securitization and hire purchase

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    SECURITIZATIONSECURITIZATION

    AND HIRE PURCHASEAND HIRE PURCHASE

    By: Raman Deep KaurBy: Raman Deep Kaur

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    SECURITIZATIONSECURITIZATION

    Pooling and Repackaging of HomogeneousPooling and Repackaging of Homogeneous

    liquid Financial Assets into Marketableliquid Financial Assets into Marketable

    Securities that can be sold to Investors, isSecurities that can be sold to Investors, isknown as Securitization.known as Securitization.

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    Parties in SecuritizationParties in Securitization

    Generally 3 parties, namelyGenerally 3 parties, namely--

    11.. OriginatorOriginator: any financial institution or: any financial institution or

    other entity, which has decided toother entity, which has decided toadopt securitization and sell its assets.adopt securitization and sell its assets.

    22.. Special Purpose VehicleSpecial Purpose Vehicle: usually a: usually atrust which converts receivables intotrust which converts receivables into

    securities.securities.33.. The InvestorThe Investor: MF, pension fund,: MF, pension fund,

    insurance company, PF, etc buyinginsurance company, PF, etc buying

    securities from SPV.securities from SPV.

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    Other Parties:Other Parties:

    4.The Obligor4.The Obligor: original borrower on whose: original borrower on whose

    integrity success of securitization depends.integrity success of securitization depends.

    55.. Credit Rating Agency:Credit Rating Agency: rates originator andrates originator andunderlying assets of securities.underlying assets of securities.

    66.. AdministratorAdministrator: receiving and paying agent: receiving and paying agent

    who receives payments from obligor and giveswho receives payments from obligor and gives

    to SPV.to SPV.

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    77.. TrusteeTrustee: ensure that all parties meet their: ensure that all parties meet their

    obligationsobligations

    88.. StructurerStructurer: works with originator to comply: works with originator to complywith all legal, taxation, proceduralwith all legal, taxation, procedural

    requirements and structuring whole deal.requirements and structuring whole deal.

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    Process ofSecuritizationProcess ofSecuritization

    Mainly includes transfer of assets, issue ofMainly includes transfer of assets, issue of

    securities, servicing of securities.securities, servicing of securities.

    1.1. Transfer of AssetsTransfer of Assets: to SPV thru any of the: to SPV thru any of thefollowing methodsfollowing methods--

    AssignmentAssignment (statutory with legal & beneficial rights or(statutory with legal & beneficial rights or

    equitable with beneficial rights)equitable with beneficial rights)

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    SubSub--participationparticipation-- (not a transfer of loan, payments(not a transfer of loan, payments

    received from borrower are transferred to buyer by thereceived from borrower are transferred to buyer by the

    lender or originator)lender or originator)

    Documentation:Documentation: rights and obligations of all parties arerights and obligations of all parties aredefined.defined.

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    2.2. Issue of SecuritiesIssue of Securities: maturity of securities is: maturity of securities is

    matched with securitized loans, rated ormatched with securitized loans, rated or

    guaranteed or underwritten by some agency.guaranteed or underwritten by some agency.

    3.3. Servicing of Securities:Servicing of Securities: repayment ofrepayment of

    securitized loan passed on to SPV, which thensecuritized loan passed on to SPV, which then

    pays to investors on maturity.pays to investors on maturity.

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    Structure ofSecuritiesStructure ofSecurities

    1.1. Pass through certificatesPass through certificates: issued to investors,: issued to investors,against pooled assets and undivided interest andagainst pooled assets and undivided interest andcash flows received from underlying assets arecash flows received from underlying assets arepassed through to investors. Tenure of PTCs ispassed through to investors. Tenure of PTCs is

    matched with life of securitized assets. Investorsmatched with life of securitized assets. Investorshave no charge against underlying assets.have no charge against underlying assets.

    2.2. Pay through certificatesPay through certificates: SPV issues secured: SPV issues secureddebt instruments of different maturity indebt instruments of different maturity in

    response to investors demand. Offered at aresponse to investors demand. Offered at adiscount to face value. Like deep discountdiscount to face value. Like deep discountbonds.bonds.

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    33.. Preferred stock certificatesPreferred stock certificates: issued by subsidiary: issued by subsidiarycompany against trade debts/ consumer receivables ofcompany against trade debts/ consumer receivables of

    parent company. Subsidiary company issues S.T.parent company. Subsidiary company issues S.T.securities against them with guarantee from merchantsecurities against them with guarantee from merchant

    banker.banker.4.Stripped structures4.Stripped structures: structured as interest only or: structured as interest only or

    principal only securities. Borrowers make early paymentprincipal only securities. Borrowers make early paymentif market interest falls. Investors in principle only gainif market interest falls. Investors in principle only gain

    by getting early payment, but interest only investorsby getting early payment, but interest only investors

    lose interest.lose interest.

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    5. Asset based commercial paper5. Asset based commercial paper: SPV purchases portfolio: SPV purchases portfolio

    of mortgages from lending institutions, combine intoof mortgages from lending institutions, combine into

    single group on the basis of interest rate, maturity andsingle group on the basis of interest rate, maturity and

    underlying collateral. Then transfers them to trust which,underlying collateral. Then transfers them to trust which,in turn, issues mortgaged backed papers (CPs) of S.T.in turn, issues mortgaged backed papers (CPs) of S.T.

    duration. Investors participate in cash flows fromduration. Investors participate in cash flows from

    underlying mortgages to the extent of investment inunderlying mortgages to the extent of investment in

    certificates.certificates.

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    Benefits ofSecuritizationBenefits ofSecuritization

    1.1. Additional source of fund/liquidityAdditional source of fund/liquidity for originator.for originator.

    2.2. Greater profitabilityGreater profitability due to high liquidity and fees whendue to high liquidity and fees whenoriginator acts as receiving and paying agent.originator acts as receiving and paying agent.

    3.Enhancement in capital adequacy ratio3.Enhancement in capital adequacy ratioby removal ofby removal ofassets from balance sheet.assets from balance sheet.

    4.Spreading of credit risk4.Spreading of credit riskby sharing responsibility withby sharing responsibility withseveral parties.several parties.

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    5.5. Lower cost of fundingLower cost of funding due to higher creditdue to higher creditrating of asset backed securities than the ratingrating of asset backed securities than the ratingof company as a whole.of company as a whole.

    6.6. Provision of Multiple instrumentsProvision of Multiple instruments forforinvestors.investors.

    7.7. Safer investment and higher returnSafer investment and higher return toto

    investors.investors.8.8. Capital formationCapital formationby preventing idle capital.by preventing idle capital.

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    Causes ofUnpopularity inCauses ofUnpopularity in

    IndiaIndia1.1. New conceptNew concept, benefits not much known, benefits not much known

    2.2. Heavy stamp duty and registration feesHeavy stamp duty and registration fees onon

    assignment of illiquid& non performing assetsassignment of illiquid& non performing assets

    to SPVs.to SPVs.

    3.3. CumbersomeCumbersome transfer procedure to SPVs.transfer procedure to SPVs.

    Difficulty in assignment of debt to third party.Difficulty in assignment of debt to third party.

    Transfer of Property Act needs amendment.Transfer of Property Act needs amendment.

    4.4. Lack of standardised loan documentLack of standardised loan document createscreates

    pooling difficult for SPVs.pooling difficult for SPVs.

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    5.5. Inadequate credit ratingInadequate credit rating facilities.facilities.

    6.6. Absence of proper accountingAbsence of proper accountingprocedure forprocedure for

    securitized assets.securitized assets.

    7.7. Absence of proper guidelinesAbsence of proper guidelines for securitization.for securitization.

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    HIRE PURCHASEHIRE PURCHASE

    Hire purchase means a transaction whereHire purchase means a transaction wheregoods are purchased and sold on the termsgoods are purchased and sold on the termsthat:that:

    (1) payment will be made in installments,(1) payment will be made in installments,(2) the possession of the goods is given to the buyer(2) the possession of the goods is given to the buyerimmediately,immediately,

    (3) the property in the goods remains with the vendor(3) the property in the goods remains with the vendortill the last installment is paid,till the last installment is paid,

    (4) the seller can repossess the goods in case of default(4) the seller can repossess the goods in case of default

    in payment of any installment, andin payment of any installment, and(5) each installment is treated as hire charges till the(5) each installment is treated as hire charges till thelast installment is paid.last installment is paid.

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    Characteristics ofHire PurchaseCharacteristics ofHire Purchase

    AgreementAgreement

    1.1. Payment is made by hirer (buyer) to the hiree, usually vendor, inPayment is made by hirer (buyer) to the hiree, usually vendor, ininstallments over a specified period of time.installments over a specified period of time.

    2.2. The possession of the goods is transferred to buyer immediately.The possession of the goods is transferred to buyer immediately.

    3.3. The property in goods remains with vendor (hiree) till lastThe property in goods remains with vendor (hiree) till last

    installment is paid. The ownership passes to buyer (hirer) when heinstallment is paid. The ownership passes to buyer (hirer) when hepays all installments.pays all installments.

    4.4. Hiree or vendor can repossess the goods in case of default and treatHiree or vendor can repossess the goods in case of default and treatthe amount received by way of installments as hire charged for thatthe amount received by way of installments as hire charged for thatperiod.period.

    5.5. The installments in hire purchase include interest as well asThe installments in hire purchase include interest as well as

    repayments of principal.repayments of principal.

    6.6. Usually, hiree charges interest on flat rate.Usually, hiree charges interest on flat rate.

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    Legal Position ofHireLegal Position ofHire

    PurchasePurchaseA.A. Possession of goods is delivered by ownerPossession of goods is delivered by owner

    there of to a person on a condition that suchthere of to a person on a condition that such

    person pays the agreed amount in periodicperson pays the agreed amount in periodic

    payments, andpayments, and

    B.B. The property in the goods is to pass to suchThe property in the goods is to pass to such

    person on the payment of the last of suchperson on the payment of the last of such

    installments, andinstallments, and

    C.C. Such person has a right to terminate theSuch person has a right to terminate the

    agreement at any time before the propertyagreement at any time before the property

    so passes.so passes.

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    THANKS!!!THANKS!!!

    ANY QUERY???