RBI’s lowering of risk weight age can make reverse mortgage cheaper

It is being considered that the reverse mortgage loans might become cheaper if the Reserve Bank of India (RBI) agrees to lower the risk weight age on such loans. Though there is some uncertainty is persisting whether the reverse mortgages should be treated as personal loans or as retail loans.

As per the sources Indian Banks’ Association has sought clarification from RBI on this. According to capital adequacy rules, on a loan of Rs 100, a bank has to keep aside Rs 9 as capital if the risk weight age is 100%. However, the capital that needs to be set aside could be lower if the risk weight age is lowered.

As per current guidelines banks have to allocate a risk weight age of 125% point on the personal loan against 75% on retail loans. As reverse mortgages are loans which will be taken by individuals and the borrowed amount will be lower in the range of Rs 1 lakh to Rs 50 lakh which can fall in personal loan category.

At present any general purpose loan taken by an individual is treated as a ‘personal loan’ as the borrower need not disclose the purpose — unlike in housing or education which is also given to individuals but for a specific purpose.

Bankers are of view that instead of classifying reverse mortgage as personal loans, these should be encouraged by granting it the main concern sector status because the scheme has social purpose attached to it. Moreover the loan does not generate any income for the bank for 15 years. In case the bank has to sell the property on the death of the borrower, the profits in excess of the loan amount are given to the nominee.

Under the scheme, senior citizens can consider earning a monthly income by taking a loan against their home from a housing finance company (HFC) or a bank their home with a housing finance company (HFC) or a bank even while they continues to occupy the house for lifetime. The borrower is not required to service the loan during his lifetime or make monthly payments.

On the borrower’s death or on the borrower leaving the house property permanently, the loan is repaid along with accumulated interest, through sale of the house property. Alternatively, the borrower or its heir can repay or prepay the loan with accumulated interest and have the mortgage released without resorting to sale of the property.

All banks are charging a fixed rate, subject to a reset after five years. SBI has a margin of 10%, but it is charging 10.75%, PNB is charging 10% and a margin of 20% and Allahabad Bank is charging 11% and a margin of 40%. Union Bank is charging 10% with a margin of 30%. The monthly installment paid to the customer will get the interest component. On the other hand the non-banks LIC Housing Finance and Dewan Housing have announced their reverse mortgage schemes.