Securitisation of debt

By: Hiren Lathiya

Securitisation of debt or asset refers to the

process of liquidating the illiquid and long term asset like loans and receivables of financial institution like banks by issuing security against them.

Meaning

A carefully structured process whereby loans

and other receivables are packaged, underwritten and sold in the form of asset backed security.

Securitisation is nothing but liquifying assets comprising loans and receivables of an institution through systematic issuance of financial instruments.

Defination

The originator The special purpose vehicle (SPV) A merchant and investment banker A credit rating agency The originator

Parties involved

Identification stage Transfer stage Issue stage Redemption stage Credit rating stage

Stages involved in Securitisation

Identification stage the bank or any other institution decide to go for Securitisation called originator. He pick up the pool of asses of homogenous nature, considering the maturities, interest rated involved and frequency of repayment and marketability.

Stages involved in Securitisation

Transfer process selected pool of asset is passed through the other institution which is ready to help the originator to convert those pools asset into securities. This institution called SPV.

Stages involved in Securitisation

Issue process SPV split the packaged into individual securities of smaller values and they are sold to the investing public. The securities issued by SPV is called different names like ‘pay through certificate’, ‘pass through certificate’, ‘interest only certificate’, ‘principal only certificate’.

Stages involved in Securitisation

Redemption process the redemption and payments of interest on these securities are facilitated by the collections received by the SPV from securitise asset.

Stages involved in Securitisation

Credit rating process since pass through certificate issue publically require credit rating agency to rate so that it become more attractive.

Stages involved in Securitisation

Additional source of fund Greater profitability Enhancement of capital adequacy ratio Spreading of credit risk Lower cost of funding Higher rate of return Prevention of idle capital Better than traditional instrumentsw

Benefit

New concept Heavy stamp duty and registration fees Cumbersome transfer process Difficult to assignment of debt Absence of standardize loan document Inadequate credit rating facility Absence of proper accounting procedure Absence of proper guidelines

Causes for unpopularity

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