The Reserve Bank of India (RBI) proposes to come out with prudential norms for reverse mortgage loans to safeguard banks in a falling real estate market. The prudential norms are likely to be announced in the 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 involves 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 monetising the owner’s equity in the house.
The senior citizen borrower is not required to service 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.
Sources close to the development said the prudential norms for banks were required as the property mortgaged with banks would erode in value if the real estate prices continued to fall. This may result in non-performing assets in the books of banks. Currently, such lonas are treated at par with commercial real estate by banks as far as prudential norms are concerned.
To begin with, norms will involve capital adequacy and asset classification for such loans.
This means a bank will have to provide a certain portion of the loan as capital for provisioning if such loans go bad. There will be norms 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. Currently, 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 clarified that such loans were non-commercial in nature and thus a lower risk weight akin to residential real estate would be appropriate.
Banking sources said such prudential norms would protect banks from having such loans as NPAs. Further, RBI will also spell out valuation norms for pricing such schemes.
Currently, National Housing Bank has come out with comprehensive norms for the reverse mortgage scheme and based on this, several banks have introduced such products.
However, banks have not been 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. forthcoming annual monetary policy of RBI on April 29.
