RBI likely to issue norms for reverse mortgage in credit policy meet

The Reserve Bank of India (RBI) on April 29 in its forthcoming annual monetary policy meeting is likely to announce the prudential norms for reverse mortgage loans to safeguard banks in a falling real estate market.

Reverse mortgage scheme was announced by the Union Finance Minister P. Chidambaram in the Finance Bill 2007 as a social security measure for the elderly. Reverse mortgage allows senior citizens with inadequate income sources to mortgage their own homes for a monthly stream of income for up to 15 years.

It includes a senior citizen borrower mortgaging the house to a lender, who then makes periodic payments to the borrower during the latter’s lifetime. It is a way of monetizing the owner’s equity in the house.

The senior citizen borrower is not required to examine the loan during his lifetime and on the borrower’s death or on the borrower leaving the house permanently, the loan is repaid along with accumulated interest, through sale of the house.

According to the sources close to the development said it has become necessary to introduce the prudential norms for banks as the property mortgaged with banks would wear down the value if the real estate prices continued to fall. This may result in non-performing assets in the books of banks. Currently, such loans are being dealt at par with commercial real estate by banks as far as prudential norms are concerned.

The norms will include capital adequacy and asset classification for such loans.

Which means a bank will have to provide a certain portion of the loan as capital for provisioning if such loans go bad. The standards will be specified to classify such loans as standard or non-performing assets.

Certain risk weights may also be attached to such loans depending on the risk potential of the loan scheme. At present, the reverse mortgage loan carries the same risk weight as that of real estate loans, which are already very high at 150 per cent. Sources made it clear that such loans were non-commercial in nature and thus a lower risk weight akin to residential real estate would be appropriate.

As per banking sources such prudential norms will protect banks from having such loans as NPAs. Further, RBI will also spell out valuation norms for pricing such schemes.

At present several banks are following comprehensive norms introduced by National Housing Bank for the reverse mortgage scheme.

In the meantime the banks are not aggressive since the guidelines from RBI are not clear. In the last Budget, the government had exempted senior citizens from paying tax on the income earned by mortgaging their property to banks.