Reverse Mortgage Products: an Indian Banking Perspective

Reverse Mortgage (RM) provides a range of non-recourse mortgage loans, which helps a borrower, to get liquid funds by mortgaging his/her house property, without moving out or make any repayment options, till he/she dies or sells the house or moves out. This has been an innovative product and has been the idea of the global banking sector for last one and half decades. Hence, RM is a power device to increase the income of the senior citizens. However, Indian banking industry has adapted this innovative product only in 2006, but without much upsurge. It has been observed that the number has, however, increased to 7000 RM Loans of Rs. 1,400 crores as on 31st March, 2010 (www.business-standard.com). The product still has huge untapped market in India. There are however some major issues which is hindering the growth of the product.

This paper endeavors to show that the growth has been sluggish in the past because of lack of awareness among the customers, lack of knowledge, some regulatory factors and confusion relating to tax treatment. The banks felt the need for a complementary insurance product that will cover the borrower if they outlive the tenure of the loan. The paper also would throw light on the fact that the accounting treatment of RM has posed a contradiction towards the concept of revenue recognition and doctrine of conservatism as the assured anticipated incomes became difficult for disclosure. On the other hand the calculation of the indexed cost of acquisition has become difficult due to the controversy relating to the date of acquisition. This has led to the difficulty in computation of the Capital Gains arising out of the transfer.

The study therefore likes to focus on the two-fold aspect of RM as a product: firstly, a study on the future opportunities and challenges that will decide the fate of Reverse Mortgage as an innovative product for the Indian Banking Industry; secondly, the study focuses on the accounting and taxation dilemma arising out of the reporting methodology and disclosure of RM.