Reverse mortgage has flopped; maybe gold would work better

By S Murlidharan

The State Bank of India has had the mortification of being the operating agency for two failed schemes - the Gold Deposit Scheme and the Reverse Mortgage. In a previous article, this writer had tried to offer an alternative scheme for the Gold Deposit Scheme: homes for gold . This article too is about bringing gold into the national mainstream, and one of the novel schemes that can be tried is to encourage people to reverse mortgage their gold.

The concept of reverse mortgage of houses originated in the US, where senior citizens who felt uncared for by their wards set out to cash in their homes without selling them. Banks give money to them either as annuities or lumpsum amounts on the strength of the mortgage of the property but without repayment obligations. The interest keeps on accruing and gets added to the loan amount without disturbing the sleep of the mortgagor.

The bank accepting such reverse mortgage would obviously be cautious and keep a safe margin. Thus, for a house valued at, say, Rs 1 crore, not more than Rs 50 lakh may be given. It patiently bides its time, and on the death of the mortgagor it sells the property to realise its dues unless the legal heirs come forward to pay off the dues. One may castigate the scheme as being perverse insofar as it wrecks vengeance on one’s own children, but Americans do not think so because if the children can be blas about looking after their parents, the parents too can nonchalantly monetise their properties.

[caption id=“attachment_1109117” align=“alignleft” width=“380”] Reverse mortgages have not worked in homes, but gold stands a better chance. It would also bring more gold out of homes into bank vaults. Reuters[/caption]

Indians, by and large, however are tender-hearted, deeply attached to their children and do not relish the prospect of teaching them a lesson even posthumously, even if they have been condemned to live in old age homes. This is why reverse mortgage scheme operated by the State Bank is nothing to write home about, especially given its niggardliness in insisting on repayment after 15 years in case the mortgagor survives. Being eligible to reverse mortgage at the age of 60, repayment would stare them in their faces at the age of 75.

The SBI probably was chary of increasing longevity but that has made its scheme that much less attractive even though this admittedly is not the prime reason for its failure.

There is no reason why the government should not think in terms of introducing a reverse mortgage scheme this time round involving the yellow metal. Reverse mortgage of homes presupposes ownership of homes in the first place. In this country, a household may or may not own a home but it does own gold in small or large quantities. Therefore, the chances of reverse mortgages of gold succeeding are much higher, though the same sentimentality that bedevils the success of reverse mortgage of homes could thwart reverse mortgage of gold as well.

Nevertheless, there is no harm in trying. Houses are by and large owned by menfolk. Jewellery, on the other hand, is owned by and large by women. Widows among them could find the scheme useful for educating their children and for other episodic events. In fact, both reverse mortgage of home and gold could be useful if the money thus gotten is used for larger family purposes like education of children rather than for meeting the day-to-day expenses of elders. When the motive is larger family good, there is likely to be lesser compunction at burdening youngsters with repayment obligations.

Rural areas would in fact be a huge and fertile catchment area for banks operating reverse mortgage of gold schemes just as they can be for microfinance companies. Benighted rural folks are taken for a royal ride by wily and unscrupulous moneylenders. Often their only precious possession, gold, is forfeited at the drop of the hat, not to talk of other evil practices like usury, extracting a huge toll on them. If banks enter with their schemes of reverse mortgage, this exploitation could stop. In fact, the RBI has been at its wits’ end in promoting rural banking, but there is resistance from village folks as well as from banks.

Reverse mortgage schemes of banks can win over this resistance. In fact, banking culture in rural areas could get a leg up if the folks there are baited with non-repayable loans for gold which is what reverse mortgage is all about. The money lent should be deposited into the savings account that hopefully would build banking culture.

There is a qualitative difference between reverse mortgage of gold and ubiquitous gold loans. The latter involves periodic payment of interest and repayment of loan secured on bullion or jewellery whereas the former leaves the borrower severely alone till the happening of a specified event, i.e., the death of the borrower. But more care must be taken in reverse mortgage of gold vis–vis gold loans because interest only gets accumulated and is not paid, which warrants greater margin money. And then while gold loans are at best medium term facilities, gold reverse mortgage could well lock up bank funds for a long time.

On the flip side, while the gold garnered from gold loans cannot enter the mainstream for the simple reason that the same has to be returned on repayment, gold garnered under reverse mortgage schemes can re-enter the mainstream since they are for the long term. In fact, it should be made clear to the mortgagors that the gold mortgaged would be melted if it happens to be in jewellery form and, in any case, the gold that would be returned would not correspond to the form in which it was mortgaged. To this extent, the proposed scheme would square with the gold deposit scheme operated by the SBI. In short, reverse mortgage of gold would serve a greater national purpose - reducing the gold import bill - than reverse mortgage of homes.

It is likely to receive a much better response than the extant gold deposit scheme because the latter does not improve the liquidity position of depositors, what with the interest rates being niggardly. Reverse mortgage, on the contrary, can address the financial needs of the mortgagors more substantially. What they get is not peanuts but dollops of cash sans interest during their lifetimes.