SECURI T I ZATION

•SECURI T I ZATION I S “THE ISSUANCE OFMARKETABLE SECURI T IES BACKED BY THE

EXPECTED CASH FLOWS FROM SPECIFIC ASSETS

(RECEIVABLES)”

securitisation

Why securitize assets?•More efficient financing

•Improved balance sheet structure•Better risk management

What type of assets can besecuritized?•Any type of asset with a reasonably

predictable stream of future cash flowscan be securitized.

•Assets that are easiest to securitize arethose:

that occur in large pools; for which past experience can be used to

predictdefault rates;

for which documentation is standardized; and for which ownership is transferable.

Types of Securitization•MBS (Mortgage based securitization )•ABS (Asset based securitization)

Benefits to Originator•Off balance sheet financing

•Regulatory capital relief•Improvement of RoCE•Multiple alternative sources of funding•Conversion of illiquid assets into liquidsecurities

•Systemically solves ALM problems in thesector - mismatch due to difference in tenorand characteristics of assets (mostly fixedrate and up to 30 years) and liabilities

Benefits to Investor•Enjoys low cost operations and servicingdue to economies of scale of the originator•Credit risk is minimized–Exposure on rated, low-risk housing loans–Expertise of originators helps maintain

qualityof underlying assets–Credit enhancement possible

Benefits to Financial System•Cleaner books due to expertise oforiginators•Systemically solves the ALM problemsin the sector

•Encourages an efficient market•Results in substantial benefits to the end customer of home loans

ALM-Asset Liability Management

What is required for a successfulasset securitization?•Robust financial infrastructure–The Legal Environment

–The Accounting Environment–The Regulatory Environment–The Taxation Environment–Back-office Systems

Drivers of Strong Investor DemandReceivables are sufficient to meet the payments promised by the SPVSafeguards exist to provide for shortfalls in

cash from receivables

Investors have clear legal claims on the income from receivables and have adequate protection in the case of delinquency.

Credit Enhancement–Third Party Guarantees

–Subordinated debt–Over-Collateralization–Cash Collateral Accounts

SECURITISATION IN INDIAN CONTEXT

First deal in India between Citibank and GIC Mutual Fund, in 1990 for Rs. 160 million.

Securitization of cash flow of high value customers of RajasthanState Industrial and Development Corporation in 1994-95,structured by SBI cap.

Securitisation of overdue payments of UP government to HUDCO by issue of tax-free bonds worth Rs. 500 million

Securitisation of Sales Tax deferrals by Government OfMaharashtra in August 2001 for Rs. 1500 million with a greenshoe option of Rs. 75 million.

First deal in power sector by Karnataka Electricity Board for receivables worth Rs. 1940 million and placed them with HUDCO.

Mega securitization deal of Jet Airways for Rs. 16000 million through offshore SPVs.

Data indicate that ICICI had securitised assets to the tune of Rs.27500 million in its books at end March 1999.

Some of the companies that have beenInvolved in this are

•Ashok Leyland finance•Cholamandalam investment & finance•Esanda finance•Sakthi finance•Tata finance•SRF finance

Originators–Churn higher returns on lower capital baseInvestors–Can invest in low-risk rated home loans paper withouthassles of origination/ servicingFinancial system as a whole–Expertise of Specialists helps maintain quality ofunderlying assets and reduces ALM mismatchesHome Loan Customers–Access to cheaper funds

Committee involved in Securitization•Narasimham committee I & II•Andhyarujina committee–Recommendations made by them•Empower banks & FI’s to take the

possession ofthe assets & to sell them without the intervention of

the court, was enacted.

When the bill was passed?•The Securitisation and Reconstruction of

Financial Assets and Enforcement ofSecurity Interest Ordinance, 2002. on21.06.2002.

It received the assent of the President on17.12.2002 and has now become an Act.