S Sridhar, CMD, Central Bank of India and chairman of the National Housing Bank, talks to Moneylife editors Sucheta Dalal & Debashis Basu on reverse mortgage, the changing role of NHB and rejuvenating CBI. In the first part of a three-part series, we explore how reverse mortgage has evolved as a product. 

Sucheta Dalal (ML): At National Housing Bank (NHB), you are credited with developing a new reverse mortgage (RM) product, that is far superior to the earlier one, which was disastrous. Would you tell us about the process of developing the new product?

S Sridhar (SS): I wouldn't say that the earlier product was a disaster. It has worked. There are a lot of people who have looked at RM as a temporary loan. They are 60 and children are not yet that well settled. So they have looked at it as a temporary loan and hope that they will be able to repay it in 10 years and redeem the mortgage.

ML: So they see it as a loan against property?

SS: Absolutely. It is a loan against property, but there are two differences. RM is a limited recourse product, as against traditional loan against property which has unlimited recourse. We can only recover from the property and not the borrower's estate. That is why, from the regulatory perspective - whether it is NHB or the RBI (Reserve Bank of India), there is a concern that it must not be misused or the product will get a bad name. After all, there are senior citizens who very active in business and also very cunning and shrewd and there was a concern that people should not take money against property and use it to speculate in the stock market or something. This was a concern with the RBI and it was a valid one. It is a fact that when I was meeting senior citizen groups in Mumbai and Pune in connection with the product, there were people who asked questions like can we take a CC (cash credit) limit against property and draw against it? That is not the segment we are looking at. We are looking at people who don't have a pension - and they are a huge number in our country - but have invested in a house. And they want to live a little better life, since the quality of life comes down sharply after retirement. Yet, not everybody in that segment needs a loan either - so we recognise that it is a niche product, but we still have to create awareness about it.

Having said that, there has been a fair amount of loans that have been sanctioned (Until 31 March 2010, Rs1,413 crore has been sanctioned to 7,034 senior citizens through RM schemes which are being offered by 23 banks and two housing finance companies). Of this, Rs100 crore has been sanctioned under the new RM loan-enabled annuity, through 40 loans under the earlier scheme as well, but there are certain issues.

ML: What are these?

SS: One of the issues that came out as we worked on this product was that the RM product is psychologically resented by children. Many of them see their legacy going away. It is perverse, but many children do not want their parents to have a better life. This is not universal, but I did get this feedback even from parents. There are instances when the son or daughter-in-law will ask why they need more money or to spend on a holiday. So there is an element of psychological tension associated with this product. Another aspect is the attitude of the parents too. There are some who say, "My son and daughter don't treat me well," but they still say, "there is no way we can allow the house we have built to go to the bank." We explain to them that the bank getting the house is only the last recourse and the son can always repay the loan and get the house back. Here too, we have had cases where the parents said if the RM extended for 30 years, the loan amount would mount significantly and make it difficult for the son to repay the loan; so they preferred to tighten their belt and live with what they have. So there is a fair amount of cultural issue involved in RM.

ML: This makes it even more niche, where only the more progressive, westernised parents, whose children do not need their house are likely to avail of RM.

SS: Investigating this phenomenon would be a useful contribution to senior citizens. As a bank we have limitations on how far we can explore this. It is a product of the future. It is certainly going to evolve and become more popular.

ML: We hear that even in the US, the government bears the interest and longevity risk on products like RM, but not in India. Is this correct?

SS: Yes it is. In fact, in most countries, it is the government that takes the risk for many financial instruments that are meant for senior citizens. The thinking is that society has a responsibility towards this segment. Here we can't afford it. We have an old-age pension scheme, but it is really for people at the subsistence level. There is nothing for the middle class and I thought that this product would fill the gap. But it hasn't taken off as expected. One major problem was the 20-year term in the original product - we have now sorted that out. Hopefully, we feel this will now get a better response.

ML: Will the government ever consider taking on some of the risk attached to RM products in the form of guarantees?

SS: The government is supportive, but it doesn't want to put any money behind it. If you recall, in the initial RM product, it was clearly structured as a loan, and the monthly payments were part of capital disbursement, they couldn't be treated as income. However, many senior citizens reported that the local ITOs (income-tax officers) said that whatever be the logic for the product, nothing is documented in an official circular. So we went back to the government and in the next Budget, they amended the Income Tax Act to make it beyond doubt that money received under the RM loan is not taxable in the hands of the senior citizen.

ML: Is there any other RM-related tax issue that you are still discussing with the government? 

SS: Our new RM product is structured as an annuity (the previous one was structured as a loan). Under the Income Tax Act, any annuity is taxable. So this particular product is taxable, while the earlier one was not taxable. But even on a post-tax basis, this product gives senior citizens 20% more than the earlier product. We now want to request the government to consider that annuity coming from RM should be made tax-exempt in the next Budget. We are saying that although it is structured as an annuity, the product is not really an annuity in the real sense of the term. We think the loss of revenue to the government on this account will be very small; we are trying to estimate what that would be and will send in our request. We would like senior citizens to make this request too.

ML: What else are the hindrances to making this popular?

SS: The other issue is the feeling among bankers that they have no real incentive to go to the trouble of pushing this product, when volumes are already quite high in regular mortgage. So they would like to earn a slightly higher interest, but that would mean that senior citizens would be short-changed. In fact, at the moment, seniors are saying that they should get the loan at a lower rate than normal mortgage. This is a difficult issue and can only be resolved if the government considers giving a subsidy for this product. But when I discussed this with the government, they said, "How can we give a subsidy to people who have a house when there are millions of people who have nothing." So that is clearly not going to happen. Another problem that banks have is that although the product leads to income, they don't actually get the income. There is an interest component on this loan as they disburse it every month. Since they account for it on an accrual basis, they have to pay tax on it. But they actually get the money only when they get the house after the RM borrower (and spouse) die or they repay the amount and release the home. So there is a cash outflow on tax, but there is no cash inflow until the tenure of the product.

So we have suggested a formula to the government and will wait to see the response. The banking industry also needs to popularise the product. They also need to train their frontline staff to have the patience to deal with senior citizens.

ML: But isn't this a product that already exists around the world? Can't we just borrow their experience?

SS: No, not in this form. We have made a lot of changes to adapt it to Indian conditions. In the US, there is a guarantee from a government organisation that is extended to all lenders providing RM. So they have no risk at all. In India it is different. Moreover, the major mainstream lenders do not offer RM; there are specialised firms that do it. In Canada also, it is supported by a guarantee by what is an equivalent of the NHB there. In countries where it has done well, including Australia, there is some government support. It does not even exist in many countries. We are the first developing country to launch RM. Even in the UK it flopped initially because there was some moral hazard due to the guarantee, but now they have restructured it. Singapore has just launched it and Hong Kong is taking advice from the NHB on structuring a product. Our product is unique in the sense that we have tried a totally market-based approach.

ML: So is it that you don't see much hope for it to grow rapidly?

SS: I am not pessimistic or disappointed. It would have been extremely naïve to expect this product to have become an instant hit that is not what it was meant to be. We need more interactions with user groups to refine the product. For instance, overseas, you can take the money as a lump-sum payment and be done with it. In India that was not favoured because there is a fear that the seniors would end up losing both the house and the money. So we have a restriction on lump-sum payments of Rs15 lakh, which can be used mainly for medical emergencies or house maintenance. Many senior citizens don't have money even for that. But many senior citizens have come and said that they have an existing housing loan that is not fully discharged even though they have turned 60. So they would like to transfer it to an RM product and would need a lump-sum payment in order to do so. In many cases, that amount is more than Rs15 lakh. They would like to get that sum, repay their mortgage and then avail of an RM product on a reduced value basis. Some of these requests appear logical. It is a constraint because many people in the generation that has just turned 60 have started taking housing loans a little late in life. I also took a housing loan fairly late in life. So we are thinking about making exceptions to these cases.