TRUST IS THE KEY FOR SUCCESS OF RM MODEL IN INDIA

In a good faith, to help senior citizens, the RBI issued guidelines for Reverse Mortgage (RM) in 2007 and then revised the same in 2008. The then Finance Minister P. Chidambaram also promoted the concept to great an extent in Union Budgets of 2007-08 and 2008-09. The apex body in housing finance, National Housing Board (NHB) came up with a definitive scheme for RM and today as many as 20 banks offer different RM products to Senior Citizens. But till January 2011 (since 2007 when RMs started in India) only 7,000 RMs were sold in the country clearly indicating how big a failure it is.

RMs, as the name suggests, can be considered as reverse EMIs wherein a Senior Citizen (over 60 years of age) can pledge his/her biggest asset, the house, to receive a series of cash flows from the bank for a fixed tenure with the rights to live in the house till the house owner or spouse is alive. For a country like India where insurance is still to go deep into the masses, pension schemes have started drawing attention just recently and pension by Central and State Governments are not enough to sustain the lives of those who are already retired with not much of cash in their pockets, RMs are a boon. But still the senior citizens have not woken up to it. The mute question remains, why?

Well, the answer remains in the basics. In stead of being friendly to the senior citizens, RMs actually aim at minting money for the issuer. For example, one of the main turn offs in these schemes is the loan tenure. While life expectancy is on rise, RMs offer cashflows for 15 years with the clause that the money cannot be used for reinvestment or business purpose. This jeopardizes the person’s future for the fact that if he buys a RM at 60, after 75 he receives nothing from the bank, owing to the terms of RM he could not invest anywhere so no income from other sources, and worse he cannot even rent or sell the property to get funds as it’s already mortgaged with the bank (RM clauses specify so). For that matter, the cash flows that the house owner receives from the mortgage lender is only equivalent to 60% of the value of the property (for example, Rs.3 million for a house valued at Rs.5 million). With such preposterous clauses that almost send senior citizens’ a full-circle from problems at a particular age to even bigger problems and helpless conditions after 15 years, it is certainly not very difficult to understand why the seniors are trying to keep their hands off such schemes.

Nevertheless, there came a ray of hope last year when a new product came out of a bank-insurance tie up and offered annuity with RM allowing the seniors to receive a payment till life. But it is just the beginning, if the RM model needs to be successful; the mortgage lenders need to make the seniors feel that they are their well wishers and not Shylocks from Shakespear’s Merchant of Venice. More so in the Indian context, where the lenders have to go past the biggest hurdle in form of pre-dominant cultural believes whereby most elderly see residential properties as entitlements of bequeaths for their next generation. RM lenders have to prove a point to the seniors before the model can take off in India, and they have to do so by their works, not just words.

The minimum that they must do in this context is to provide a better value for the mortgage (like around 90% of value of the property) and the make cash flows available to the seniors till at least one, mortgagee or spouse, is alive. This becomes all the more crucial in case of the urban middle-class nuclear families, who are the ideal target group for RMs. The government should also show some responsibility towards the senior citizens and play a vital role by subsidising the interest rates associated with these schemes. It’s our moral duty to help the seniors in our society. Thus, instead of creating schemes to mint money, if the financial institutions can act as trustworthy friends to the senior citizens, the RM model can deliver a lot for them in the long-run.

DOES SENSEX REFLECT A TRUE PICTURE OF THE STOCK MARKET?

For most common Indian, the BSE Sensex is equivalent to the Indian stock market, and for experts it is the nerve of Dalal Street. But, since the day I started understanding stock market and its functions, the biggest question that kept haunting me was, when we have a huge pool of listed (public limited) companies in the country (as many as 81,926 as on December 31, 2010), how correct are we by following a benchmark indicator that consists of just 30 companies selected on the basis of a single parameter - market capitalisation?

As a finance professional, I often get to see many presentations which compare BSE Sensex with NYSE Composite to prove a point. But I just want to ask a simple question to those sophisticated presenters; the comparison that they showcase, is it between two equals? Certainly not! While the Sensex presents an ultra-narrow view point by indicating stock movement of 30 companies of an exchange that houses the world’s largest number of listed companies, NYSE Composite, on the other hand, presents a broad and global view by showing market movements of 1867 stock (1530 US companies and 337 non-US companies).

Moreover, while the top global indices, be it NYSE Composite or Nasdaq Composite, provide comprehensive sector coverage by including stocks from all the 10 industries defined by the Industry Classification Benchmark, the Sensex does not even pay a heed to the same. On the contrary, the Indian benchmark index is heavily skewed towards just 3 sectors - Oil & Gas, Financial Services and Information Technology - as combined together they control over 50% of the total weight in the index at any point of time – whereas some other key sectors like aviation and gems and jewellery are either completely ignored or get a paltry weight of 1%-2% like the healthcare sector (Cipla is the only healthcare company in the Sensex with a weight of 1.1% as on April 21, 2011).

But possibly, what makes Sensex the worst possible indicator from India’s point of view is the fact that the index does not even represent 30 stocks in true sense. Thanks to sole selection criteria of market capitalisation, it’s just a representative of the top 10 stocks which have a combined weight of 67.25% (as on April 21, 2011) in the index, whereas, the top 10 in NYSE Composite holds a total weight of less than 15% at any point of time. What’s laughable in the Indian context is the fact that any strong movement in the top 2 index constituents, Reliance Industries (11.78% weight) and Infosys (9.43% weight), alone is good enough to rig the Sensex much more than what the bottom 5 (combined weight of just 3.69%) can do together.

For an average common man, who does not understand what the Sensex at 20,000 actually means, the index is also an indicator of the country’s economic growth. But as the past records suggest (in 2008, the economy grew at 9% when the Sensex dropped over 52%; on the other hand, Sensex gained 81% in 2009 when the economy only managed a 7.4% GDP growth) the Sensex is on a completely different tangent as compared to the economy. And the reason, for sure, is the narrow base that it represents. So it’s high time that we actually should either abandon looking at the Sensex as a benchmark of any sort and move one to some other index like BSE 500 or perhaps BSE 1500, or change the existing selection criteria of Sensex to present a comprehensive and wider indicator that also shows the real picture of the economy. BSE has already lost the stock market war to NSE in 2009. It might also lose the index war in 2011...