The Competition Commission has sent notices to at least 15 banks, NBFCs and IBA seeking explanation on why they penalise borrowers who choose to foreclose loans

Indian banks have expressed concern over the intervention of the Competition Commission of India (CCI) on the home loan prepayment penalty issue as they fear that this would put pressure on their costs, increase risk and even lead to higher lending rates, reports PTI.

Last month, CCI, the apex body that operates to sustain and promote competition, sent notices to at least 15 banks, non-banking financial companies (NBFCs) and the Indian Banks’ Association (IBA) seeking explanation on why they penalise borrowers who choose to foreclose loans.

In the communication, CCI is understood to have observed that loan prepayment penalties will suppress the competition in the home loan market by limiting the chances of a borrower to switch their loan to another lender.

Banks which have been asked to explain this matter include State Bank of India (SBI), ICICI Bank Ltd, Axis Bank Ltd, Punjab National Bank (PNB), Canara Bank, Indian Overseas Bank (IOB), Indian Bank, Oriental Bank Of Commerce (OBC) and HDFC Bank Ltd, amongst others. Besides, home financiers like Housing Development Finance Corp Ltd (HDFC) and LIC Housing Finance Ltd were also served notices by CCI.

According to sources, many of these institutions have already replied to CCI, to make it clear that the removal of prepayment penalty will result in higher lending risk and may cause asset-liability mismatch in banks.

IBA, which is the industry lobby of Indian lenders, said banks would send their responses individually to CCI as early as this week.

“IBA’s view is that this (prepayment penalty) does not violate competition laws. Moreover, if CCI insists that banks should stop penalising foreclosures, banks will have to hike the lending rates by at least 0.25% to cover the risk,” a top IBA official told PTI.

IBA would respond to the CCI’s notice this week, the official said.

Presently, most banks charge prepayment penalty in the range of 1%-2% in the event of a customer opting to close the home loan prematurely. Banks do this with a view to cover the interest loss due to the foreclosure of the loan.

What irked CCI is the fact that some institutions are charging higher penalties as high as 3% to 4% to discourage customers from switching their loans to another bank or a financial institution, the official said.

SBI, which charges around 2% prepayment penalty for premature closures within three years of availing the loan, said the penalty is necessary in the system to avoid any asset-liability imbalances.

“Prepayment penalty is an accepted norm in all developed markets across the world. Banks give loans for a specified maturity and raise liabilities (deposits) to lend. During foreclosures, banks will have to take a hit in cost terms. This necessitates (the) prepayment penalty,” a top SBI official said.

Besides, the costs of all borrowers are likely to go up if banks stop penalising customers for loan foreclosures as banks will be forced to hike lending rates to cover the interest loss, the official added.

The CBI arrested CEO of LIC Housing Finance Ramachandran Nair and seven others including three top officials of public sector banks in connection with an alleged housing finance racket.

Apart from Nair, those arrested are Naresh K Chopra, Secretary (Investment), LIC, R N Tayal, General Manager of Bank of India (Delhi), Maninder Singh Johar, Director (Chartered Accountant) of Central Bank of India, Venkoba Gujjal and Deputy General Manager of Punjab National Bank (Delhi).

Rajesh Sharma, Chairman and Managing Director of Mumbai-based firm Money Matters Ltd and two of its employees — Suresh Gattani and Sanjay Sharma– were among those arrested, CBI said on Wednesday.

The officials allegedly colluded with the firm to sanction large scale corporate loans, overriding mandatory conditions for such approvals along with other irregularities.

“The CBI has busted a racket wherein a private financial services company, its CMD and other associates were allegedly bribing senior officials of public sector banks and financial institutions for facilitating large scale corporate loans,” CBI spokesman R K Gaur said in a statement.

“Officers of top management and middle management of various public sector banks and financial institutions viz. Bank of India, Central Bank of India, Punjab National Bank, LIC and LIC Housing Finance Ltd were receiving illegal gratifications from the private financial services company who were acting as mediators and facilitators for corporate loans and other facilities from financial institutions,” he said.
“They were also gathering confidential business information from financial institutions,” Gaur said.

Searches were conducted at various locations in Mumbai, Delhi, Chennai, Jaipur, Kolkata and Jalandhar, which have resulted in seizure of incriminating documents.

The CBI has registered five separate cases in this regard and investigation is in progress, the spokesman said.

Money Matters Financial Services Ltd. which raised Rs445 crores in November from four top foreign investors, has been under a CBI raid since last night

Money Matters Financial Services Ltd. (MMFSL), a Mumbai-based non-banking finance company (NBFC) was raided by a large team of officials from the Central Bureau of Investigation investigating irregularities regarding market-related transactions attached to politicians.

Money Matters, until recently a small-time NBFC into debt market financial services company (debt syndication, debt placement) managed to raise a stupendous Rs445 crore at Rs625.25 per share in late October through Qualified Institutional Placement (QIP) from top investors to supposedly to grow its asset financing business such as short-term corporate funding, structured product funding, margin funding and acquisition funding to corporates.

The deal had raised a lot of eyebrows. At a time when NBFCs and debt market brokers have been struggling to grow their businesses, it was amazing that a company like Money Matters with little pedigree could raise Rs445 crores from four renowned institutional investors Morgan Stanley, Wellington, Fidelity and GMO. These investors picked up as much as 60% of the placement. The lead manager to the issue was India Infoline.

Rajesh Sharma is chairman and managing director of MMFSL. The CBI is apparently investigating whether MMFSL was involved in deals with political connections. Recently, IL&FS Milestone Fund had picked up a 74% stake in HCC Park, a 1.8 million square feet commercial property located in Vikhroli in Mumbai for around Rs 575 crore. Interestingly, Money Matters Financial Services Ltd was the sole advisor to the deal. HCC’s promoter Ajit Gulabchand, who is setting up a controversial township called Lavasa near Pune, is known in market and business circles to be close to Agriculture minister Sharad Pawar.

The stock of Money Matters which was languishing at Rs7 in late 2007, jumped to around Rs120 in early January 2008 and fell to Rs50 in April 2009. Since then, it rose vertically all the way to Rs787 in the last week of October just after the QIP. Yesterday, the stock was quoted at Rs663.90.

What is today Money Matters, was incorporated as Daiwa Securities Limited on November 15, 1994. The Company’s name was changed to Dover Securities Limited on May 19, 1999 with its registered office at 501, Shubham, 1, Sarojini Naidu Sarani, Kolkata-70001. The registered office was shifted to 1-B, 1st Floor, Court Chambers, 35, Sir Vithaldas Thackersey Marg, New Marine Lines, Mumbai-400020. In March 2008, Dover bought over unlisted Money Matters Securities P Ltd. On 6th October 2008, the name was changed from Dover Securities Limited to Money Matters Financial Services Limited.

Owning a house or a car is a dream come true for many because of the availability of loans. In the last few years with an increase in standard of living particularly in the metros, the once conservative and loan averse investor is now willing take on loan commitments to satisfy even leisure requirements.

Taking a loan has an impact on your cash flows by way of EMI payments. What happens to all your loan commitments, if you have lost your job or are entangled in a debt trap because of too many commitments? Default becomes imminent. A default occurs when a customer repeatedly fails to make payments to the lender as per the schedule outlined by the lender at the time of giving the loan.

Does a default mean that you need to give up ownership of the asset for which the loan was taken?

When you find that you are in a situation where you will not be able to meet your loan obligations, running away from the lender is the last thing you should do. Banks/lending institutions understand that there could be genuine reasons for which the borrower is unable to make timely payments such as loss of job, or an accident that may have confined the borrower to the bed. This is especially true if you have always paid your EMIs on time, every time before events took an unfortunate turn.You need to engage in a dialogue with the bank/financial institution. Based on how genuine your intent and case is, the bank may look for various feasible solutions that is mutually acceptable. The borrower will benefit because he will be able to retain his asset and the bank will also benefit because this agreement will prevent an addition to its NPA portfolio.

The various options that can be worked out include:

* Reschedule your debt: After having analysed your financial position, if the bank feels that the quantum of EMI is what is troubling you, they may be willing to reschedule your debt by extending the loan tenure. That will bring down the monthly EMI commitment, though it will mean more interest outgo in the long term. However, you should consider the immediate relief it can bring to your current situation. When the tide turns and you are facing better times you can try negotiating with your bank and revert to your old or higher EMI or even prepay your loan, closing it early and saving excessive interest outgo if it makes sense post the pre-payment penalty.

* Deferring the payment: If your financial situation is such that there is likely to be a jump in cash flow going forward because of change in job or any other reason, you may seek temporary relief from the bank for a few months. The bank may permit the same but may charge penalty for not paying within the time frames agreed upon earlier.

* Restructuring the loan: In case of housing loans, banks have a provision for restructuring the loan e.g. terms of extending the tenure of the loan. For the same, the bank must perceive the reason of default to be genuine. The Reserve Bank of India (RBI) has issued guidelines on the same. For. e.g. the loan tenure can be increased by not more than 1 year in most cases. Foreclosure by selling the collaterals with the borrower’s co-operation is also advised as the next step.

* One time settlement: If you express your desire to pay back, and make known to the bank your current financial condition, banks may be willing to enter into a one time settlement on a case to case basis. This is a good way to get rid of your loan if you have some money as usually the settlement will be done at a lesser value i.e. the bank may waive off some amount/charges. If your financial situation is really bad, then you may need to file for bankruptcy to free yourself from the loan commitment.

* Conversion of loan in case of unsecured loans: Banks tend to be stricter as far as unsecured loans are concerned. The borrower could opt for converting the unsecured loan to a secured one by offering a security. That should bring down the rate of interest and thus the EMI burden.Running away from the problem is not the solution. Not only will you undergo emotional stress, you will also end up losing your asset. What is important is that your intent to pay off the loan should be evident to the lender.

It is in the banks interest too, to ensure that the loan doesn’t turn bad. So be wise and engage in a dialogue with the bank the moment you figure out that you will not be able to meet obligations and don’t wait till the last moment. That should help you tide over the temporary crisis you could find yourself in.

WHAT HAPPENS IF NONE OF THE ABOVE OPTIONS WORK OUT?

If none of the above options work, the bank after giving you time for repayment will go in for repossession of the asset for the purpose of recovery of dues.

MOVABLE ASSET (CAR/AUTO)

* Borrower will be given a notice of 7-15 days to pay the dues before the repossession of the Vehicle. In case of non payment within this notice period, the Bank will repossess the pledged vehicle..

* After repossession of the vehicle, a Pre-Sale Notice would be issued to the borrower giving him a time line of 7 days to make payment of the outstanding dues.

The Pre Sale Notice would clearly mention the details of the concerned office and the corresponding contact person for payment and release of vehicle.

* In case the borrower makes the payment in accordance with the agreed terms of settlement, the vehicle will be released back to the borrower within 7 days from the realization of the payment.

* The vehicle will be sold by way of auction through dealers empaneled with the bank within 90 days from the date of repossession.

IMMOVABLE ASSET (HOUSE/PROPERTY/LAND)

A notice will be sent to the borrower u/s 13(2) of the SARFAESI Act. This can be done only after the loan is classified as NPA as per the guidelines set by RBI

The customer will be allowed 60 days post issuance of the notice to regularize the account or come forward to settle the account. .

* If the borrower refuses to pay, then the authorized officer will ask for the physical possession of the mortgaged property by handing over the demand possession notice to the borrower

* The Bank shall proceed with the auction of the attached property post 30 days of taking possession of the property, in the event, that the customer does not come forward and settle the loan. The Bank shall send the customer a letter intimating him, of the venue of the sale indicating date and time of the same.

* The bank will consider handing over possession of property to the borrower any time after repossession and before concluding sale transaction of the property, provided the bank dues are cleared in full.

Any excess amount obtained after adjusting the dues on the loan will be refunded to the borrower.

BORROWER’S RIGHTS

The SARFAESI act gives the customer the right to appeal against the action of repossession taken by the bank in the Debt Recovery Tribunal u/s 17 within 45 days from the date when the action was taken. If the DRT passes an order against the borrower, then an appeal can be filed before the Appellate Tribunal within 30 days of receiving it. If it is held in appeal that the possession of the asset taken by the secured creditor was wrongful, the Tribunal or the Appellate Tribunal may direct its return to the borrower, along with appropriate compensation and cost.

Loan default can have serious consequences. Not only could it result in seizure and auction of your assets, but your credit score too will take a beating.

Even rescheduling debt tarnishes your credit history to an extent and will reflect in your credit score. Obtaining a loan in the future will become an issue which is a huge financial setback

Make sure you take a loan only if you’re sure of timely repayment. A good way to do this is to ascertain your personal net worth in terms of assets you own and the money you have at your disposal after taking stock of your existing debts and other financial commitments

Loan protection insurance, or loan payment protection insurance, is a form of payment protection insurance. This type of insurance can help you protect your monthly loan payments if you become unemployed or suffer an accident or sickness.

Loan protection insurance will typically be used to protect a home loan, car loan or even sometimes personal loans.

Rahul was a young software professional working in a multinational company. After a few years of working he was in a position to apply and get a home loan for a house close to his heart.

Unfortunately, a year after he got the home loan, he met with an accident and was bed ridden for more than six months. In such a situation he was not able to make his home loan EMI payments and had to eventually let go of his house.

Such an unfortunate situation could have been avoided if Rahul had gone in for home loan insurance.

Loan insurance is a concept catching up in India. Most people taking a loan are not aware about what they would do in case they are unable to make the monthly payments towards the loan.

What is Loan Insurance?

Loan protection insurance, or loan payment protection insurance, is a form of payment protection insurance. This type of insurance can help you protect your monthly loan payments if you become unemployed or suffer an accident or sickness.

Loan protection insurance will typically be used to protect a home loan, car loan or even sometimes personal loans.

Under a loan insurance cover, the lump sum amount reduces as the outstanding loan decreases as per the loan schedule.

What are the benefits of loan insurance?

Loan insurance means during tough times, you’ll have an insurance cover to take care of the EMIs

* In case of death or disability due to an accident or sickness

* In case of loss of job

This effectively reduces the burden on your family in case of any unfortunate event that occurs with you. They would be saved from the financial trauma of paying off the loans.

In cases of a joint loan application, a joint loan insurance plan can be taken which will effectively cover you and your partner. Both will have the reassurance that if either of you should be faced with redundancy, illness, have an accident or even die, your repayments will be made for you.

What kinds of loans are covered under such an insurance schemes?

Loan insurance is offered mainly for home loan borrowers. However, some banks offer loan insurance for personal loans as well as auto loans.

Do I have to pay any premium for such insurance? If yes, how much?

Like any insurance you do need to pay premium for the insurance. There are only a few banks which offer this kind of insurance without any premium. Premium amounts usually vary from bank to bank and depend primarily on:

* The age of the person taking the loan – the premium is usually higher for older people

* The loan amount – if the loan amount is high, the premium payment will also higher owing to the fact that the bank has a higher liability in such cases

* The tenure of the loan – If the repayment period is longer, the premium to be paid is also higher

* The medical record of the individual – if your physical health is good, the premium amount comes down. However, if you are suffering from any kind of serious ailments the premium amount will go high

What are the things to keep in mind while checking about loan insurance?

Loan insurance is something that you need to give careful thought to. You need to check:

* What does the loan insurance cover? – Does it cover death by accident or death by any cause? Does it cover temporary disability only or does it cover permanent disability as well?

* Eligibility for the insurance – Check about the eligibility criteria for the insurance. Check whether the loan needs to be of a certain amount

* Payment of premium – Check whether you can pay the premium as part of the EMI or does it have to be made as a lump sum amount

* Is a medical check-up necessary? – Check whether a medical checkup is necessary in all cases.

Are there any tax benefits because of the insurance being a ‘life insurance’ scheme?

Yes, there are tax benefits that you can get with such kind of insurance. Since you are paying a life insurance premium, you can get deduction under Section 80C. However, if it is clubbed with your EMI payments, you will not get the insurance benefit.

DISCLAIMER

Copyright 2009 Ask4money.com. All rights reserved

The most significant advantage of a joint home loan is the increase in home loan eligibility. Incomes from all joint home applicants are pooled in to enable the applicants to obtain a higher loan amount towards purchasing their dream home.

All the joint home applicants are eligible for tax rebates under Section 80 C for principal repaid and under Section 24 for interest repaid. However, these tax deductions are capped at 1 L for the principal repaid and 1.5 L for the interest repaid.

There are a number of advantages when you combine incomes and apply for a joint home loan. A bunch of these advantages are detailed here for your reference.

a) The most significant advantage of a joint home loan is the increase in home loan eligibility. Incomes from all joint home applicants are pooled in to enable the applicants to obtain a higher loan amount towards purchasing their dream home.

b) All the joint home applicants are eligible for tax rebates under Section 80 C for principal repaid and under Section 24 for interest repaid. However, these tax deductions are capped at 1 L for the principal repaid and 1.5 L for the interest repaid.

c) Another advantage of jointly taking a home loan is that all the borrowers can simultaneously avail these income tax rebates, thus maximizing the tax benefits of the home loan.

d) The number of people who can avail a joint home loan can be anywhere between 4 and 6, depending on their individual credit profiles.

e) The one criteria banks insist on is that all co-owners of the property should also be co-applicants but the reverse need not be true.

Who can take a joint loan?

– A married couple or a parent and child can take a joint loan.

– Some banks allow brothers to take a joint home loan provided they will both be co-owners of the property. Banks insist that all co-owners of the home must be co-borrowers in a joint home loan.

Exceptions: Sisters, friends or unmarried couples living together are, generally, not allowed such loans by banks.

Do both borrowers get tax benefits?

Yes. You as well as the co-borrower can avail tax rebates on the principal and interest repaid on the loan.

This way you can maximize your tax benefits

Manoj was looking to buy a car within two years. His friend advised him to invest in an equity mutual fund that offered him very good returns. He took this advice and invested in the fund suggested by his friend. But then the things changed. The markets crashed and Manoj saw his investment lose its value drastically.

Why did this happen? The main reason was that he did not hire the services of an expert financial planner.

Manoj is not alone. There are many like him who invest solely on the advice of their friends, relatives and colleagues. Others go to their friendly broker and ask him to suggest the best investment option for them. These brokers then end up suggesting an investment avenue that may not meet the investor’s goal. Due to this, many investors end up losing money and not fulfill their investment objective.

IMPORTANCE OF A FINANCIAL PLANNER

When we set out on a journey, we need a clear map, showing us the directions we need to follow to reach our destination. In the same way, whenever we set out to reach a financial goal, we need directions to help achieve it. This guidance is provided by the financial planner. He recommends you the suitable investment avenues based on your goals, time horizons and risk appetite. Once the investment is done, he monitors your investments to determine your investments are performing as expected. If not, he can suggest modifications to your financial plan to ensure you meet your financial goals as determined.

SOME CRITERIA TO CONSIDER WHEN CHOOSING A FINANCIAL PLANNER

When it comes to choosing a financial planner you need to be very careful. Any mistake in selecting a financial planner can cause massive financial loss. Also you will not be able to reach your goal. Here are the most important characteristics that every good financial planner must possess.

1. Qualifications: This criterion is very important from the legal perspective. Ensure the financial planner is qualified and registered with the respective bodies governing the corresponding investment options like AMFI and IRDA. These bodies conduct tests before approving the agents. This ensures the agent is well-versed in all aspects of investments.

2. Capability: A good financial planner must understand that nowadays it is not enough to just get the application forms filled. The old method of “one-size fits all” doesn’t work anymore with the opening up of many new and innovative investment options.

A good financial planner should be adept at finding out the most suitable ones for his clients. For this, he needs to conduct in-depth research in the avenues available.

3. Value added services: Does your financial planner provide any value added services? Does he provide you with periodic updates about your investments? Does he keep you updated about the latest happenings in the market through newsletters and online tutorials? This is important to prevent an investor from panicking when the going gets tough.

4. One stop place for your investment needs: Does the financial planner provide you with various investment options? This is important to meet your changing life situations. E.g. if you are young, you would be more interested in equities.

But as you approach retirement age, you should concentrate more on debt products. When you are married with kids, a term insurance should play an important part in your financial plan. A financial planer should act as a one stop shop for all your investment requirements by dealing in all these investment options.

5. Unbiased advice: The success of any financial plan lies in the unbiased advice given by the financial planner. Unfortunately these planners today have become rare, as most of the planners today care more for their commissions than for the welfare of their clients.

While initially it may be difficult to judge if the planner is really difficult, you will understand this from your subsequent interactions with him. You can also ask your friends, relatives and colleagues for their references. Always remember, a planner’s top priority is the welfare of his clients.

6. Easy to access: You have a major crisis and need your planner’s help. But he is busy with other clients or has relocated to some other place. This is sure to create problem for you. Since you are building a long-term relationship with the planner, he should be easily accessible to you. Normally this is common in an organization when the planner operates individually. If he is not easily accessible, it creates problems for his clients.

If you aim to achieve your financial goals, choosing a right financial planner is the most important step. He should be qualified, competent, easily accessible and able to meet all your financial needs. He will be your partner in helping you reach your financial objective. So choose wisely to achieve your goals successfully 

Initial public offers, gold, infrastructure bonds… investors never had it better. Consider for example: Coal India’s public issue, which saw a phenomenal response from investors, is expected to list at least 20-25% premium over the issue price when it gets listed on the stock exchanges today.

The IPO market is buzzing with frenetic action with several real estate developers and infrastructure companies including Lodha Developers, Neptune and Reliance Infratel slated to hit the market soon. As for gold which has been defying gravity for sometime now, less said the better.

If deep pockets are spoilt for choice, empty coffers have no cause for complaint either. For example, those who are eyeing the IPO space with no money to spare have received loan offers from banks and non-banking finance companies (NBFCs). Public sector banks are offering women loans to buy gold. Private sector banks and credit card companies are also luring buyers with offers to convert their gold coin or jewellery purchases into equated monthly installments (EMIs) that can be paid off via credit cards. Several banks are offering 3-9-month EMI schemes for buying gold coins this festive season.

But hold on a second. Common sense says you should invest with your surplus money, right? Borrowing to invest? Is it such a smart move? For example, what happens if the IPO that you have invested in lists at a huge discount to the issue price. It’s a double whammy. You have to bear the interest cost plus the losses. The same holds true for gold which does not look to be in a hurry to come off the highs that it’s currently riding on.

“A high net worth individual can earn some money by borrowing if he already has money parked in, say, a liquid fund. He can pull it out for down payment and borrow the rest of the money for 10-12 days, which will come at around 15-20% interest. The chances of allotment increase in case you take IPO financing as you are bidding for a higher allotment,” says Gaurav Rastogi, Founder, Ask4money.com

In short, you will have to shell out half the money required for investing in an IPO from your own bank account and the balance amount will be funded by the bank or non-banking finance company. The interest charged is 21% in some cases.

And, mind you, it is not 21% per annum, but 21% for the 10-12 day period. This means that if you have taken a loan to invest in an IPO, priced at Rs 100 a share, you will have to make at least Rs 125 to just recover the cost of funding, including the processing charge. “There is always a chance that the listing gains may not give you good returns. In that case you will have to hold,” says Mr Rastogi

That really is the problem. What if everything doesn’t work according to plan? If the IPO fails to list at a premium, you will land in a soup. First, you have to repay the loan you have taken from the bank or NBFC within 10 to 30 days of taking it. So, what will you do? Sell the stock and return the money and bear the loss with a grin?

Even with a happy ending (read listing), the leveraging can cap your profits. Obviously, if you borrow at a higher rate to invest, then even at a phenomenal return, your profits will be affected. “The cost of funds should not be too high because even if the IPO gets subscribed heavily and the listing gains are higher, your cost per share will also be very high,” says Mr Rastogi

Post retirement, Sanjay Sharma was struggling to meet his regular expenses, especially due to the rising cost of living and healthcare. As there was no close family to take care of his growing expenses, he decided to sell his house — his only saving — and move to an old-age home. Since I knew how attached he was to his house, I introduced him to reverse mortgage scheme, which is offered by leading Indian banks and is popular in developed countries. Under the scheme, he can mortgage his house and receive a regular cash flow from the bank during his lifetime, without worrying about repayment.

Mr Sharma immediately rushed to a nearby bank and gathered the following details and enthusiastically, shared it with me: The minimum age for availing this scheme is 60 years. Married couples are also eligible as joint borrowers, provided one of them is above 60 years and other is not below 55 years of age. The borrower should be the owner of the house, which has at least 20 years of residual life.

The borrower may mortgage the house to a lender and receive periodic payments (monthly, quarterly, etc) during his/her lifetime. The periodic payout depends on the value of the property and the term of the agreement. Maximum monthly payments are capped at Rs 50,000. Lump-sum payments are allowed, subject to medical exigencies, which is restricted to 50% of the total eligible amount of loan, up to a maximum of Rs 15 lakh.

The borrower is not required to service the loan during his lifetime. In case the borrower dies or leaves the house permanently, the loan is repaid along with accumulated interest through sale of the house. The balance surplus (if any) is paid back to the borrower/ his nominees. The borrower or his heir can also repay or prepay the loan with accumulated interest and have the mortgage released.

The transaction of reverse mortgage also enjoys favourable tax treatment, under the Income Tax Act, 1961 (Act). Transfer of a house, under the scheme, does not attract capital gains tax. Further, any amount received as a loan, either in lump sum or installments, under the scheme, is not regarded as income, and hence, will not be taxed as income tax. However, the borrower (or the legal representatives) is liable to pay capital gains tax at the point of alienation of the mortgaged property by the mortgagee, for the purposes of recovering the loan.

Similar tax provisions have also been incorporated under the Direct Taxes Code Bill, 2010. However, the scheme has, so far, failed to attract senior citizens primarily due to lack of awareness and their reluctance to part with their houses. Even the lure of higher monthly lifelong payments has failed to generate interest in the scheme. It is necessary for the government and the banking institutions to educate the senior citizens and organise public awareness programs to highlight the benefits of the scheme.

Coming back to Mr Sharma, he is now enjoying his life to the hilt, proud to be independent and is propagating the scheme amongst his peer group.