Subject – FINANCIAL SERVICES

Class –B.B.A./M.B.A.
Topic – Debt Securitisation

Key-Words – Securitization, Illiquid, Modus of Operandi, Originator, SPV

Dr. Dileep Kumar Singh

Dr. Dileep Kumar Singh

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Introduction
The financial system all over the world is in
transforming stage . The capital, money and debt
markets are getting widened and deepened. The
development of debt market increases the efficiencyof
capital market. The debt or assets securitization plays
very important role. It is the debt market which has
provided more impetus for capital formation than
equity market in the economically advancecountries.
Debt or asset securitizationassumes
a significant role and it is one of the most innovative
techniques introduced in the debt market.

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 Meaning and Definition
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.
The definition can be stated as “Acarefully
structured process where by loans and other
receivables are packaged , underwritten and sold in
the form of asset backed securities”.

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Securitization is also differs from
factoring, on following points.
Securitization Factoring
 Associated with loans  Associated with book debts
 Deals with loans  Deals with bills receivables
Nature is medium or long Nature is short term
term
 Collection work is done by  Collection work is done by
originator or agency factor himself
 Part of credit risk can be  Whole credit risk is on the
absorbed by originator shoulder of factor

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Modus of Operandi
In securitization following parties are required
1. Originator : An entity making loans to borrowers or having
receivable from customers.
2. Special purpose vehicle(SPV) : The entity which buys assets
from originator and packages them in to security for further
sale.
3. Investment Bank : A body that is Responsible for conducting
the documentation work
4. Credit rating agency : To provide value addition to security .
5. Insurance company/under writer : To provide cover against
redemption risk to investor and /or under subscription
6. Obligator : Company that gives debt to other company as a
result of borrowing (debtor)
7. Prospective investor : The party to whom securities are sold

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Stages in securitization
There are 5 stages involved in the working of
securitization
1. Identification stage/ process
2. Transfer stage/ process
3. Issue stage/ process
4. Redemption stage / process
5. Credit rating stage/ process

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Process of Securitization
Originator

Asset Pool

SPV Credit enhancement

Issue proceeds
Class A Notes
Investor
Note issue
Class B Notes

Class C Notes
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Securitization :
Operational Mechanism
The crucial link in the Securitization chain is the
creation of a special purpose vehicle (SPV). The SPV
intermediates between the primary market for the
underlying asset and the secondary market for the
asset backed security .The SPV is a separate entity ,
incorporated in consonance with prevailing laws . The
basic process can be split up into 3function.
1.The originator function
2 .The pooling function
3 .The securitization function
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Methods of Securitization
As stated earlier, securitization is liquidating
long term assets in to marketable securities, the asset‟s
quality , amount of amortization , default experience
of original borrower, financial reputation and
soundness etc ., is vital
There are 3 important Methods of Securitization
1.Pass through and Pay through certificates
2 .Preferred stock certificates
3 .Asset based commercial paper

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Pass through certificate
Cash flows are „passed through‟ to the holders of the
securities in the form of monthly payments of interest,
principal & pre-payments
They reflect ownership right in the assets backing the
securities
Pre-payment precisely reflects the payment on the
underlying mortgage . If it is a home loan with
monthly payments, the payments on securities would
also be monthly but at a slightly less coupon rate than
the loan.

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Pay through certificate
This permits the issuer to restructure receivables flow
to offer investment maturities to the investors
associated with varied yields and risk .The issuerowns
the receivables and sells the debt backed by the assets.
The cash flows can be remade into various debt
tranches with different maturities.

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Preferred stock certificates : it is issued by a subsidiary
company against the trade debts and consumer
receivables of its parent company
Asset-based commercial papers : The SPV purchase
portfolio of mortgages from different sources (various
lending institutions) and they are combined into a
single group on the basis of interest rates, maturity
dates and underlying collaterals . Then it transferred
in to trust and issue mortgage backed securities.

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 Types of Securitization
1. Mortgaged Backed securitization (MBS)
2. Mortgage pass through securitization
3. Auto loan securitization (ALS)
4. Credit card segment
5. Trade receivable
6. Non asset based securitization
7. Asset based securitization (ABS)

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The following assets are generally
securitized by financial institutions
1. Term loans to financially reputed companies
2. Receivables from government departments and
companies
3. Credit card receivables
4. Hire purchase loans like vehicle loans
5. Lease finance
6. Mortgage loans etc..;

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Benefit of securitization
Securitization provides benefits to all the parties suchas,
the originator, investor and the regulatory authorities .
Some of them are as below
1. Additional source of fund
2. Greater profitability
3. Enhancement of capital adequacy ratio
4. Spreading of credit risk
5. Lower cost of funding
6. Provision of multiple instrument
7. Higher rate of return
8. Prevention of idle capital
9. Better than traditional instrument.

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History of securitization in India
 Securitization in India began in the early 1990‟s ,with CRISIL
rating the first securitization program in 1991-1992, of an auto
loan . City bank securitized auto loans and placed a paper with
GIC mutual fund worth about Rs 16 cores.
Securitization 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) becomes common in late 1990 through most of
the 90‟s securitization of the Indian markets .
 From 2000 till today ABS& RMBS have fuelled the growth of the
Indian securitization market.

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Short Answer Question:-
1. Why is the entity seeking to raise funds through a securitization referred
to as the“seller” or the “originator”?
2. Describe and assess the various types of credit enhancements

Long Answer Question:-

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 References
1. Khan, M.Y (2004). Financial Services. Tata McGraw Hill Publishing Co. Ltd.
2. Rustogi, R.P. (2000). Financial Management. Galgotia Publishing Co.
3. Sriram, K. Handbook of Leasing, Hire Purchase and Factoring. The Institute of
Chartered Financial Analysts of India.
4. Bajaj, U., 2013. Securitization in India: A Bumpy Ride, s.l.: s.n.
5. Carter, J., 2005. Highlights From securitization news, s.l.: s.n.
6. Fang, M. & Long, F., n.d. A preliminary look at effects of asset-backed
securitization on shareholders, s.l.: s.n.
7. Frank J. Fabozzi, V. K., n.d. Securitization: The Tool of Financial Transformation,
s.l.: s.n.

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