The Hindu Business Line : NHB talking to insurance cos to sweeten reverse mortgage

Offering succour: Mr S. Sridhar, Chairman and Managing Director, National Housing Bank, interacting with The Hindu group’s journalists, in Chennai on Saturday.

M. Ramesh

Chennai, June 7 National Housing Bank is asking insurance companies to bring in an annuity-based product which could be combined with the reverse mortgage scheme of banks, so that the senior citizen continues to receive monthly payments even after the tenure of the scheme is over.

Under the reverse mortgage scheme, a senior citizen who owns a property receives monthly payments from the bank that offers the scheme, for a fixed number of years. The bank pays a certain sum over the years — treated as loans in its books. The bank collects its loan plus interest by selling the property after the senior citizen dies.

For example, suppose a senior citizen buys reverse mortgage when he is 60 years old. The bank agrees to pay him a fixed monthly sum for, say, 20 years. If the man dies after 15 years, the bank sells the house and collects its dues out of the proceeds and pays any surplus to the heir. But if the man lives on, the monthly payments stop when he is 80, but the bank will still sell the property only when he dies — whenever it happens.

The question is, what will the 80-year-old man do if his monthly income stops? It is here that NHB wants insurance companies to step in, according to Mr S. Sridhar, Chairman and Managing Director of the bank. The insurance company could be paid a premium by the bank for an annuity fund.

Slow acceptance

The reverse mortgage product, meant exclusively for senior citizens, is new in India. Banks began offering it about a year ago, but so far only about 1,100 senior citizens have availed themselves of the scheme.

Part of the reason for the slow acceptance was that the banks themselves did not aggressively sell it, owing to a confusion over whether the monthly payments are treated as income for the purposes of tax or as loans. Again, if they are treated as loans, would embedded interest income be taxed on accrual basis?

These issues have since been clarified. The monthly receipts will not be taxed in the hands of the senior citizens. However, the interest income in the books of the banks will be taxed on accrual basis.

Fixed deposits

Meanwhile, NHB has decided to raise funds through public deposits. “We will launch our fixed deposit scheme shortly,” Mr Sridhar said.

NHB, which raised Rs 13,200 crore from the market last year, is searching for cheaper sources of funds for on-lending to banks. Apart from public deposits, NHB is working out a scheme for accessing NRI funds —while the funds received would be in foreign currencies, its repayments would be in rupees.

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