D.M.S. What is securitization Securitization of debt or asset refers to the process of liquidating the illiquid and long term assets like loans and receivables of financial institutions like banks by issuing marketable securities against them. In Other words, debt securitirization is a 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. The different entities-: Originator The original lender is called the originator. It is the entity on whose books the assets to be securitized exist. Typically, the Originator is a bank, a Non-banking finance company(NBFC), a housing finance company or, occasionally even a manufacturing/service company.
Obligor The Obligor(s): The Obligor is the Originator's debtor (borrower of the original loan).The amount outstanding from the Obligor is the asset that is transferred to the SPV. The credit standing of the Obligor(s) is of paramount importance in a securitization transaction
09-09-2014 4 Special Purpose Vehicle SPVs are companies with small capital, or sometimes trusts, formed for the specific purpose of issuing securities in securitization transactions whose ownership and management are independent of the Originator. In order to ensure that the assets actually achieve the bankruptcy remoteness, it is essential to move them out of the balance sheet of the Originator and park them with another independent entity.
The SPV is critical in a securitization transaction because it is this
entity that delinks the credit of the entity seeking funding from the creditworthiness of the securities that are created in a securitization
Servicer The servicer collects the moneys due from individual borrowers in the pool, makes payouts to the investors and follows up on delinquent accounts. The servicer also furnishes periodic information to the rating agency and the trustee on pool performance.
09-09-2014 5 Trustee The trustees have a fiduciary role to oversee the performance of the transaction until maturity with a view to protect the interest of the investors. Trustees tend to be reputed banks, financial institutions or firms of Chartered Accountants or Solicitors. Rating Agency Credit rating agencies rate the securities which are issued to provide an external perspective on the liabilities being created and help the investor make a more informed decision. The rating process would assess the strength of the cash flow and the mechanism designed to ensure full and timely payment by the process of selection of loans of appropriate credit quality, the extent of credit and liquidity support provided and the strength of the legal framework.
09-09-2014 6 Structurer Normally, an investment banker is responsible as structurer for bringing together the Originator, credit enhancer/s, the investors and other partners to a securitization deal. It also works with the Originator and helps in structuring deals.
ABS refers to the securitization of non-mortgage retail loans. Till the late 1990s, assets classes securitized under ABS in India included only car loans and commercial vehicle loans. Thereafter, construction equipment loans, two wheeler loans, utility vehicle loans, and personal loan pools, have also been securitized.
Mortgage Backed Securities (MBS) (MBS) are asset-backed securities whose cash flows are backed by the principal and interest payments of a set of mortgage loans. Since the underlying home loans in MBS pool have a floating- rate, the scheduled cash flow on such pools is uncertain and liable to change, depending on actual interest rate. Moreover, options to convert from fixed to floating rate and vice-versa, coupled with negotiated re-pricing of loans, added to the uncertainty of the cash flow in the MBS pool. With the underlying loans earning floating rates, Pass Through Certificates (PTCs) in MBS issues are also being predominantly priced on a floating rate basis. In 2005, 52% of issuance was based on a floating rate. Collateralized Debt Obligation (CDO) : In CDO transactions, the debt securities issued by the SPV are backed by a diversified loan or bond portfolio. There is thus a basic difference between CDOs and ABS, the latter being homogeneous pools of assets such as mortgages or credit card receivables, in contrast to the diversified portfolios backing CDOs.
Collateralized Loan Obligations : Where the originating bank transfers a pool of loans, the bonds that emerge are called collateralized loan obligations or CLOs.
Collateralized Bond Obligations : Where the bank transfers a portfolio of bonds and securitizes the same, the resulting securitized bonds could be called collateralized bond obligations or CBOs.
Securitisable Assets Term loans to financially reputes companies Receivables from govt. departments and companies Credit and receivables Hire purchase loans like vehicle loans Lease finance Mortgage loan Benefits of securitization Additional Source of fund Greater profitability Enhancement of capital adequacy ratio Spreading of credit risk Lower cost of funds Higher rate of return Prevention of idle capital
14 Securitisation in India began in the early 1990s, with CRISIL rating the first securitisation program in 1991-92, of an auto loan. Citibank securitized auto loans and placed a paper with GIC mutual fund worth about Rs. 16 crores.
Securitisation began with the sale of consumer loan pools, and originators directly sold loans to buyers. They acted as servicers and collected installments due on the loans.
Creation of transferable securities backed by pool receivables (known as PTCs) became common in late 1990s. Through most of the 90s, securitisation of auto loans was the mainstay of the Indian markets.
Initially it started as a device for bilateral acquisitions of portfolios of finance companies. These were forms of quasi-securitisations, with portfolios moving from the balance sheet of one originator to that of another.
But from 2000 till today, Asset-Backed Securities (ABS) and Residential Mortgage-Backed Securities (RMBS) have fuelled the growth of the Indian securitisation market. HISTORY OF SECURITISATION IN INDIA
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17 Causes for unpopularity of securitisation in India New Concept Heavy Stamp duty and registration fee for SPV Difficulty in assignment of debt Absence of standardized loan documentation Absence of proper accounting procedure Absence of proper guidelines