TRADING IN

SECURITIZATION
INSTRUMENT AND PRICING
OF THE SAME

PRESENTATION OUTLINE
Definition
Advantages/ Benefits
Regulatory Framework
Securitisation Structure
Securitisation Market
Future Outlook
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DEFINITION (AS PER RBI)

Securitisation is the financial practice of pooling
various types of contractual debt such as residential
mortgages, commercial mortgages, auto loans or
credit card debt obligations (or other non-debt assets
which generate receivables) and selling their related
cash flows to third party investors as securities,
which may be described as bonds, pass-through
securities, or collateralized obligations(CDOs)

Securitisation diversifies credit markets as it breaks

the process of lending and funding into several
discrete steps, leading to specialisation and
economies of scale.
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SECURITIZATION PROCESS

SECURITIZATION PROCESS
Selection of assets by the Originator
Packaging of pool of loans and advances (assets)
Underwriting by underwriters.
Assigning or selling to of assets to SPV in return for cash
Conversion of the assets into divisible securities
SPV sells them to investors through private stock market in return for
cash
Investors receive income and return of capital from the assets over the
life time of the securities
The risk on the securities owned by investors is minimized as the
securities are collateralized by assets
The difference between the rate of the borrowers and the return promised
to investors is the servicing fee for originator and the SPV .
Assets to be securitized to be homogeneous in terms of underlying
assets ,maturity period ,cash flow profile
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PLAYERS INVOLVED IN SECURITIZATION

An entity making loans to borrowers or
having receivables from customers

ORIGINATOR
SPECIAL
VEHICLE

PURPOSE

The entity which buys assets from Originator

and packages them into security for further
sale

INVESTMENT BANK

A body that is responsible for conducting the

documentation work

CREDIT
AGENCY

To provide value addition to security

RATING

INSURANCE COMPANY /
UNDERWRITERS

To provide cover against redemption risk to

investor and / or under-subscription

OBLIGORS

Company that gives debt to other company

as a result of borrowing.( debtor)

INVESTOR

The party to whom securities are sold .

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WHY ORIGINATOR
SECURITIZE
Off-balance sheet financing remove illiquid assets.
Improves capital structure
Extends credit pool
Reduces credit concentration
Risk management by risk transfers
Avoids interest rate risk
Improves accounting profits

INVESTOR VIEW POINT

ADVANTAGES
Opportunity to potentially earn a higher rate of return
Opportunity to invest in a specific pool of high quality
credit-enhanced assets
Portfolio diversification

DISADVANTAGES
Prepayment by borrowers can lessen the earning through
interest
Currency interest rate fluctuations which affect the floating
rates on ABS
Maintenance obligations of the collateral are not met as
given in the prospectus
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CATEGORY OF
SECURITIZATION
Assets backed securities
Those securities whose income is derived from pool of
underlying assets
Example: payments from car loan, credit card

Mortgage backed securities

Mortgage loans are purchased from banks and assembled
into pools which become securities

Credit debt obligation

CBO: Those backed b corporate bonds
CLO: Those backed by leveraged home loans
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WHAT CAN BE SECURITIZED

Mortgages

Credit card
receivables

Student
Loans

Auto Loans

Lease
payments

SECURITIZE

Accounts
receivable

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13

SALE OF SICK SUGAR MILLS TRIGGERS ROW

INMAHARASHTRA
Claim by State Sugar Commissionerate
MSC Bank owes the Govt Rs. 1,200 cr from sale of 37 mills under the
Securitization Act, since the amount was given to the mills at the time of
erection
MSC Bank Stand
The first priority under Securitization Act is towards secured creditors. So
far, the bank itself has not been able to recover full dues from the sale of
such mills.
Claim by MSC Bank
The state owes the bank Rs. 2,275 cr from Govt guarantees for loans to
mills.
State Sugar Commissionerate Stand
Further, state had given an affidavit to the high court that the bank
should first sell the sick sugar mill under the SARFAESI Act and then
come to the Govt for revoking the guarantee.

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MFIs TO SFB TRANSITION

MFI's are opting for securitization of their assets with Banks as a viable solutions
for fund raising.

RBI gave in-principle license to 10 entities to set up SFBs in September 2015, out
of which eight are MFIs.

These Eight MFIs will soon turn into small finance banks (SFBs) may have to rely
on securitization for freeing up capital to cater to fresh loan demand as they begin
to meet a new set of rules by the RBI
Once these MFIs turn into SFBs, they will have to follow rules that do not apply to
them currently. They will have to maintain CRR and SLR. A lot of increase in
securitization will be seen for these SFBs to meet CRR and SLR norms
SFB will see an increase in the securitization to manage their balance sheets as
they have to redraw their liabilities from bank-led liability model to deposit-led
liability model. As an NBFC, there is no regulatory limit on bank borrowing, but
once start with banking operations, they have to limit bank borrowing and replace
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it with deposits

FUTURE OF SECURITIZATION IN INDIA

Introduction of three significant regulatory changes will transform the
structured finance market:
1. New tax regime that will lift post-tax investment returns from securitization
trusts.
This will increase post-tax returns from investments in pass through certificates
(PTCs), whose issuance volumes have fallen due to lower demand from bank investors
put off by current lower returns
2. Changes regard to FPIs that will encourage foreign investment and changes to
deal structures.
Participation of foreign investors through the new FPI rules will help the Indian
market evolve so that it becomes more in line with global practices.
3. Changes to deal structures; and a new bankruptcy code that will reinforce
creditors' rights.
Once implemented; it will over time strengthen the legal framework of India's credit
markets by significantly increasing the bargaining power of creditors against debtors
in the resolution of distressed assets.
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FUTURE OF SECURITIZATION IN INDIA

Together, these three changes further develop India's structured

finance market and allow securitization to play a bigger role as a
source of funding in the economy, an objective promoted by the
government
Indias Central Bank is driving investment in securitization
transactions. There is increase in issuance of securitization passthrough certificates is primarily being driven by the RBI's policy of
priority sector lending targets.

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PRICING
Pricing for securitized securities, investors need to find
answers to the following question:
Dynamics of the risk transferred in securitization transaction
expected value of loss being transferred and the compensation
fair risk premium to be paid for underwriting this exposure

Hence initial pricing is based on the creditworthiness, the

presumed pre-payment rate and the financials of the
instrument.
While pricing for secondary market after the cash flows have
commenced throw up another challenge, since, the actual
performance of the pool is to be factored in the prices.
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FUTURE OUTLOOK
The recent changes on the taxation side is sure to have a positive impact
on the securitisation market coupled with the FPIs permissibility in
investing in securitised debt instruments will propel the growth of the
securitisation transactions in India.
Distribution tax being replaced by pass-through status for securitization
trusts will allow tax neutrality to prevail. The permissibility for FPIs to
invest in securitized debt instruments will broad base the investors in
PTCs.

The current trends in securitization are indicating that the market is

trying to grow beyond the priority sector requirements. There are several
public sector banks that are purchasing loan portfolios for inorganic
growth in the loan books. Also the regulations allowing priority sector
lending certificates may have an impact on the demand for
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securitization.

FUTURE OUTLOOK
The NBFCs, be they Asset Finance Companies specialises ME financing
or transport financing, or be they MFIs or Housing Finance Companies
(HFC), their USP is their capacity to originate loans and advances in
sectors where the main stream banks have least penetration. They have
comparative advantage and to leverage that they will have good
opportunities in resorting to securitisation.

The new set of differentiated banks, the Small Finance Banks, whose
major portfolio will be small loans, will resort to securitisation for
diversifying their balance sheet. In all likelihood, they are unlikely to
build capacity in large sized lending and will resort to building
diversified portfolio of large credit through securitisation

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Thank you
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