WELCOME

TO A PRESENTATION ON
REVERSE MORTGAGE LOAN-ENABLED ANNUITY SCHEME - A GROUP PRODUCT OF L.I.C. OF INDIA

WHAT IS REVERSE MORTGAGE?

A Reverse Mortgage is a loan available to seniors and is used to release the home equity in the property as one lump sum or multiple payments. The homeowner's obligation to repay the loan is deferred until the owner dies, the home is sold, or the owner leaves (e.g., into aged care)

The analysis of definition provides some basic features of Reverse Mortgage products. These are
The loan is available only to senior citizens owning a home. The loan can be in the form of Lump-sum or multiple payments like annuity etc. Homeowner does not have obligation to repay the loan till the house is his prime residence. The payback is done once the owner dies or leaves the house. This is done though selling the house and recovering the loan through its proceeds.

Thus a home owner going for Reverse Mortgage may take his payment in the following form: A lump sum at the beginning (can be used for home improvement health expenses etc) Monthly payments till a fixed term Monthly payments as a life-long annuity Establishing a credit-line with or without accrual of interest on credit balance A combination of the above

Pricing of Reverse Mortgage Products

Age of the borrower-If it is a joint borrowing then the age of the younger borrower is considered. Value of the property- Then value of the property plays a major role in determining the price for an RM product. Expected Interest Rate- As the product resembles the normal annuity product in some sense, the current and expected interest also plays a major role in pricing the product.

Significance of Reverse Mortgage System in India

The society in India has undergone huge changes in last 4-5 decades. Nuclear family has replaced the joint family system. The support system that was available to family elders has almost vanished. We have no state-sponsored public pension system to provide an alternate support to old people. This condition leaves the older people in jeopardy.

They face following issues:

Outliving their retirement income. Depending on their children to help pay expenses. Getting sick and having no way to pay the expenses. Not being able to guarantee an income for their spouse after they are gone. Being able to live as long as they like in their own home.

Reverse mortgage or equity release products provides a solution to these issues

Every Indian, irrespective of its income level tries to build a home for himself during his working life. Reverse mortgage will give him/her an opportunity to generate income from that very home. As the ownership remains with the borrower, he can transfer the home to his successors also, if the latter agrees to pay the loan amount. Such a product relieves the pressure on government also to provide old age security and thus government also needs to support such initiative.

Why is it Not Clicking in India?

Till now, a very small number of applicants have availed this loan in India since its inception in 2007, according to sources from banks & other lending institutions. The reasons for the model not taking off in India are manifold. From an emotional attachment with ones house to real estate price correction; from an absence of clear guidance against legal complications to inadequate marketing, the plan has been unable to meet the expectations of financial institutions.

Why is it Not Clicking in India?..Contd..

There are some very basic reasons that have worked against this product which has taken off rather well in international markets. The psyche of Indians does not make them comfortable with the idea of selling their home. This could be perhaps because better awareness had not been created about the product. Secondly, the Indian lending institutions cap the available loan amount at Rs 50 lakhs, instead of providing for an equitable percentage of the property's value, and limits the loan period to a tenure of 15 years. The product is still evolving and may take on new dimensions depending on how the banks can present its consumer appeal.

RELEVANCE TO INDIA MARKET

The number of elderly (>60 yrs) will increase to 113 million by 2016, 179 million by 2026, and 218 million by 2030. Their share in the total population is projected to be 8.9 % by 2016 and 13.3% by 2026. The dependency ratio is projected to rise from 15% as of now, to about 40% in the next four decades. The percentage of >60 in the population of Tamil Nadu and Kerala will reach about 15% by 2020 itself! Life expectancy at age 60, which is around 17 yrs now, will increase to around 20 by 2020.

Market Potential
Considering the above facts in mind, if we assume that about 20% of the eligible elderly population will take the advantage of RML, the total number of loans would be of the order of 18 Million in 2010, 28 Million by 2016 and 44 Million by 2030. If the average eligible amount of one loan is taken to a conservative sum equal to Rupees 1 Million per borrower, the total RML market size will become in the range of Rupees 20 to 25 Trillion. This is a huge market and cannot be ignored in terms of opportunity by the lenders and also social security measure by the borrowers and the Government of India.

Regulatory Mechanism in India

Reverse Mortgage Loans (RMLs): Primary Lending Institutions (PLIs) viz. Scheduled Banks and Housing Finance Companies registered with NHB have been allowed to extend it. Eligible Borrowers: The borrower should be more than 60 years and the spouse should not be less than 55 years of age. The minimum residual life of the property should be 20 years Determination of Eligible Amount of Loan: Depends on the value of the property, age of the borrower and the prevalent interest rate. The PLI should ensure that the Equity to Value Ratio (EVR) should never be less than 10%.

SALIENT FEATURES OF NHB POLICY AS REGARDS REVERSE MORTGAGE SCHEME

Nature of Payment: Monthly, Quarterly, Half Yearly, Yearly or Revolving Credit. However a cap of Rs 50000/ on monthly and Rs 1500000/ or 50% of the eligible amount have been introduced. Eligible End use of Funds: Allowed for the purposes beneficial to the senior citizens and prohibited for activities like speculation. Period of Loan: Maximum 20 years (Revised from 15 years earlier). Interest Rate: The interest rate to be charged on the RML to be extended to the borrower(s) may be fixed by PLI. Fixed and floating rate of interest may be offered. Security: The RML shall be secured by way of mortgage of only residential (not commercial) property in favour of PLI.

SALIENT FEATURES OF NHB POLICY AS REGARDS REVERSE MORTGAGE SCHEME

Valuation of Residential Property: Periodic, compulsory in every 5 years. Taxation: All payments to the borrower from the PLI are income tax exempt as the same are considered as capital payments rather than income.

Provision for Right to Rescission: 3 working days time is given for this Loan Disbursement by Lender to Borrower: PLI is expected to pay directly to the borrowers except in certain special situations Title Closing: The PLIs will provide a fair and complete package of reverse mortgage loan material and specimen documents, covering the benefits and obligations of the product. Settlement of Loan: All the conditions under which the loan is due are listed.

SALIENT FEATURES OF NHB POLICY AS REGARDS REVERSE MORTGAGE SCHEME

Prepayment of Loan by Borrower(s): The borrower(s) will have option to prepay the loan at any time during the loan tenor. There will not be any prepayment levy/penalty /charge for such prepayments. Loan Covenants, Indemnity/Insurance, Foreclosure: Option for PLI to Adjust Payments Title Indemnity /Insurance: PLI will have the obligation of ensuring clarity on title of the residential property Foreclosure: Several events are listed on the occurrence of which the loan would be liable for foreclosure. PLIs Option to Adjust Payments Counseling and Information to Borrowers

Role of life insurers in Reverse mortgage market

Better understanding of mortality/longevity trends- Life insurers have better research about mortality trends and so they have better ability to measure longevity risks which is one of the major risk in the product. This also helps in development in the market as the life insurers can provide option of life annuity to borrowers rather than payment for fixed term. A life annuity will help the borrower to have income even at the time when he is very old. Long Term Player- Reverse Mortgage is a long term product. Life insurers being long term players in the financial market, they have ability to estimate and manage long term interest rate movements and thus manage the interest rate and other risk in better manner. Natural Hedge- Life insurers are on a better footing to hedge reverse mortgage product risk with their portfolio of life insurance benefits.

LICs REVERSE MORTGAGE LOAN-ENABLED ANNUITY SCHEME

The Master Policy Holder shall be Scheduled Commercial Bank/Housing Finance companies. The beneficiary of the Product shall be the borrowers. Annuity shall be of the following types: 1. Annuity for life 2. Joint life annuity 3. Annuity for life with Return of Capital.

LICs REVERSE MORTGAGE LOAN-ENABLED ANNUITY SCHEME

The Annuity disbursement shall be directly credited through ECS to the specified account of the beneficiary. In case the Annuity option exercised by the borrower is Annuity for Life with Return of Capital, the Purchase Price is returnable to the Master policy Holder. The bank/finance company may purchase a fresh Annuity in case the surviving borrower opts. In case of pre-payment of the loan, the Bank/Financial Institution shall inform the Insurance company about such pre-payment. The Annuitant shall, thereafter, receive the Annuity payments directly from LIC as per the terms of the Annuity.

THE POWER OF SYNERGY BETWEEN

MOST CUSTOMER-FRIENDLY BANK OF THE COUNTRY &

THE UNDISPUTED LEADER OF THE INDIAN LIFE INSURANCE INDUSTRY WELL AFTER A DECADE OF PRIVATIZATION

CAN WORK MIRACLES TOGETHER WE SHALL

AGGRESSIVELY FORAY INTO THIS YET GROSSLY UNDER-EXPLORED ARENA TO CREATE A GREAT WIN-ALL SCENARIO

THANK YOU
P & GS UNIT, MANGALORE, UDUPI DIVISION