SECURITISATION OF DEBT : SECURITISATION OF DEBT INTRODUCTION:- Financial system is in rapid transformation Due to this capital, money and the

debt market are getting widened and deepened Development of debt market increases the efficieny of a capital market Debt market should have both primary and secondary markets MEANING OF SECURITISATION : MEANING OF SECURITISATION Securitisation means technique by which a long term , non-negotiable and high valued financial asset like hire purchase is converted into securities of small values which can be tradable in the market just like shares Definition:-Securitisation s nothing but liquifying assets comprising loans and receivables of an institution through systematic issuance of financial instruments. Securi tisation helps them to recycle funds at a reasonable cost and with less credit risk As from the risk management point of view , the lending financial institutions have to absorb the entire credit risk by holding the credit outstanding in their own portfolio. Securitisation offers a good scope for risk diversification The entire transaction relating to securitisation is carried out on the asset side of balance sheet MODUS OPERANDI : MODUS OPERANDI The originator A special purpose vehicle (SPV) or a trust A merchant or investment banker A credit rating agency A servicing agent-receiving and paying agent (RPA) The original borrowers or obligors The prospective investors i.e.., the buyers of securities The various stages involved in the working of securitisation are:Identification stage / process Transfer stage / process Issue stage / process Redemption stage / process Credit rating stage / process Identification Process : Identification Process Lending financial institution a bank or any institution for that matter which decides to go in for securitisation of its assets is called the originator Originator has got various assets: Commercial mortgages Lease receivables Hire purchase receivables Originator has to pick up from various assets which includes homogeneous nature , considering the maturities , interest rates involved and marketability. The process of a selecting a pool of loans and receivables from the asset portfolios for securitisation is called Identification Process. TRANSFER PROCESS : TRANSFER PROCESS The process of passing through the selected pool of assets by the originator to a SPV is called transfer process and once this transfer process is over , the assets are removed from the balance sheet of the originator ISSUE PROCESS After transfer process the SPV converts these assets in various types of maturity. SPV splits individual securities of smaller values and they are sold to investing public . SPV gets reimbursed by sales proceeds. the securities issued by SPV are known as Pay through certificates, Pass through Certificates , Interest only certificates , Principal only certificate.they are structured in such a way that the maturity of these securities may synchronise with the maturities of the securitised loans. REDEMPTION PROCESS : REDEMPTION PROCESS Redemption and payments of interest on these securities are facilitated by the collection received by the SPV from the securitised assets. Collection of dues is generally entrusted to originator or special servicing agent and paid with certain % of commission They are responsible for collection of interest and principal on assets pooled CREDIT RATING PROCESS Pass through certificate has to be publicly issued , they require credit rating by good credit rating agency so that they become more attractive and easily acceptable they should be rated by one credit rating agency on the eve of the securitisation issue can be guaranteed by external guarantor like merchant banker which would enhance credit worthiness of certificates These are tradable in secondary market this are negotiable securities ROLE OF MERCHANT BANKERS : ROLE OF MERCHANT BANKERS Merchant or Investment bankers play a big role in asset securitisation they act as special purpose vehicle (SPV) Many issues are involved like :- Timing of issue of pass through certificates Pricing of these certificate for marketing Underwriting of the issues In private placements , they act as agents for the issuer connecting the sellers and buyers They involve in structuring the issue to see:- legal regulatory Accounting tax and other requirement Merchant bank has a definate role to play Most of the issue is underwritten by popular merchant banker which adds credit to that issue and become more attractive from investors point ROLE OF OTHER PARTIES : ROLE OF OTHER PARTIES THEY ARE THE ORIGINAL BORROWERS AND THE PROSPECTIVE INVESTORS ORIGINAL BORROWERS ARE CALLED Obligors Infact the success of the securitision process depends upon these

original borrowers and if this process fails to meet its commitment then its in danger the receipts of cash flows from original borrowers and passed to the investors the prospective buyers are nothing but public at large STRUCTURE FOR SECURITISATION /TYPES OF SECURITIES : STRUCTURE FOR SECURITISATION /TYPES OF SECURITIES Securitisation is a structured transaction , whereby the originator transfers or sells some of its assets to a SPV which break this assets into tradeable securities of smaller values which could be sold to the investing public The general principle is that the securities must be structured in such a way that the maturity of these securities may coincide with the maturity of the securitised loans There are three types of important securities :- Pass through and pay through certificates Preferred stock certificates Assets based commercial papers Slide 10: Pass through and pay through certificates:- Payments to investors depends upon the cash flow from the assets backing certificates in other words , as and when cash (principal+interest) is received from the original borrower by SPV , it is passed on to holders of certificate at regular intervals In pay through certificates have a multiple maturity structure depending upon the maturity pattern of underlying assets The securities issued are of short , medium and long terms They are issued on investors demand for varying maturity patterns This type is more attractive from investors point of view This are offered at a discount Preferred stock certificates :- Subsidiary companies buy the trade debts and consumer receivables of parent companies , convert them into short term securities and help the parent companies to enjoy liquidity this securities are backed by guarantees by merchant banks this are normally short term in nature Asset-based commercial papers:-This type of structure is mostly prevalant in mortgage backed securities.The SPV purchases portfolio of mortgages from different sources and combined into a single group on the basis of interest rates , maturuty dates and underlying collaterals.Then it is tranferred to a trust which in trust issues certificate to the investors this are short term in nature certificate holder are entitled to participate in the cash flow from underlying mortgages to the extent of investmentsOther types :-1)Interest only certificates2)principal only certificates : Asset-based commercial papers:-This type of structure is mostly prevalant in mortgage backed securities.The SPV purchases portfolio of mortgages from different sources and combined into a single group on the basis of interest rates , maturuty dates and underlying collaterals.Then it is tranferred to a trust which in trust issues certificate to the investors this are short term in nature certificate holder are entitled to participate in the cash flow from underlying mortgages to the extent of investmentsOther types :-1)Interest only certificates2)principal only certificates SECURITISABLE ASSETS : SECURITISABLE ASSETS ALL ASSETS ARE NOT SUITABLE FOR SECURITISATION ONLY IN RARE CASES THEY ARE SECURTISED EG:- Preferred Stock Certificate The following assets are generally securitised by the financial institutions:- term loans to financially reputed companies Receivables from government departments and companies Credit card receivables hire purchase loans like vehicle loans Lease finance Mortgage loans etc BENEFITS OF SECURITISATION : BENEFITS OF SECURITISATION Additional source of funds Greater Profitability Enhancement of capital Adequacy Ratio Spreading of credit risk Lower cost of funding Provision of multiple instruments Higher rate of returns Prevention of idle capital Better than traditional instruments Other benefits SECURITISATION AND BANKS : SECURITISATION AND BANKS There is a vast scope for commercial banks to go in for securitisation due to following factors:- Innovative and Low cost source of funds Better Capital Adequacy Norms Creation of more credit Increased Profitability Tool for asset liability management and risk management