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Introduction
Securitization is the financial practice of pooling various types of
contractual debt such as residential mortgages, commercial
mortgages, auto loans or credit card debt obligations and selling said
debt as bonds, pass-through securities or Collateralized Mortgage
Obligation (CMOs) to various investors.
The principal and interest on the debt, underlying the security, is paid
back to the various investors regularly. Securities backed by mortgage
receivables are called Mortgage-Backed Securities while those backed
by other types of receivables are Asset-Backed Securities.
Securitization has evolved from its tentative beginnings in the late
1970s to a vital funding source with an estimated outstanding of
$10.24 trillion in the United States and $2.25 trillion in Europe as of the
2nd quarter of 2008. In 2007, ABS issuance amounted to $3.46 trillion
in the US and $652 billion in Europe.
WBS (Whole Business Securitization) arrangements first appeared in
the United Kingdom in the 1990s and became common in various
Commonwealth legal systems where senior creditors of an insolvent
business effectively gain the right to control the company.
Introduction
Securitization is the process in which the underlying pool of assets are
structured or packaged and sold as financial instruments to investors
either directly or through a Special Purpose Vehicle (SPV).
Typically in India, the originators or sellers are Banks, NBFCs, HFCs &
others. The underlying assets are mainly secured loans like housing
loans, auto loans, commercial vehicle loans, construction equipment
loans, two wheeler loans, tractor loans, three wheeler loans and
unsecured loans like personal loans, consumer durable loans.
The SPV is formed in the form of trust, settled and managed by a
trustee. The trust purchases the pool for a consideration either at par
or premium. The investors subscribes to the Pass through Certificates
(PTCs) issued by the trust. These PTCs are backed by the underlying
loan receivables and the beneficial interest lies with investors.
The Servicer (typically, Originator in India) is appointed by the trust to
service the loans. Servicer passes on the periodic collections from the
underlying borrowers to the trust which is further passed on to the
investors as per scheduled payouts.
Theme of Securitization
Loan installments are receivables for such Banks, NBFCs,
HFCs & others. It can make a pool of such receivables and get
them rated from rating agencies.
Ratings would ascertain the quality of these receivables. These
pooled and rated receivables can be sold to some other party
for cash.
The party which buys these receivables would also be in
interest business or it could be a simple individual investor
having investible funds thereby making cash available to these
institutions upfront.
These institutions would assign future receivables to these
investors . In this process, these institutions get its desired
differential rate of interest for the risk it has taken.
Investors would get their desired rate of interest. All future
receivables (for these institutions) would be received by the
investors. This is more popularly called as securitization of
future receivables.
Definition
Liquidity
Reduced Cost of Capital
Profitability
Risk Stripping
Higher Capital Turnover
Benefits of Securitization to Investors
Growth in Transactions
Promotes Savings
Promotes Socialism over Capitalism
Less Importance to Banks & NPAs
(Demerits)
Benefits of Securitization to the Banks
Stamp Duty
Taxation
Accounting Rules
Eligible Investors
Lack of sophisticated Debt Market
Lack of Investor Awareness and Risk
Appetite
Scope of Securitization in India