation
Cross Tabulation using SPSS
25- 55 years
Above 55 years
123
127
250
Age Group
25- 55 years
51%
49%
Above 55 years
Fig 6.1
Interpretation: I have divided the total age group in two groups one is the respondent with age between 25 to 55
years and second is the respondent with age above 55 years. From above graph we can say that the total 250
respondents will be divided in two parts and all the answers are interpreted from the angle of their age group. Here,
51% means 127 respondent from age group above 55 years and 49% i.e. 123 respondents are from age group of 25 to
55 years.
No
39%
61%
Fig 6.2
Interpretation: One of the most important criteria for obtaining for Reverse Mortgage is you should own a house
with its clear title. From above graph we can say that 61% (153 respondents) of the total respondents own a house
whereas 39% (97 respondents) does not.
Question 2A: If yes, what is the market value of the house? (Table 6.3)
If yes, What is the market value of the house?
Below 5 lacs
19
43
153
Below 5 lacs
12%
5 lacs 10 lacs
54%
10 lacs to 20 lacs
28%
Fig 6.3
Interpretation: In the sample size of 250 people 153 people own a house, out of that 153 people 8 people had house
whose market value was below 500000 Rs., 19 people had house whose market value was between Rs 500000 to Rs
100000, 43 people had house whose market value was between Rs 1000000 to Rs 200000 and 43 people had house
whose market value was above Rs 2000000.
Question 2B: Is the house used for residence? (Table6.4)
Yes
No
149
153
Fig 6.4
Interpretation: From 153 people who own the house maximum that is 97% people use that house for residence and
3% people are not using the house for residence.
50%
50%
Yes
No
Fig 6.5
Yes
No
49
126
75
YES
NO
60%
Fig 6.6
Interpretation: From above graph we can say that from 126 retired people only 40% i.e. 49 people get pension and
75 people does not get any pension after retirement.
Question 4: Do you need any financial assistance after retirement? (Table 6.7)
Yes
No
237
13
250
Fig 6.7
Interpretation: Financial assistance refers to whether the respondent is in need of money for his daily needs after
retirement. Here out of 250 respondents 95% of the people needed financial assistance for their expenses and
remaining 5% people did not need any kind of financial assistance for their daily expenses.
Question 5: Are you concerned about your ability to handle a large unexpected expense such as a health
emergency after retirement? (Table 6.8)
Yes
No
231
19
250
Are you concerned about your ability to handle a large unexpected expense such as a health emergency after retirement?
8%
Yes
No
92%
Fig 6.8
Interpretation: Here 92% respondent were concerned about their ability to handle a large unexpected expense such
as a health emergency after retirement and rest 8% did not worried about unexpected expenses after retirement.
Question 6: Do you know about Reverse Mortgage? (Table 6.9)
Yes
No
52
250
198
Yes
No
79%
Fig 6.9
Interpretation: Here knowledge about Reverse Mortgage refers to how many people are aware about the concept of
Reverse Mortgage. So according to my survey of 250 respondents only 21% that is 52 respondents had a basic idea
Yes
No
73%
Fig 6.10
Interpretation: Only 27% respondents from 250 people are willing to know about reverse mortgage rest 73% are
not interested to even know the concept of RM.
Yes
No
37
213
250
Yes
No
85%
Fig 6.11
Interpretation: As before we saw that only 21% of the respondents had some basic knowledge about reverse
mortgage and after providing the knowledge about reverse mortgage only 15% that is 37 respondents were willing to
go for reverse mortgage. From the above chart we can say that maximum people feel it is not worthwhile to go for
reverse mortgage.
Missing
Percent
Total
Percent
Percent
25_55_years : Yes
31
12.4%
219
87.6%
250
100.0%
25_55_years : No
92
36.8%
158
63.2%
250
100.0%
Above_55_years : Yes
21
8.4%
229
91.6%
250
100.0%
Above_55_years: No
106
42.4%
144
57.6%
250
100.0%
Age group 25 to 55 years who are having knowledge about Reverse mortgage
Count
Yes6
1
@25_55_years
Total
Total
31
31
31
31
Age group 25 to 55 years who are not having knowledge about Reverse mortgage
Count
No6
1
@25_55_years
Total
Total
92
92
92
92
Age group above 55 years who are having knowledge about Reverse mortgage
Count
Yes6
1
Above_55_years_
Total
Total
21
21
21
21
Age group above 55 years who are not having knowledge about Reverse mortgage
Count
No6
1
Above_55_years_
Total
Age Group
Total
106
106
106
106
Total
31
21
92
106
123
127
250
55 & above
106
1
21
92
31
Fig 6.12
Interpretation: From above graph I can say that there are total 123 people from age group 25 to 55 years and 127
people from above 55 years age group. From 25 to 55 age group, 31 people had knowledge about reverse mortgage
and 21 people from age group of 55 years and above had knowledge about reverse mortgage
2. Relationship between people those who need any financial assistance after retirement and people those want
to go for reverse mortgage.
Result from SPSS:
(Table 6.13)
Missing
Percent
Total
Percent
Percent
Yes4 * Yes8
35
14.0%
215
86.0%
250
100.0%
Yes4 * No8
202
80.8%
48
19.2%
250
100.0%
No4 * Yes8
.8%
248
99.2%
250
100.0%
No4 * No8
11
4.4%
239
95.6%
250
100.0%
People who need financial assistance after retirement and want to go for reverse mortgage
Count
Yes8
1
Yes4
Total
Total
35
35
35
35
People who need financial assistance after retirement and do not want to go for reverse mortgage
Count
No8
1
Yes4
Total
Total
202
202
202
202
People who do not need financial assistance after retirement and want to go for reverse mortgage
Count
Yes8
1
Total
Total
Total
35
35
35
35
People who need financial assistance after retirement and do not want to go for reverse mortgage
Count
No8
1
Yes4
Total
Total
202
202
202
202
People who do not need financial assistance after retirement and want to go for reverse mortgage
Count
Yes8
No4
Total
2
2
Total
2
2
Total
Total
11
11
11
11
Total
after retirement
yes
no
Total
yes
35
2
No
202
11
237
13
250
People who need financial assistance after retirement and want to go for reverse mortgage
yes (retirement assistance) no (retirement assistance)
112
202
12
35
Fig 6.13
Interpretation: From above graph I can say that 237 people need financial assistance after retirement but only 35
people willing to go for reverse mortgage. 13 people do not need any financial assistance after retirement.
CHAPTER 7
CONCLUSION
Nikita Jadhav (Finance)
Conclusion:1. The senior citizens will definitely find Reverse mortgage a solution for their financial needs after retirement
and help them in regaining their feeling of independence. With the changing social milieu in India and the
collapse of the joint family system, introduction of reverse mortgage products could be a worthwhile
experiment. Instead of being dependent on their children for monetary support, this would be a good option
for the elderly to continue with a graceful lifestyle. For the purpose of feasibility study I conducted a survey
of 250 respondents. After conducting the survey of 250 peoples, only 21% of the total population had some
basic knowledge about reverse mortgage which includes 25% with age group of 25 to 55 years and 16% with
age group above 55 years. Using cross tabulation I can conclude that 95% of the respondents needed some
kind of financial assistance after their retirement but only 15% people were willing to go for reverse
mortgage. People are not willing to go for reverse mortgage the reasons may be that the house is only
important assets, the elder people would like to transfer their house to their legal heirs. As we can see in India
joint families are more the elder people dont like to sell their house they would like to live in the same house
and would like to transfer the house to their legal heirs. So it can be concluded that concept of Reverse
CHAPTER 8
FINDINGS AND SUGGESTIONS
An attractive option to the elderly to finance their consumption needs on their own.
The loan is given without any income, medical or credit requirements criteria.
Encourage more people in the working population to increase the proportion of their savings invested in
housing.
Reverse mortgage lender in the Indian market must proceed with caution.
The actual size of the reverse mortgage markets is nowhere near its estimated potential.
Out of 250 respondents only 52 people had some basic knowledge about Reverse Mortgage.
Only 37 people were willing to go for Reverse Mortgage out of 250 respondents.
Suggestions:
Educate people about reverse mortgage: - As by the survey I have found out that only 21% of the respondents
have some basic idea about reverse mortgage, so by this it can be said that people are not educated about
reverse mortgage. So I would suggest the bank to educate the people about reverse mortgage through
advertisements, conducting workshops and lectures on reverse mortgage etc.
Take responsibility for the expenses incurred by the borrower on property valuation etc: - As it is necessary
that the person going for reverse mortgage should make valuation of his property first, these valuation
expenses are incurred by the applicant himself. During my survey some respondents said that, as they are
aged it is very difficult for them arrange money for property valuation and for this reason they think going for
reverse mortgage is not attractive. So I would suggest bank to take responsibility of the expenses incurred by
the borrower on property by including it in the total value so that many people go for it.
Proper eligibility criterions: - In some cases there is a risk of default by the borrower; this risk can be avoided
at the time of providing loans. So in order to avoid the risk I would suggest the bank to do proper verification
Geographical diversification.:- The bank can look at spreading the business across the country by promoting
the product in secondary and tertiary cities also so that the law of large numbers may work properly and if the
bank has a bad experience in one market; it can be compensated with good experience in other cities
Following steps may be taken to make the facility of reverse mortgage workable:
1. End use of loan should be monitored. An explicit clause preventing use of loan to support wards personal
requirements or businesses to be introduced.
2. Interest paid on reverse mortgage should be explicitly allowed under income from house property to give
tax advantage to the borrower.
3. Insurance of credit default such as in the US should be made mandatory. A small part of the loan amount may
be parked in unit linked insurance schemes so that the premium paid will keep appreciating and at the same
time in the eventuality of death, the sum assured will likely make any good deficit.
4. 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.
5. 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.
CHAPTER 9
BIBLIOGRAPHY
Nikita Jadhav (Finance)
Bibliography
I.
Research Journal
Catherine,
2002,
Practical
Research
Methods,
New
Delhi,
UBS
PublishersDistributors
20. Kothari, C.R.,1985, Research Methodology- Methods and Techniques, New Delhi,
Wiley Eastern Limited.
21. Kumar, Ranjit, 2005, Research Methodology-A Step-by-Step Guide for Beginners,
(2nd.ed.),Singapore, Pearson Education.
II.
Webliography
22. http://reports.celent.com/PressReleases/200803122/RMLIndia.htm
23. http://www.expressindia.com/latest-news/reverse-mortgage-scheme-still-to-catch-up-with-seniorcitizens/341057/
24. http://www.reuters.com/article/idUSTRE67F2UX20100816
25. http://www.indiahousing.com/reverse-mortgage-india.html
26. http://www.rupeetimes.com/article/home_loans/reverse_mortgage_in_india_your_property_pays_you_a_regu
lar_income_1129.html
27. http://www.rediff.com/money/2009/mar/06perfin-all-about-reverse-mortgage.htm
28. http://www.rediff.com/money/2008/mar/03budget14.htm
29. http://www.inrnews.com/realestateproperty/india/housing_finance/national_housing_bank_guidelin.html
30. http://www.nhb.org.in
31. http://www.citefin.com/1405-history-banking-india.html
32. http://proquest.umi.com/pqdweb?
did=1447301201&sid=8&Fmt=3&clientId=103388&RQT=309&VName=PQD
33. http://proquest.umi.com/pqdweb?
did=1675363931&sid=8&Fmt=3&clientId=103388&RQT=309&VName=PQD
34. http://proquest.umi.com/pqdweb?
did=1501703871&sid=8&Fmt=3&clientId=103388&RQT=309&VName=PQD
35. http://www.blonnet.com/2008/06/08/stories/2008060851090500.htm
36. http://proquest.umi.com/pqdweb?
did=1584145291&sid=5&Fmt=3&clientId=103388&RQT=309&VName=PQD
37. http://proquest.umi.com/pqdweb?
did=1615588591&sid=5&Fmt=3&clientId=103388&RQT=309&VName=PQD
38. http://proquest.umi.com/pqdweb?
did=1670977231&sid=5&Fmt=3&clientId=103388&RQT=309&VName=PQD
39. http://proquest.umi.com/pqdweb?
did=2145878721&sid=5&Fmt=3&clientId=103388&QT=309&VName=PQD
40. http://www.livemint.com/2008/02/20005155/Reverse-mortgages-fail-to-take.html
41. http://www.business-standard.com/india/news/conferencereverse-mortgages-in-india/95154/on
42. http://seniorjournal.com/NEWS/ReverseMortgage/2009/20091021-nCitFacingHome.htm
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did=2173606071&sid=2&Fmt=3&clientId=103388&RQT=309&VName=PQD
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48. http://proquest.umi.com/pqdweb?
CHAPTER 10
APPENDIX
QUESTIONNAIRE
Disclaimer: All the collected data is purely for the research purpose at an institute level and not for any other
commercial or non commercial usage.
Personal Details
Name:_______________________________________________________________________________
Gender: __________
Age: ____________
Address: _____________________________________________________________________________
Contact No.: __________________________________________________________________________
No [ ]
If yes,
A. What is the market value of the house?
Below 500000
[ ]
500001 1000000
[ ]
1000001 2000000
[ ]
[ ]
No [ ]
No [ ]
No [ ]
No [ ]
5. Are you concerned about your ability to handle a large unexpected expense such as a health emergency after
retirement?
Yes [ ]
No [ ]
No [ ]
No [ ]
No [ ]
9. Reverse mortgage is used for whom, and what will it be used for?
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