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RBI to introduce prudential norms for reverse mortgage

RBI to introduce prudential norms for reverse mortgage

Apnaloan.com Research Bureau

22 Apr 2008

The Reserve Bank of India (RBI) is likely to come out with prudential norms for reverse mortgage loans to safeguard the interests of the banks when a correction in realty prices is expected. The norms are expected to be announced in the annual monetary policy meet on April 29.

Reverse mortgage is a customized product for senior citizens who are 60 years of age (or more) and have a self-owned, self-occupied property. The loans are available for up to 15 years for pensioners.

The borrower does not have to repay the loan during his life time. Upon the death of the borrower, the house is sold to cover the loan.

According to media reports, prudential norms for banks will be required if the real estate prices spiral down. The price correction is likely to lead to Non-Performing Assets (NPAs).

Currently, such loans are being treated at par with commercial realty by banks as far as prudential norms are concerned.

The bank will provide a certain portion of the loan as capital for provisioning if such loans remain unpaid. There will be norms specified to classify such loans as standard or non-performing assets.

There could be additional risk weights attached to such loans depending on the risk potential of the loan scheme.

As of now, 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 just as in case of residential property is appropriate.

The National Housing Bank (NHB) has come out with comprehensive norms for the reverse mortgage scheme as more and more banks join the bandwagon, introducing such products.

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