Index: Executive Summary 3

SECURITISATION A TOOL TO MODERN
FINANCING.
Index
EXECUTIVE SUMMARY
INTRODUCTION TO SECURITISATION
1. INTRODUCTION
2. MEANING
3. HISTORY
4. BASIC PROCESS
11
5. FORMS OF SECURITISATION STRUCTURES
13
6. METHOD OF TRANSFER OF ASSETS
16
7. MOTIVATION AND BENEFITS
18
8. RISK PROFILE
23
9. PARTIES TO SECURITISATION
10. TYPES OF ASSETS THAT CAN BE SECURITISED
THE INDIAN EXPERIENCE
27
30
33
1. SECURITISATION IN INDIA
33
2. NEED FOR SECURITISATION IN INDIA
35
3. MAJOR CONSTRAINTS OF SECURITISATION IN INDIA
36
4. FUTURE PROSPECTS OF SECURITASATION IN INDIA
39
BANKING & SECURITISATION
41
1. THE CONCEPT
41
2. THE PROCESS AND PARTICIPANTS
41
3. IMPACT ON BANKS
44
4. IMPACT ON THE INDIAN BANKING SECTOR
46
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INFRASTRUCTURE DEVELOPMENT AND FINANCING
50
1. INTRODUCTION
50
2. WHAT IS INFRASTRUCTURE?
50
3. WHY IS INFRASTRUCTURE IMPORTANT?
51
4. KEY ISSUES
52
5. FISCAL INCENTIVES FOR INVESTING IN

INFRASTRUCTURE PROJECTS
54
6. TECHNIQUE OF SECURITISATION IN INFRASTRUCTURE

FINANCING
55
7. INTRODUCTION TO THE VARIOUS SECTORS UNDER

INFRASTRUCTURE
57
8. RELEVANCE OF SECURITISATION TO DIFFERENT

SECTORS OF INFRASTRUCTURE
59
9. CRITERIA FOR STRUCTURING A SECURITISATION

TRANSACTION
62
10. PRE REQUISITES FOR STRUCTURING
64
11. SECURITISATION IN THE PRE IMPLEMENTATION

STAGE
65
12. SECURITISATION IN THE POST COMMISSIONING STAGE
66
THE NHB HDFC RMBS TRANSACTION
67
HDFC COMPLETES ASSET BACKED SECURITISATION
77
CONCLUSION
78
BIBLIOGRAPHY
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Securitisation A Tool to Modern Financing

EXECUTIVE SUMMARY
The objective of this study is to understand the concept of Securitisation, its
history, and its importance in the field of financing in an ever booming global
economy.
Securitisation is the process of conversion of existing assets or future cash flows
into marketable securities. In other words, securitisation deals with the conversion
of assets which are not marketable into marketable ones.
The meaning of "Securitisation" is to create a multiple assets generation at a lower
Cost of Capital while protecting the Beneficial Interest of the Investors. It is a
financial instrument for various investment projects. Securitisation in simple
words can be defined as "Structured Project Finance. Thus it can be said with
ease that the objective of "True Securitisation" is to create a multiple assets
generation at a lower Cost of Capital while protecting the Beneficial Interest of the
Investors.
The study also gives an overview on the Indian experience of securitisation, its
help in financing infrastructure projects & building credit off stake for banks and
its importance and future in the Indian economy
Provision of quality infrastructure services at a reasonable cost, is a necessary
condition for achieving sustained economic growth. In fact, one of the major
challenges being faced by the Indian economy is to enhance infrastructure
investment and to improve the delivery system and quality of services. There is a
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huge critical importance of the infrastructure sector and high priority for
development of various infrastructure is being given these days. Investments in
these sectors involve high risk, low return, lumpiness of huge investment, high
incremental capital/output ratio, long payback periods, and superior technology.
The Infrastructure Sector, it is the biggest Capital Deficit Sector of Indian
Economy; it requires Financial Engineering and Innovations to Fund the
Infrastructure Projects. One of best the solutions to this problem is
"Securitisation."
The need of securitisation is not only felt by the infrastructure sector but also the
banking sector. Other than freeing up the blocked assets of banks, Securitisation
can transform banking in other ways as well - it helps in the growth of credit off
stake of banks thus funding for release of more loans.
This will benefit investors as they will have a claim over the future cash flows.
The Originator will also benefit as loan obligations will be met from cash flows
generated.
The reasons why Securitisation gains over other forms is its low capital costs for
high asset generation, an alternative source of fund and minimal risks involved.
Therefore Securitisation can be viewed as a major tool for financing the various
projects over different sectors in the present as well as for the years to come
FINANCING.
INTRODUCTION TO SECURITISATION
INTRODUCTION
"Securitisation will be the major financial instrument for the next decade,"
-by ICICI chairman K V Kamat.
Recent years have witnessed the wide spread of Western financial innovations into
developing markets. Globalisation and integration of capital markets, started in the
1990s, have made it possible for such big global players as India to adopt new
financial strategies which allow increasing liquidity and accelerating development
of the capital markets. One of these financial innovations is securitisation, the
process of transformation of illiquid assets into a security which can be traded in
the capital markets.
Securitisation is the buzzword in today's World of Finance. It's not a new subject
to the developed economies. It is certainly a new concept for the emerging markets
like India. The Technique of Securitisation definitely holds great promise for a
Developing Country like India.
Funds of a firm get blocked in various types of assets such as loans, advances,
receivables etc. To meet its growing funds requirements, a firm has to raise
additional funds from the market while the existing assets continue to remain on
its books. This adversely affects the capital adequacy and debt equity ratio of the
firm and may also raise its cost of capital. An alternative available is to use the
existing illiquid assets for raising funds by converting them into negotiable
instruments. E.g. a housing loan finance company, which has a portfolio of loan
advances having periodic cash flows, may convert this portfolio to instant cash.
Though the end result of securitisation is financing, it is not financing as such
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since the firm securitizing its assets is not borrowing money, but selling a stream
of cash flows that are otherwise to accrue to it.
Securitisation is "Structured Project Finance". The financial instrument is
structured or tailored to the risk-return and maturity needs of the investors, rather
than a simple claim against an entity or asset. The popular use of the term
Structured Finance in today's financial world is to refer to such financing
instruments where the financier does not look at the entity as a risk: but tries to
align the financing to specific cash accruals of the borrower.
The actual and a current meaning of securitisation is a blend of two forces that are
critical in today's world of Finance: Structured Project Finance and Capital
Markets.
The process of Securitisation creates a strata of risk-return and different maturity
securities and is marketable into the capital markets as per the needs of the
investors. The basic idea is to take the outcome of this process into the market, the
capital market. Thus, the result of every securitisation process, whatever might be
the area to which it is applied, is to create certain instruments, which can be placed
in the market.
Securitisation is the process of de-construction of an entity: If one envisages an
entitys assets as being composed of claims to various cash flows, the process of
securitisation would split apart these cash flows into different buckets, classify
them, and sell these classified parts to different investors as per their needs. Thus
securitisation breaks the entity into various sub-sets.
Securitisation is the process of integration and differentiation: The entity that
securitizes its assets first pools them together into a common hotchpot assuming it
is not one asset but several assets. This is the process of integration. Then, the pool
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itself is broken into instruments of fixed denomination. This is the process of

differentiation.
MEANING
Securitization is the process of homogenizing and packaging financial instruments
into a new fungible one. Acquisition, classification, collateralization, composition,
pooling and distribution are functions within this process
As defined by The Securitisation and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002:
Securitisation means acquisition of financial assets by any securitisation
company or reconstruction company from any originator, whether by raising of
funds by such securitisation company or reconstruction company from qualified
institutional buyers by issue of security receipts representing undivided interest in
such financial assets or otherwise.
Securitisation is the process by which, financial assets such as household
mortgages, credit card balances, hire-purchase debtors and trade debtors, etc., are
transformed into securities by the owner (the Originator) in return for an
immediate cash payment and/or deferred consideration through a Special Purpose
Vehicle (SPV) created for this purpose.
The pooling standard prescribes that the asset portfolio has to be homogeneous in
terms of underlying financial asset, maturity and risk profile. This ensures an
efficient analysis of the credit risk of the asset portfolio and a common payment
pattern. It means only one type of asset (e.g. car loans) of similar duration (e.g. 20
to 24 months) having uniform risk (whose repayment is continuous during the first
10 to 12 months of the loan) will be bundled for creating one securitized
instrument.
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The Special Purpose Vehicle finances the assets transferred to it by the issue of
debt securities such as loan notes or Pass through Certificates, which are
generally monitored by trustees. Pass through Certificates are certificates
acknowledging a debt where the payment of interest and/or the repayment of
principal are directly or indirectly linked or related to realisations from securitised
assets.
Let us consider some examples:
1)
Suppose Mr X wants to open a multiplex and is in need of funds for the
same. To raise funds, Mr X can sell his future cash flows (cash flows arising from
sale of movie tickets and food items in the future) in the form of securities to raise
money.
This will benefit investors as they will have a claim over the future cash flows
generated from the multiplex. Mr X will also benefit as loan obligations will be
met from cash flows generated from the multiplex itself.
2)
A finance company with a portfolio of car loans can raise funds by selling
these loans to another entity. But this sale can also be done by securitizing its car
loans portfolio into instruments with a fixed return based on the maturity profile
(the period for which the loans are given). If the company has Rs 100 crore worth
of car loans and is due to earn 17 per cent income on them, it can securitize these
loans into instruments with 16 % return with safeguards against defaults. These
could be sold by the finance company to another if it needs funds before these loan
repayments are due. The principal and interest repayment on the securitised
instruments are met from the assets which are securitised, in this case, the car
loans.
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Selling these securities in the market has a double impact. One, it will provide
the company with cash before the loans mature. Two, the assets (car loans) will go
out of the books of the finance company, a good thing as all risk is removed.
HISTORY
Securitization in its present form originated in the mortgage markets in USA. It
was promoted with the active support of the government. The government wanted
to promote secondary markets in mortgages to allow liquidity for mortgage
finance companies. Government National Mortgage Association (GNMA) was the
first one to buy mortgages from mortgage companies and to convert them into
pass through securities - this was 1970. GNMA were passing through securities
backed by Mortgage insured by FHA.
These pass through have the full credit and the backing of the US government,
since GNMA has guaranteed both the repayment of the principal and timely
payment of the interest. The 1970 program (GNMA -I) is still in operation. In
1983, GNMA launched another pass through program called GNMA - II. These
programs are further classified based on the type of mortgages pooled therein,
such as single family (SF) loans, mobile home (MH) loans, project loans (PL) etc.
Other US government agencies, FNMA and Freddie Mac jumped in later. The first
FNMA Mortgage Backed Securities (MBS) was issued in 1981. The agency
played a crucial role in promoting securitisation of Adjustable-Rate Mortgages
(ARMs) and Variable Rate Mortgages (VRMs). FHLMC was created in 1970 to
promote an active national secondary market in residential mortgages and has been
issuing mortgage-backed securities since 1971.
The first securitisation of receivables outside the mortgage markets happened in
1975 when Sperry Corporation securitised its computer lease receivables.
FINANCING.
Another mortgage funding device, slightly different from the US-type Pass
through Certificates, has existed in Europe for almost two centuries in the past. In
Denmark, for example, mortgage bonds are more than 200 years old. Germany
also has a long history of mortgage bonds and it is stated that there have been no
defaults on these instruments for all these years.
Other countries in Europe have been relatively slow starters, though regulatory
and legislative changes in Germany, France, Belgium and Spain have been
fashioned to assist development of securitisation. In Japan, the securitisation
market was not well developed until recently; the Government had restricted
securitisation to the assets of leasing, consumer loans and credit card companies.
The Government has, however, amended laws to allow full-scale securitisation in
May 1997.
India
The first widely reported securitisation deal in India occurred in 1990 when auto
loans were secured by Citibank and sold to the GIC mutual fund. However, the
sound legal framework for securitisation was not drafted until 2002 when the
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Ordinance (Ordinance) was promulgated by the president of India. According to
this law, securitisation was defined as acquisition of financial assets by any
securitisation company or reconstruction company from any originator, whether by
raising funds by such securitisation or reconstruction company from qualified
institutional buyers by issue of security receipts representing undivided interest in
such financial assets or otherwise. The notion of financial assets for the above
definition is stated as any debt or receivables. Non-surprisingly, it follows that the
definition of securitisation in India is very close to that of western countries,
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especially taking into account that the experience of the UK is of special relevance
to India.
BASIC PROCESS
The basis process of Securitisation is explained in the following steps:
OriginatorAssets to Securitize.
SPV Formation.
SPV passes
collection to
investor- Pass
TC
SPV invests to
payoff at stated
intervalsPay TC
SPV Acquires receivables

under agreement.
Servicer collects receivables

(escrow account) & gives to SPV.
1)
SPV Funding by investors

& issue of securities.
Servicer appointed
generally is originator.
Selection and Pooling of homogeneous assets & estimation of the Cash
Flows:
Securitization in its basic form consists of the pooling of a group of homogeneous
assets. Homogeneity is necessary to enable a cost efficient analysis of the credit
risk of the pooled asset and to achieve a common payment pattern. The originator
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estimates the cash flows from the underlying assets. The payment of interest and
principal on the securities is directly dependent on the cash flows arising from the
underlying pooled assets. For this purpose, the originator uses his historical data.
Appropriate and accurate calculations are done keeping in view of the pre payment
rates, amortization, etc for estimation of the cash flows.
2)
Creation of SPV:
The next step is to create an SPV.

The basis logic behind the creation of an SPV is
a) To isolate the underlying assets from the originator. This is an important
step in the whole process as the ultimate result of this is "Bankruptcy
Remoteness" from the Originator.
b) Aggregation of the underlying assets into a Pool. Thus the assignment of
the cash flow to the SPV is done in this manner.
SPV issues securities/notes to the Investors:
3)
The SPV formed (Trust / MF / Corporate Form) now issues securities/notes to

the investors to invest in the securitised exercise done by the originator.
4)
Investors - Proceeds of the issue of securities to SPV
The collection from the investors for their investment in the securitised instrument
is forwarded to the SPV. The SPV, in turn, channelises these proceeds to the
Originator.
5)
Collections and Servicing from the Obligors:
The Originator generally performs this function. In some cases, specialized

servicing agents are appointed to collect and service from the loan obligors.
6)
Pass Over to the SPV:

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In this step the Servicing agent passes the collected payments from the obligors to
the SPV less his fees.
7)
Reinvestment of Cash Flows:
The SPV if permitted reinvests the proceeds from the Servicing agent (Generally
in the Pay through Structures) and in turn receives the reinvestment proceeds also.
If the structure of the instrument is the Pass Through Structure then Step no. 8 is
followed directly after Step no. 6.
8)
Payment to the Investors:
The Investor earns on his investments by receiving the proceeds from the SPV.
Depending upon the structure of the Instrument the payment of the investment is
made to the Investors.
9)
Originators Residuary Profit:
After the payments are made to the Investors if any residue is left, it is passed on
the Originator as his residuary profit, which is generally maintained, by the
originator for the over-collaterisation and guarantee purpose.
FORMS OF SECURITISATION STRUCTURES

The financial structure of the securitized product is a function of the type of the
instrument to be issued:
1. Pass Through Structure
2. Pay Through Structure.
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FINANCING.
Pass Through Structure

1. Investors get a proportional interest in the pool of receivables.
2. Monthly Collections are divided proportionally among the Investors.
3. All the investors receive proportional payments - no slower or faster
payments.
4. Refinement can be done in the form of 'Senior' or 'Junior' investors to
enhance the credit rating of the transaction.
5. Pre-payments are passed on to the Investors.
6. No reinvestment of cash collected.
7. Thus, SPV is a passive conduit.
Figure 1. Pass Through Structure
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FINANCING.
Pay Through Structure

1. Structure is almost similar to the Debt instrument, but with an off balance
sheet treatment to the originator
2. Investors get a proportional interest in the pool of receivables.
3. SPV reinvests the amount collected generally in a AAA rated paper
(Guaranteed Investment)
4. Investors are serviced on the dates of the schedule payment; the payment
for this is released from the Receiving and the Paying Bank Account.
5. Pre-payments are reinvested in the Guaranteed Investment Paper.
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FINANCING.
6. Thus, SPV is an active conduit.
Figure 2. Pay Through Structure
METHODS OF TRANSFER OF ASSETS

There could be three basic methods of transfer of assets, viz.,
1. Novation,
2. Assignment and
3. Sub-participation.
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1. Novation is the clearest way of selling a loan and effectively transferring

both the rights and obligations. In novation, the existing loan between the
originator and the borrower is cancelled and a new agreement between the
investor and the borrower is substituted. The buyer steps into the shoes of
the original lender or seller who ceases to have any obligations to the
borrower. The loan, is therefore, excluded from the balance sheet of the
seller.
2. An assignment transfers from the seller to the buyer, all rights to principal
and interest. Assignments for the purpose of disposing off assets may fall
into two basic legal categories. The first is statutory assignment,
transferring both legal and beneficial title. A statutory assignment will pass
and transfer from the seller to the buyer all the legal rights to the principal
and the interest. In most cases, it will also pass on all the legal remedies
available against the borrower to ensure discharge of debt. In other words,
the buyer acquires the full legal and beneficial interest in the loan. The
second is equitable assignment, transferring only beneficial title. It does not
transfer legal rights. Thus, a buyer may not be able to proceed directly
against a borrower. The seller must be joined in action. However, the seller
is not liable for debt.
3. Sub-participation does not transfer any of the seller's rights, remedies or

obligations against the borrower to the buyer. But, it is an entirely separate,
back-to-back, non-recourse funding arrangement, under which the buyer
places funds with the seller. In return, the seller passes on to the buyer,
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payments under the underlying loan, which the borrower makes to him.
But, the loan itself is not transferred.
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MOTIVATION AND BENEFITS

TO THE ISSUER
Any company with a minimum of $400 million in sales and working capital needs
of at least $50 million should consider trade receivable securitisation, according to
the experts. "The securitisation structure is well established and is the logical next
step for companies who are approaching a half billion dollars in sales," says Dan
Hom, Senior Vice President, GE Capital Commercial Finance. "This mechanism
can either entirely support working capital needs, or it can become an integral part
of the total capital structure."
1. Capital requirement:
The issuer can raise funds of longer maturities than he would have been able to
through the conventional routes like bonds or term loans. For instance, in the case
of toll roads, the financing costs can normally be recovered only over a very long
period of time. A loan where repayments can be made over a long period may not
be easily available.
Here, securitisation can provide a solution. For instance, conventional loans are
generally backed by the borrowers existing assets. In many cases, the borrower
may not be in a position to offer the required collateral. The process of
securitisation allows the borrower to raise funds against future cash flows rather
than existing assets.
Securitisation keeps the other traditional lines of credit undisturbed.
Hence, it increases the total financial resources available to a firm.
2. Off balance sheet financing:

This off balance sheet feature could be looked at either, from accounting
viewpoint, or from regulatory viewpoint. The tendency of financial institutions
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and others to prefer off balance sheet funding over on-balance sheet funding is
because the former allows higher returns on assets, and higher returns on equity,
without affecting the debt-equity ratio. Securitisation allows a firm to create assets,
make income thereon, and yet put the assets off the balance sheet the moment they
are transferred through the securitisation device.
3. Influence on Financial Ratio:
By being able to market an asset outright securitisation avoids the need to raise a
liability, and hence, it improves the capital structure. Alternatively if securitisation
proceeds are used to pay off existing liabilities, the firm achieves a lower debtequity ratio. Securitisation also leaves the firm with a healthier balance sheet and
reduced risk.
4. Raising funds at cheaper rates:
Cost reduction is one of the most important motivations in securitisation.
Securitisation seeks to break an originating companys portfolio into echelons of
risks, trying to align them to different investors risk appetite. This alchemy
supposedly works - the weighted overall cost of a company that has securitised its
assets seems lower than a company that depends on generic funding. It is
important to note that one of the most tangible effects of securitisation is to reduce
the extent of risk capital or equity required for a given volume of asset creation.
Assuming that equity is the costliest of all sources of capital, lower equity
requirements do result into lower costs.
5. Providing Market access:
Securitisation enables a financial intermediary to retail-market its assets to a large
section of investors.
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FINANCING.
6. Perfect matching of assets and liabilities:

As a liability is created (in the real sense, no liability is created: only an asset is
disposed off) perfectly matching up an asset, it avoids the need to manage maturity
mismatches.
7. Makes the issuer rating irrelevant:
Being an asset based financing, securitisation may make it possible even for a lowrated borrower to seek cheap finance, purely on the strength of the asset quality.
Hence, the issuer makes himself irrelevant in a properly structured securitisation
exercise.
8. Multiplies asset creation ability:
Securitisation makes it possible for the issuer to create any amount of asset with
given equity. The extent of assets that he can create is solely dependent on the
conversion cycle, that is, the period that elapses between the date an underlying
receivable is created and is marketed.
9. Helps in capital adequacy requirements:
Capital adequacy requirements are the requirements relating to minimum
regulatory capital for financial intermediaries. One of the very strong motivations
for securitisation is that it allows the financial entity to sell off some of its onbalance sheet assets, and thus, remove them from the balance sheet, and hence
reduce the amount of capital required for regulatory purposes. Alternatively, if the
amount raised by selling on-balance-sheet assets is used for creating new assets,
the entity is able to increase its asset-creation without a haircut for its capital.
10. Risk trenching / Unbundling:
Securitisation has also been used by many entities for reducing credit
concentration. Concentration either sectoral, or geographical, implies risk.
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Securitisation by transferring a non-recourse basis exposure by an entity has the

effect of transferring the risk.
11. Avoids interest rate risks:
One of the primary motives in securitisation of mortgage receivables was to
transfer interest rate risk to the investors. The lenders were subject to the risk since
the mortgages carried a fixed rate of return while the loans taken by the lenders
had a variable rate. When the mortgages were securitised, the lender made an
instant spread on the basis of a fixed rate, and therefore, completely avoided the
price risk.
12. Escapes taxes based on interest:
For technical purposes securitisation would not be treated as interest on loans.
Hence, if there are taxes based on interest earnings, the same would not be
applicable to investors earnings in securitised products.
TO THE INVESTOR
1. Yield premiums:
Securitised offerings have offered good yields with adequate security. Empirical
data about securitisation offerings reveal that an investor who maintained a good
balance of the emerging market and developed market offerings has been able to
come out with good rates of return.
2. Diversification:
Securities issued by SPEs are typically backed by numerous assets. By investing
in a pool of assets rather than in an individual asset, investors can diversify their
risk. This is similar to the difference between investing in mutual funds as opposed
to individual stocks.
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3. Liquidity:
From the point of view of the financial system as a whole, securitisation increases the
number of debt instruments in the market, and provides additional liquidity in the market.
There is an active secondary market in many types of ABS and MBS, whereas there is
relatively little trading in the underlying assets themselves. It could widen the market by
attracting new players on account of superior quality assets being available.
4. Varying investor needs:

Securitized instruments can be designed, or structured to meet different investor
needs. For example, some investors require shorter-term investments, while others
wish to make longer-term investments. Investors looking for a safe high-grade
investment can pick up a senior most a-type product, while those looking for a
mediocre risk but with a higher rate of return can opt for a B-type option.
5. Stability:
The securitisation market has exhibited very stable credit performance overall, and has
experienced relatively few adverse credit events such as downgrading or default of SPE
securities or bankruptcy of SPEs.
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RISK PROFILE
The inherent nature of the securitized instrument makes it less risky. The cash flow
from the securitized instrument is backed by tangible identified financial assets
earmarked exclusively for an instrument and is independent of the originator.
Dependability of these cash flows is further strengthened as signified by the
ageing of the portfolio. This means, an asset having a cash flow for three years
would be monitored for the first 8 to 10 months to determine its historic loss
profile. Earmarking a specific pool of aged assets is the core feature contributing
to lowering the risk associated with securitized product. Further, the pool of
borrowers creates a natural diversification in terms of capacity to pay, geography,
type of the loan etc and thereby lowers the variability of cash flows in comparison
to cash flows from a single loan. So, lower the variability, lower is the risk
associated with the resulting securitized instrument.
Understanding of risk enhancement measures, which at times are used in
combination, is also necessary to analyze the risk profile of securitized product.
Normally, these risk enhancement measures are provided to cover the historic risk
profile (first level risk) of the financial assets and some percentage of losses,
which may be higher than the historic risk profile (second level risk).
Internal risk enhancement measures like over- collateralization, liquidity reserve,
corporate undertaking, senior / sub-ordinate structure, spread account etc. cover
the first level risk. External risk enhancement measures like insurance, guarantee,
and letter of credit are used to cover the second level risk.
Over-collateralisation means for servicing an instrument of Rs. 100/- cash flow
from underlying asset valuing Rs. 110/- are earmarked. Similarly, cash worth Rs.
5/- called Liquidity Reserve may be separately earmarked for servicing an
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instrument of Rs. 100/-. These features cover investors against the likely default in
cash flow from the borrower to the extent of Over-collateralisation / Liquidity
Reserve.
In case of Senior/Sub-ordinate debt, cash flows from two groups of borrowers are
independently used to bundle two sets of securities. These two trenches of
securities are issued with a pre-determined priority in their servicing. This means
the senior trench has prior claim on the cash flows from the underlying assets so
that all losses will accrue first to the junior securities up to a pre-determined level.
Thereby, the losses of the senior debt are borne by the holders of the sub-ordinate
debt, normally the originator.
The difference between yield on the assets and yield to investors is the spread,
which is the gain to the originator. A portion of the amount earned out of this
spread is kept aside in a spread account to service investors. This amount is taken
back by the originator only after the payment of principal and interest to investors.
Other third party credit enhancement measures such as insurance, guarantee and
letter of credit are also used by originator to get a better credit rating for the
instruments.
With such multiple options for risk reduction and natural diversification inherent
in the product, can a securitized instrument be presumed to be risk free? No.
Primary risks associated with securitized product are pre-payment risk and credit
risk. The pre-payment means refinancing at lower rate of interest or early
repayment of the loan amount in part or in full. This risk is associated with
mortgaged backed products using the Pass Through Structure (PTC).
Generally, loan agreements allow the borrower to make an early payment of the
principal amount. The risk originates from the possibility of obligor making such
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early payment of principal amount and thereby disturbing the yield and the
investment horizon of the investors.
For premium securities, accelerated pre-payment reduces the average life and yield
since the principal is received at par which is less than the initial price. Opposite is
the case of securities purchased at a discount. Consequently, investors have to
predict the average life of such securities and may have to look for alternate
investment opportunities in a changed interest rate scenario.
The Act provides for PTC as the securitized instrument and so the pre-payment
risk will exist in Indian market. Factors affecting pre-payment and corresponding
pre-payment models to evaluate this risk will have to be developed in order to
make investment decisions.
Credit risk reflects the risk that the obligor may not be able to make timely
payments on the loans or may even default on the loans. In case of defaults,
internal and external risk enhancement measures will come into play.
Finally, the mortgaged backed securitized products in the foreign markets are
backed by a guarantor who guarantees to the investors the timely payment of
interest and principal. As of now, such guarantees do not exist in Indian market.
However, National Housing Board (NHB) is working in this direction to guarantee
securitisation of housing loan mortgages.
Transaction Legal Risk represents the possibility that some of the fundamental
legal assumptions in the transaction are proved invalid. For example, a court may
disregard the SPVs title over the receivables recharacterising the whole
transaction as a financial transaction. Or, the SPV may be consolidated with the
originator, and so on.
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FINANCING.
Tax uncertainties may sometimes affect the investors. If the SPV is liable to entity
level taxes and payments to investors are treated as payment to equity holders, the
entire cash flows in the transaction may be subjected to unprecedented taxes.
Sometimes, the underlying cash flows may be subjected to a withholding tax
requirement. These are risks that concern the investors, and they need to study
these risks carefully.
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FINANCING.
PARTIES TO SECURITISATION
The number of players in the securitisation process is large. They can be grouped
in two categories the main players and the facilitators. The main players and
their role are as follows
1. The SPV
Special Purpose Vehicle (SPV) is a legal entity in the form of a trust or company
created for the purpose of securitisation. By its very nature, an SPV must be
distanced from the sponsor both in terms of management and ownership, because
if the SPV were to be owned or controlled by the sponsor, there is no difference
between a subsidiary and an SPV. It buys assets (loans / receivables etc.) from
originator and packages them into security for further sale to investors. In
securitisation, one of the primary concerns of participants is to ensure nonbankruptcy of the SPV. In order to make SPV bankruptcy proof its registration net
worth, corporate governance requirements are specified.
2. The Originator
The Originator is an entity owning the financial assets that are the subject matter
of securitisation. Originator is normally making loans to borrowers or is having
receivables from customers. It is the originator who initiates the process for
securitisation and is the major beneficiary of it. Only banks and financial
institutions can securitize their financial assets thereby restricting the Originators
of securitisation. So, it may not be possible to securitize assets and receivables of
other business entities having such assets and receivables from credit card, export
earnings, sale of tickets, car rentals, electricity and telephone bill etc. within the
parameters of the Act.
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FINANCING.
3. The Investor
The Investor is the entity buying the securitized instrument. Principally, large and
sophisticated institutional investors, such as Private pension funds, Credit unions,
Government pension funds, Insurance companies, Government agencies, Money
market funds, Banks, Mutual funds, Bank trust departments. This is a new product
only big investors informed and capable of taking risk shall be allowed to invest in
it.
4. The obligor(s)
The Obligor (borrower) takes the loan or uses some service of the originator that
he has to return. His debt and collateral constitutes the underlying financial asset
of securitisation.
5. The Rating agency

Credit Rating Agency provides rating to the securitized instrument and thus
provides value addition to security.
6. Receiving and Paying Agent

Receiving and Paying Agent is the entity responsible for collecting periodic payment
from obligors and paying it to investors. Normally, the originator performs this activity.
7. Agent and Trustee

The Trustee acts on behalf of the investors and has priority interest in the financial
asset supporting the securitized product. Trustee oversee the performance of other
parties involved in securitisation transaction, review periodic information on the
status of the pool, superintend the distribution of the cash flow to the investors and
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FINANCING.
if necessary declare the issue in default and take legal action necessary to protect
investors interest.
8. Facilitators
Facilitators play a very crucial role in the securitisation chain. Their services are
instrumental in enhancing the credit worthiness of the product which is one of the prime
reasons apart from collateral for the run away success of securitized products.
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FINANCING.
TYPES OF ASSETS THAT CAN BE SECURITISED

Any asset having a cash flow profile over a period of time can be securitized.
Some of the assets which may be securitised are housing loans, car loans, term
loans, export credits, and future receivables like credit card payments, toll
collections from roads or bridges, and sales of petroleum-based products from oil
refineries, ticket sales, album sales, car rentals, electricity and telephone bill
receivables etc. In fact, artists have even raised funds by securitizing the royalty
they will get out of future sales of their records. For example, David Bowie
securitized royalties from his music catalogue. Thus, any present or future
receivables in part or in whole can be securitised.
The most readily securitizable assets are those which display the following
characteristics:
Predictable cash flows;
Isolation from the Originator.
Consistently low delinquency and default experience;
Total amortization of principal at maturity;
Many demographically and geographically diverse obligors; and
Underlying collateral with high liquidation value and utility to the obligors.
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The securitisation market can be split into following broad areas:

Securitisation Market
1.
Asset Backed
Mortgage Backed
Asset Backed
Collateralized Debt
Securities (ABS)
Securities (MBS,
Commercial
Obligations (CDO,
RMBS, CMBS)
Paper (ABCP)
CLO, CBO)
Asset Backed Securities (ABS)
Asset backed Securities are the most general class of securitisation transactions.
The asset could vary from Auto Loan/Lease/Hire Purchase, Credit Card,
Consumer loan, student loan, healthcare receivables and ticket receivables to even
future asset receivables.
2.
Mortgage Backed Securities (MBS, RMBS, CMBS)
MBS constitutes about 76% of the securitized debt market in the US. In contrast,
the MBS market in India is nascent - National Housing Bank (NHB), in
partnership with HDFC and LIC Housing Finance, issued Indias first MBS.
3.
Asset Backed Commercial Paper (ABCP)
Asset Backed Commercial Paper (ABCP) is usually issued by Special Purpose Entities
(ABCP Conduits) set up and administered by banks to raise cheaper finances for their
clients. ABCP conduits are usually ongoing concerns with new CP issuances taking out
the previous ones. Apart from legal requirements, an active ABCP market requires a large
number of investors who understand the instrument and have appetite. Indias
securitisation market may not be mature currently for instruments like ABCPs.
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FINANCING.
4.
Collateralized Debt Obligations (CDO, CLO, CBO)
In this era of bank consolidations, CDOs can help banks to proactively manage
their portfolio. CDOs can also help banks in restructuring their stressed assets.
ICICI made an aborted attempt to do a CBO issuance in August 2000. The CDO
market in India is, however, likely to grow slowly owing to its complexities. The
taxation and accounting treatment for CDOs needs to be clarified.
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FINANCING.
THE INDIAN EXPERIENCE

SECURITISATION IN INDIA
While there has been a lot of discussion about the potential of securitisation in
India, actual deal activity has not kept pace. While some early adopters like ICICI,
TELCO and Citibank have been actively pursuing securitisation, almost all the
transactions in the market so far have been privately placed with a majority of
them being bilateral fully bought out deals.
Lack of appropriate legislation and legal clarity, unclear accounting treatment,
high incidence of stamp duties making transactions unviable, lack of
understanding of the instrument amongst investors, originators and, till recently,
even rating agencies are some of the glaring reasons for the lack of activity in the
area of securitisation in India.
In India By Securitisation bill parties which are allowed to securitise assets
are Banks, FIs & NBFCs
Last year volume was expected to be low as in Feb 2006 RBI came with
guidelines on regulatory capital treatment for securitisation. This has dealt a
blow to Securitisation market as it prohibits profit booking in securitisation
transactions.
Standard & Poors report says securitisation market will boom. India is only
second to South Korea in this ex-Japan Asia.
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FINANCING.
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FINANCING.
Need for Securitisation in India

The generic benefits of securitisation for Originators and investors have been
discussed above. In the Indian context, securitisation is the only ray of hope for
funding resource starved infrastructure sectors like Power. For power utilities
burdened with delinquent receivables from state electricity boards (SEBs),
securitisation seems to be the only hope of meeting resource requirements. As on
December 31, 1998, overall SEB dues only to the central agencies were over Rs.
184 billion.
Securitisation can help Indian borrowers with international assets in piercing the
sovereign rating and placing an investment grade structure. An example, albeit
failed, is that of Air Indias aborted attempt to securitize its North American ticket
receivables. Such structured transactions can help premier corporates to obtain a
superior pricing than a borrowing based on their non-investment grade corporate
rating.
A market for Mortgage backed Securities (MBS) in India can help large Indian
housing finance companies (HFCs) in churning their portfolios and focus on
what they know best fresh asset origination. Indian HFCs have traditionally
relied on bond finance and loans from the National Housing Bank (NHB). MBS
can provide a vital source of funds for the HFCs. After the merger of Indias
largest financial institution ICICI with ICICI Bank, ICICI, faced with SLR and
other requirements, is actively seeking to launch a CLO to reduce its overall asset
exposure. It appears to be only a matter of time before other Public Financial
Institutions merge with other banks. Such mergers would result in the need for
more CDOs in the foreseeable future.
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FINANCING.
MAJOR CONSTRAINTS OF SECURITISATION IN INDIA

The Obstacles & Policy recommendations
1)
Lack of appropriate legislation
Though THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 has
given the much needed relief in terms of a law framed for securitisation
transactions. The following are the key areas where legislation is required:
a) True Sale (Isolation from bankruptcy of the Originator)
The central idea of a securitisation transaction is to isolate the assets of the
Originator from Originators balance sheet and seek a higher credit rating than the
Originators own rating. A key requirement for that is to achieve a true sale of
the assets to the Special Purpose Entity.
b) Tax neutral bankruptcy remote SPE
The special purpose entity that buys assets from the Originator should be a
bankruptcy remote conduit for distributing the income from the assets to the
investors. While banks have experimented with company revocable trust and
mutual fund structures, no clear vehicle has emerged for performing securitisation.
This should be addressed by the Securitisation act.
c) Stamp Duties
Stamp Duty is a state subject in India. Stamp Duties on transfer of assets in
securitisation can often make a transaction unviable. While five Indian states have
recognized the special nature of securitisation transactions and have reduced the
stamp duties for them, other states still operate at stamp duties as high as 10% for
transfer of secured receivables. The Working Group of RBI has recommended a
uniform rate of 0.1% duty on all transactions. The acceptance of these
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FINANCING.
recommendations by other states can boost the securitisation activity in India

especially in the MBS area.
d) Taxation & Accounting
At present there are no special laws governing recognition of income of various
entities in a securitisation transaction. Certain trust SPE structures actually can
result in double taxation and make a transaction unviable. The Securitisation Act,
when it comes to force, should address all taxation matters relating to
securitisation. Securitisation legislation should also specify requirements for off
balance sheet treatment for securitisation and regulatory capital requirements for
Originator and Investors.
e) Eligibility
Only recently Mutual funds have been allowed to invest in PTCs. The government
should lay down norms governing investment eligibility for various securitisation
instruments.
2)
Debt market
Lack of a sophisticated debt market is always a drawback for securitisation for

lack of benchmark yield curve for pricing. The appetite for long ended exposures
(above 10 years) is very low in the Indian debt market requiring the Originator to
subscribe to the bulk of the long ended portion of the financial flows. The
development of the Indian debt market would naturally increase the securitisation
activity in India.
3)
Lack of Investor Appetite
Investor awareness and understanding of securitisation is very low. RBI, key

drivers of securitisation in India like ICICI and Citibank and rating agencies like
CRISIL and ICRA should actively educate corporate investors about securitisation.
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FINANCING.
Mandatory rating of all structured obligations would also give investors much
needed assurance about transactions. Once the private placement market for
securitized paper gathers momentum, public retail securitisation issuances would
become a possibility.
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FINANCING.
FUTURE PROSPECTS OF SECURITISATION IN

INDIA
A big boost for securitisation has been the introduction of the `Securitisation and
Reconstruction of Financial Assets And Enforcement of Security Interest
Ordinance 2002 that was promulgated in May, has given a more acceptability to
this product.
With the Ordinance, securitisation as an activity has got a legal status and now it is
possible to define securitisation under the laws of the land. Its very existence will
change the boisterous and evading attitude of the commercial dealers and
defaulters in our economy
The traditional drivers of securitisation have seen the desire of the issuer to raise
funds without adding to borrowings. This helped companies which had high debt
equity ratio. The motivating factor in some securitisation transaction in the past
was the ability to book profits upfront. While these could continue to be the
drivers demanded for securitisation. Securitisation is likely to be increasingly used
for better asset liability management. As securitisation replaces long to medium
term assets by cash, the weightage average maturity of assets of the company
comes down. This is a big comfort, as typically, NBFCs were funding three-year
assets with one year fixed deposits. Further, the NBFCs, which are required to
bring down the excess deposit level, could use the proceeds of securitisation to
retire the fixed deposits.
Traditionally in the fund based business segment of the financial services sector in
India, a single entity was engaged in the entire gamut of activities viz raising
funds, locating borrowers, credit appraisal of the borrowers, servicing of the loans
and recovery. Owing to the rapidly changing environment, some kind of
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FINANCING.
realignment is likely to happen in this sector. One could see some specializations
emerging in the market. In developed economies, particularly in the mortgage
market, there is a lot of specialization. Typically in these markets a single entity
could not perform more than one or two of the activities mentioned earlier. This is
also in line with the increasing emphasis on "core competence". Instead of an
entity engaging in all the activities, it makes sense to focus on a few areas where it
has competitive advantage.
The trend is already visible in the auto loan sector. Owing to many regulatory
changes, many NBFCs are finding it difficult to raise funds at competitive rates.
These NBFCs, however, have a relatively low cost distribution network in place to
originate and service loans.
On the other hand, large companies and Foreign Banks find that it is not
economical to create a large distribution network in terms of extensive branch
network across the country due to their high cost structure. However, these
companies, given their size, parent support, managerial talent and a high credit
rating have a much stronger funding capability.
Securitisation could be effectively used to combine these two complementary pool
of resources. NBFCs could originate loans and securities them and sell to large
companies. And they could use the proceeds of the sale to originate more loans
and the process could go on. The small NBFCs could continue to service the loans
which would ensure a steady flow of fee income.
While many transactions are under way in the auto loan sector, this trend has also
extended to housing sector also. In housing finance the funding required is of a
much longer tenure and thus far more difficult to rise.
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FINANCING.
BANKING AND SECURITISATION

'Banks
will have to unload bad loans to Asset Reconstruction Companies by
FY2007' read a leading business newspaper headline sometime back.
The concept
In the traditional lending process, a bank makes a loan, maintaining it as an asset
on its balance sheet, collecting principal and interest, and monitoring whether
there is any deterioration in borrower's creditworthiness.
This requires a bank to hold assets (loans given) till maturity. The funds of the
bank are blocked in these loans and to meet its growing fund requirement a bank
has to raise additional funds from the market. Securitisation is a way of unlocking
these blocked funds.
Section 5 of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, mandates that only banks and
financial institutions can securitise their financial assets
The process and participants

Consider a bank, ABC Bank. The loans given out by this bank are its assets. Thus,
the bank has a pool of these assets on its balance sheet and so the funds of the
bank are locked up in these loans. The bank gives loans to its customers. The
customers who have taken a loan from the ABC bank are known as obligors.
To free these blocked funds the assets are transferred by the originator (the person
who holds the assets, ABC Bank in this case) to a special purpose vehicle (SPV).
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The SPV is a separate entity formed exclusively for the facilitation of the
securitisation process and providing funds to the originator. The assets being
transferred to the SPV need to be homogenous in terms of the underlying asset,
maturity and risk profile.
What this means is that only one type of asset (eg: auto loans) of similar maturity
(eg: 20 to 24 months) will be bundled together for creating the securitised
instrument. The SPV will act as an intermediary which divides the assets of the
originator into marketable securities.
These securities issued by the SPV to the investors and are known as passthrough-certificates (PTCs).The cash flows (which will include principal
repayment, interest and prepayments received ) received from the obligors are
passed onto the investors (investors who have invested in the PTCs) on a pro rata
basis once the service fees has been deducted.
The difference between rate of interest payable by the obligor and return promised
to the investor investing in PTCs is the servicing fee for the SPV.
The way the PTCs are structured the cash flows are unpredictable as there will
always be a certain percentage of obligors who won't pay up and this cannot be
known in advance. Though various steps are taken to take care of this, some
amount of risk still remains.
The investors can be banks, mutual funds, other financial institutions, government
etc. In India only qualified institutional buyers (QIBs) who posses the expertise
and the financial muscle to invest in securities market are allowed to invest in
PTCs.
Mutual funds, financial institutions (FIs), scheduled commercial banks, insurance
companies, provident funds, pension funds, state industrial development
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FINANCING.
corporations, et cetera fall under the definition of being a QIB. The reason for the
same being that since PTCs are new to the Indian market only informed big
players are capable of taking on the risk that comes with this type of investment.
In order to facilitate a wide distribution of securitised instruments, evaluation of
their quality is of utmost importance. This is carried on by rating the securitised
instrument which will acquaint the investor with the degree of risk involved.
The rating agency rates the securitised instruments on the basis of asset quality,
and not on the basis of rating of the originator. So particular transaction of
securitisation can enjoy a credit rating which is much better than that of the
originator.
High rated securitised instruments can offer low risk and higher yields to
investors. The low risk of securitised instruments is attributable to their backing by
financial
assets
and
some
credit
enhancement
measures
like
insurance/underwriting, guarantee, etc used by the originator.

The administrator or the servicer is appointed to collect the payments from the
obligors. The servicer follows up with the defaulters and uses legal remedies
against them. In the case of ABC bank, the SPV can have a servicer to collect the
loan repayment installments from the people who have taken loan from the bank.
Normally the originator carries out this activity.
For an originator (ABC bank in the example), securitisation is an alternative to
corporate debt or equity for meeting its funding requirements. As the securitised
instruments can have a better credit rating than the company, the originator can get
funds from new investors and additional funds from existing investors at a lower
cost than debt.
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Impact on banks
Other than freeing up the blocked assets of banks, securitisation can transform
banking in other ways as well.
The growth in credit off take of banks has been the second highest in the last 55
years. But at the same time the incremental credit deposit ratio for the past oneyear has been greater than one.
What this means in simple terms is that for every Rs 100 worth of deposit coming
into the system more than Rs 100 is being disbursed as credit. The growth of credit
off take though has not been matched with a growth in deposits.
So the question that arises is, with the deposit inflow being less than the credit
outflow, how are the banks funding this increased credit offtake?
Banks essentially have been selling their investments in government securities. By
selling their investments and giving out that money as loans, the banks have been
able to cater to the credit boom.
This form of funding credit growth cannot continue forever, primarily because
banks have to maintain an investment to the tune of 25 per cent of the net bank
deposits in statutory liquidity ratio (SLR) instruments (government and semi
government securities).
The fact that they have been selling government paper to fund credit off take
means that their investment in government paper has been declining. Once the
banks reach this level of 25 per cent, they cannot sell any more government
securities to generate liquidity.
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FINANCING.
And given the pace of credit off take, some banks could reach this level very fast.
So banks, in order to keep giving credit, need to ensure that more deposits keep
coming in.
One way is obviously to increase interest rates. Another way is Securitisation.
Banks can securitise the loans they have given out and use the money brought in
by this to give out more credit.
Not only this, securitisation also helps banks to sell off their bad loans (NPAs or
non performing assets) to asset reconstruction companies (ARCs). ARCs, which
are typically publicly/government owned, act as debt aggregators and are engaged
in acquiring bad loans from the banks at a discounted price, thereby helping banks
to focus on core activities.
On acquiring bad loans ARCs restructure them and sell them to other investors as
PTCs, thereby freeing the banking system to focus on normal banking activities.
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FINANCING.
Impact on the Indian Banking Sector

The growth in credit off take of banks has been the second highest in the last 55
years. But at the same time the incremental credit deposit ratio for the past oneyear has been greater than one.
Asset Reconstruction Company of India Limited (ARCIL) was the first (till date
remains the only ARC) to commence business in India. ICICI Bank, Karur Vyasya
Bank, Karnataka Bank, Citicorp (I) Finance, SBI, IDBI, PNB, HDFC, HDFC
Bank and some other banks have shareholding in ARCIL.
A lot of banks have been selling off their NPAs to ARCIL. ICICI bank- the second
largest bank in India, has been the largest seller of bad loans to ARCIL last year. It
sold 134 cases worth Rs.8450 Crore. SBI and IDBI hold second and third
positions.
ARCIL is keen to see cash flush foreign funds enter the distressed debt markets to
help deepen it. What is happening right now is that banks and FIs have been
selling their NPAs to ARCIL and the same banks and FIs are picking up the PTCs
being issued by ARCIL and thus helping ARCIL to finance the purchase. A recent
report in a business daily quotes , Rajendra Kakkar, ARCIL's Chief Executive as
saying, "We have got a buyer, we have got a seller, it so happens that the seller is
the loan side of the same institutions and buyer is the treasury side."
So the risk from the balance sheet of banks and FIs is not being completely
removed as their investments into PTCs issued by ARCIL will generate returns if
and only if ARCIL is able to affect recovery from defaulters.
A recent survey by the Economist magazine on International Banking, says that
securitisation is the way to go for Indian banking.
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FINANCING.
As per the survey, "What may be more important for the economy is to provide
access for the 92% of Indian businesses that do not use bank finance. That
represents an enormous potential market for both local and foreign banks, but the
present structure of the banking system is not suitable for reaching these
businesses. Securitising micro-loans- bundling many loans together and selling the
resulting cash flow- may be the way of achieving economies of scale. One private
bank, ICICI, securitised $4.3 million of micro-loans last year. But most Indian
banks are more interested in competing for affluent customers".
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Problems faced by the Banking Sector in India

1)
Lack of Proper Legal Measures on part of the Govt.
In spite of various legislative measures, there are hardly any securitisation

transactions undertaken pursuant to amended legislations. The SARFAESI Act was
enacted with specific object of facilitating securitisation of healthy/standard assets,
but RBI has taken a stand that the SARFAESI Act is intended only for dealing
with stressed assets and there are no RBI regulations for standard assets.
Amendments to the SCRA Act have been done very recently and the object of the
amendments is to facilitate securitisation of financial assets by raising funds from
investors. While SCRA amendments contemplate issue of securitised debt
instruments to the pubic, the SARFAESI Act restricts issue of security receipts
only to Qualified Institutional Payers. The SARFAESI Act equates a securitisation
company with any bank or financial institution and confers powers of recovery of
defaulted loans without the intervention of the court on the securitisation
companies. The SCRA amendment, on the other hand, makes no provision for
recovery of defaulted loans by special purpose distinct entity (SPDE) and such
SPDEs are required to file suits in civil courts. The SCRA covers any kind of debt
or receivables for securitisation but SARFAESI is restricted to loans and advances.
2)
Lack of Proper Legal Awareness regarding Securitisation Norms
In spite of all the legislative measures, till RBI issued directives to banks last year,
securitisation transactions were being undertaken under the general law applicable
to private trusts and the Indian Contracts Act, 1872. The RBI directives to banks
are
restrictive
and
some
constraints
discouraging
securitisation
are:
On securitisation of financial assets, banks cannot book profits upfront and

Investors are not permitted to treat the investment in securitised debt instruments
as exposure to underlying debts.
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FINANCING.
3)
Confusion and Complexities over Stamp Duty
To add to the confusion and complexities, there is a major issue of stamp duties
payable as per State laws on securitisation transaction. While some States have
reduced stamp duties on securitisation, there is no uniformity. Some have reduced
duty on housing loans securitisation while others have done it only for SARFAESI
securitisation. The Reserve Bank, SEBI and the Ministry of Finance need to take a
total view of this matter and facilitate securitisation of any assets by banks and FIs
without any impediments whether legal or regulatory. There is a need for the
Parliament to enact a comprehensive new law for securitisation of debts and
receivables, by treating assignment of debts and receivables as a new kind of
transfer of property.
Since such debt-instruments issued pursuant to securitisation have to be provided
characteristic of transferability by endorsement and delivery, the new Law can also
provide for rates of stamp duties for documents effecting assignment of debts and
receivables for securitisation and issue of debt instruments, overriding any State
Laws on stamp duties.
Conclusion
Securitisation is expected to become more popular in the near future in the
banking sector. Banks are expected to sell off a greater amount of NPAs to ARCIL
by 2007, when they have to shift to Basel-II norms. Blocking too much capital in
NPAs can reduce the capital adequacy of banks and can be a hindrance for banks
to meet the Basel-II norms.
Thus, banks will have two options- either to raise more capital or to free capital
tied up in NPAs and other loans through securitization.
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FINANCING.
Infrastructure
Development
And
Financing
INTRODUCTION
The availability of adequate infrastructure facilities is imperative for the overall
economic development of the country. Infrastructure adequacy helps determine
success in diversifying production, expanding trade, coping with population
growth, reducing poverty and improving environmental conditions. Today, it is
necessary to broaden one's concern from increasing the quantity of infrastructure
stocks to improving the quality of infrastructure services. In recent years, there has
been a revolution in thinking about who should be responsible for providing
infrastructure stocks and services, and how these services should be delivered to
the users.
One of the bottlenecks in infrastructure development in India is the conflict arising
out of the confusion over the government's role in being licensers for infrastructure
development, an infrastructure developer and operator, and finally a regulator. A
clear separation of these roles would be essential. To further aid this process, the
financial, insurance and legal sectors would have to play a significant role.
WHAT IS INFRASTRUCTURE?
As per India Infrastructure Report:
"Infrastructure is generally defined as the physical framework of facilities through
which goods and services are provided to public. Its linkages to the economy are
multiple and complex, because it affects production and consumption directly,
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FINANCING.
creates negative and positive spillover effects (externalities) and involves large
flow of expenditure.
Infrastructure contributes to economic development, both by increasing
productivity and by providing amenities which enhance the quality of life. The
services provided lead to growth in production in several ways:
Infrastructure services are intermediate inputs to production and any reduction in
these input costs raises the profitability of production, thus pertaining higher levels
of output, income and or employment.
These raise the productivity of other factors including labour and other capital.
Infrastructure is thus often described as an "Unpaid Factor of Production", since its
availability leads to higher obtainable from other capital and labour.
WHY IS INFRASTRUCTURE IMPORTANT?

As per India Infrastructure Report:
"The availability of adequate infrastructure facilities is imperative for the overall
economic development of the country. Infrastructure adequacy helps determine
reducing poverty and improving environmental conditions."
"Research indicates that total infrastructure stocks increase by 1% with each 1%
increment in per capita GDP."
52
FINANCING.
KEY ISSUES IN INFRASTRUCTURE DEVELOPMENT

AND FINANCING
The Key issues in infrastructure development are: 1. Privatization
The importance of privatization is because it brings along with it
a) Additional resources and
b) Improved managerial efficiency in asset creation, asset utilisation and customer
service leading to better financial health, due to stake holding.
2. Unbundling and Project Structuring
Unbundling is a necessary condition before attracting private participation is
unbundling the infrastructure into logical sub activities which can be privatised
separately to enable private parties not to have to bite more than what they can
chew.
To enable unbundling necessary acts shall have to be overhauled. Regulatory
reform would also be essential to provide increased autonomy, especially for
capital investment, even as a precursor to unbundling. Another reason for
regulatory reform is to exercise controls over implicit monopoly situations.
Project Structuring is also a key issue as since projects have to be structured small
enough to make them investment friendly, and at the same time "Commercial"
viable.
3. Project Appraisal and Financing
The key issue here is one of appraising the project against future cash flows rather
than an asset base or collaterals. Various forms of revenue, control over revenue
53
FINANCING.
and risk guarantees would also be related concerns. A vital banking infrastructure
to complement all this would be essential.
4. Project Implementation
Speed of project implementation would be imperatives, in the context of
environmental and other regulatory issues.
54
FINANCING.
FISCAL
INCENTIVES
INFRASTRUCTURE
FOR
INVESTMENT
IN
PROJECTS
The Government of India has sought to alleviate some of these concerns/issues by

providing certain fiscal incentives, concessions and policy reforms. Some of these
reforms have been:
1. Income Tax exemptions under Section 10 (23)(g) for interest and capital gains
income earned for infrastructure projects
2. Income Tax exemptions under Section 54 (EA/EB) for capital gains which can
be reinvested in infrastructure project companies
3. Deduction under Section 88 for investment in infrastructure projects Deduction available for individual investors.
4. Exemption from Minimum Alternative Tax
5. Concessional import duties and port charges for project-related imports.
6. Increased limits for External Commercial Borrowings.
7. Five year tax holiday to be claimed within 12 years of operation. For the
balance years, a 30% exemption is available.
55
FINANCING.
TECHNIQUE
OF
SECURITISATION
IN
INFRASTRUCTURE FINANCING
Securitisation of wholesale assets refers mainly to the use of securitisation as a
technique for infrastructure financing. Securitisation works on the principle of
unbundling the cash flows, customizing risk and evolving superior credit structure
in Infrastructure Financing.
Securitisation will benefit infrastructure financing because it: 1. Permits funding agencies whose sector exposures are choked, to continue
funding to those sectors.
2. Permits the participation of a much large number of investors by issue of
marketable securities.
3. Lowers the cost of funding infrastructure projects; long term funding ( a sine
quo non for most infrastructure projects) is more feasible in securitised
structures than conventional lending.
4. Facilities risk participation amongst intermediaries that specialise in handling
each of the components of risks associated with infrastructure funding (while
these may initially be borne by regular financial intermediaries and insurance
companies, it is expected that specialized institutions would develop over time)
5. Shifts focus of funding agencies of to evaluation of credit risk of the
transaction structure rather than overall project risk. This is because the other
56
FINANCING.
components of project risk would be borne by specialized intermediaries at a

fee cost.
Thus, in a nut shell securitisation will change the project evaluation parameters to
an exposure driven by Credit Rating of a transaction structure rather than overall
project risk and also securitisation will facilitate participation of a large number of
investors by ensuring tradability of issued Negotiable Instrument (Participation
Certificates).
Thus these considerations would facilitate the process of financial intermediation
for resource raising of fund Infrastructure Projects. The outcome of which will
reduce the cost of funding for Infrastructure Projects in the long run.
Diagrammatic Representation of the technique:
Securitisation works on the principle of unbundling cash flows

Customizing risk and Evolving Superior credit structure
The Conventional financing pattern is:
- Driven by credit extended in the form of non-tradable loans
- Project risk compensated by high cost of debt
- Sponsor comfort and "right" to project cash flows
- Key driver
57
FINANCING.
Securitisation in Infrastructure Financing will:

- Disseminate risk by identifying risk parameters
- Allocate cash flows to lenders/investors
- Leverage on structure of infrastructure projects
- Quasi Government risk
- Lending driven by Credit Rating of Structure rather than overall project risk
- Participation of a large number of investors
- Tradability of loans
- Participation /Pass thru Certificates
Thus the whole mechanism results in the reduction in cost of capital for the
Infrastructure Projects.
58
FINANCING.
INTRODUCTION TO THE VARIOUS SECTORS THAT

COME
UNDER
INFRASTRUCTURE
SECTORAL
FRAMEWORK BACKGROUND AND ISSUES

1. Power Sector:
The generation of power is a key input for industrial and agricultural efficiency.
Availability of Power is also a basic requirement for the common amenities such
as lighting of roads and housing.
Traditionally, India has been a power deficit state and has operated on the principal
of subsidising power for certain priority sectors. The onus of setting up power
generating capacity was on State and Central governments through Public Sector
Enterprises such as NTPC, NPC, NHPC and various State Electricity Boards
(SEBs). The power segment in terms of generation, transmission and distribution
is primarily controlled by states through their respective State Electricity Boards.
2. Road Sector
Adequacy and efficiency of a road network is essential for smooth and efficient
movement of cargo and people. The responsibility of maintaining and netting up
of a road network rests with the National Highway Authority of India (NHAI), the
State Government and its constituents.
The resource allocation to this sector is primarily based on budgetary
considerations against the State which imposes levies such as vehicle tax, road tax,
octroi, cess on diesel/petrol.
3. Port
59
FINANCING.
India has a long coastal line dotted with over 11 major ports and 140 minor ports.
Major Port Trust of India manages the major ports and the minor ports are
managed by State Maritime Boards.
The port sector in India is governed under the Indian Port Act, 1908 and the Major
Port Trust Act, 1963. These acts have permitted private sector investment in the
following manner:
1. Setting up of major ports at several locations across the coastline. The states of
Maharashtra, Gujarat and Andhra Pradesh have embarked on development
initiatives in this segment.
2. Privatisation of support services at major ports. Government of Gujarat has
identified 10 Greenfield Port Projects and has seen substantive Investment from
the Private sector for the development of the Port Sector in the sate of Gujarat
4. Urban Infrastructure
Urban Infrastructure requirements comprise of diverse services such as water
supply, sewage management, garbage disposal, town planning, housing and local
transportation services. The pace of urbanization has increased demand for such
services. This segment is covered by the State Governments and Municipal
Corporations. Housing Finance is already under the purview of the private sector
and in addition services such as supply of water and sanitation, local transportation
are being sought to be privatized.
60
FINANCING.
RELEVANCE OF SECURITISATION TO DIFFERENT

SECTORS OF INFRASTRUCTURE
1. Power Sector: The short term financial position of various SEBs is key concern for various PSUs
which are in generation and financing power sector initiatives viz. NTPC, NHPC,
REC, PFC, PGCIL. These Institutions have a high financial exposure to various
SEBs, some of which are sub-standard since several SEBs have inadequate
solvency for meeting obligations on the due date. Securitisation in this sector can
be envisaged in the segments of:
SEB Receivables of various PSUs viz, NTPC, REC, PFC, etc securitised to
reduce/rebalance financial exposure of the PSUs
Securitisation of SEB revenues for raising resources.
2. Road Sector: Private Sector road projects are expected to earn revenues from toll collections and
concessions. However these projects carry multiple level risks which could be
summarised as under:
Construction Risk - In event of inordinate delays in procuring land and
completing implementation.
Traffic Estimation Risk - Accuracy of estimating traffic in various segments
i.e. Commercial vehicle, buses, passenger cars, two wheelers and achieving
desired traffic estimates.
Toll collection risk - Intent and willingness of users to pay requisite toll for
usage. Considering the multiple level of risk, securitisation could be used to
61
FINANCING.
splice various levels of risk and thereby facilitate financial closure at an

optimal cost of capital.
3. Port Sector: The revenues of typical port projects would be in the nature of stowage and
loading revenues levied on ships which stop at the port of call. In addition, ports
tend to provide storage facilities for chemicals, cargo, petroleum products, etc. to
several large companies. The port authority/operator contract such storage
facilities for a long tenure. The port revenues of this nature are amenable to
securitisation.
4. Urban Infrastructure: Primarily opportunities in urban development are in the area of housing loans.
Globally, the home loans in the form of "Mortgage Backed Securities" comprise a
prime segment in the securitisation market. The issuance of "Mortgage Backed
Securities" results in dissemination of portfolio risk for Housing Finance
Companies and facilities participation of a breadth of financial investors such as
provident
62
FINANCING.
CRITERIA FOR STRUCTURING A SECURITISATION

TRANSACTION
1. Assets or Cash flows should be of an operative nature and they should be
likely to be translated into a cash flow at a future date with minimal risk of
performance.
2. Isolating Credit risk of the Originator (Owner of such assets or receipt of
cash flow) from that of the Obligor (Payer for the obligations/asset sought
to be securitised)
3. Evolving a "bankruptcy" remote structure for the transaction i.e. a
transaction structure which will not be impacted by the bankruptcy/default
of the Originator of the cash flows.
This is conventionally achieved through:
"True Sale" of cash flow or the "right to receive cash flow.
Setting up of an independent "Special Purpose Vehicle" which would
provide an appropriate framework for capital market participation.
Credit enhancement based on the following principles:
a. Credit rating/standing of the Obligor
b. Providing adequate collateral for investors participating in the "securitised"
paper
c. Evolving a suitable risk framework compromising of "Senior" investors who
have the first "right" on cash flows and "Sub-ordinate" investors who would bear
significant portion of the credit risk on the Obligor.
63
FINANCING.
The advantage for Originators would be realising an upfront cash flows in

exchange of future receipts which would be "securitised" in favour of the SPV and
its investors.
The following diagram explains structuring of the securitisation transaction for the
Infrastructure Project: -
Diagram: Structuring a Securitisation Transaction

Based on the structuring of the Transaction, securitisation can be applied in the
Pre-Implementation Stage and also in the Post Commissioning Stage.
64
FINANCING.
PRE REQUISITES FOR STRUCTURING

In absence of conventional asset cover, for the lenders - Trust and Retention
Account are created so that prioritizing of the cash flows can be done in
Infrastructure Financing.
The following Diagram Explains the concept of Prioritizing of the Cash
flow in Infrastructure Financing for a Toll Road Project: -
Diagram: - Prioritizing of Cash Flow in a Toll Road Infrastructure Project
65
FINANCING.
SECURITISATION IN THE PRE-IMPLEMENTATION STAGE

In an Infrastructure Project, the Project Risk is the Highest in the PreImplementation Stage. In the Pre-Implementation Stage there is high degree of
uncertainty of the Project and the Project Sponsors carry the highest amount of
risk.
The Prime concern of the Sponsor is to reduce the cost of capital in the PreImplementation stage.
Diagrammatic Representation: Diagram: - Project Funding Pre-Implementation Stage
66
FINANCING.
SECURITISATION IN THE POST COMMISSIONING STAGE

In the Post Commissioning Stage, Multiple Project Risk Participation can be
attracted to optimize the cost of fund. The Project Risk is almost diminished in the
Post Commissioning Stage. Thus in this manner a large number of Investors can
be attracted in the Financing of the Infrastructure Projects. The diagram below
explains the process of securitisation in the post commissioning stage.
Diagram: - Securitisation in the Post Commissioning Stage
67
FINANCING.
THE NHB-HDFC RMBS TRANSACTION

INTRODUCTION
As part of its role as the apex body in India for promotion of housing finance, the
National Housing Bank (NHB) made a Financial Milestone in the Indian Financial
World by issuing India's First Residential Mortgage Based Securities (RMBS) for
India's Premier Housing Finance Company i.e. Housing Development Finance
Corporation (HDFC) through a Private Placement Structured and Lead Managed
By SBI Capital Markets Limited. The Pilot Issue of NHB was of Rs. 88.32 Crores,
NHB issued the investors Class A PTCs (Rs. 59.7 Crores) and to the HDFC (the
originator) Class B PTCs (Rs. 28.62 Crores) by forming a Special Purpose
Vehicle.
68
FINANCING.
PART A
TERMS OF THE ISSUE
Principal Terms Of The Pass Through Certificates (PTCs)
NHB in its corporate capacity as also in its capacity as sole Trustee of the SPV
Trust issued securities in the form of Class A and Class B Pass Through
Certificates (PTCs). Class B PTCs are subordinated to Class A PTCs and act as a
credit enhancement for Class A PTC holders.
Only Class A PTCs were available for subscription. Class B PTCs were subscribed
by HDFC itself (the Originator).
Issue Details
Target Amount
The issue was for 600 Class A PTCs aggregating to Rs. 59.70 crores. The amount
was based on the outstanding principal balance in the receivables pool as on the
cut-off date, i.e., 31st May 2000, and is equal to the principal amortisation of the
pool for the first 84 months.
Authority For The Issue
NHB was authorised under the National Housing Bank Act, 1987, to undertake
securitisation of the housing loans of housing finance companies and scheduled
banks.
69
FINANCING.
Principal Terms Of The Securities (Class A Pass Through

Certificates)
Denomination Of Ptcs
Each Class A PTC had face value of Rs. 9,94,998/-.
Security
NHB in its capacity as trustee will hold all underlying securities including
mortgages, except for mortgages pertaining to loans in respect of properties
located in Maharashtra, which shall be held in trust by HDFC for the benefit of the
SPV Trust declared by NHB. The SPV Trust would in turn hold the mortgages also
for the benefit of the PTC holders. While the receivables will be legally transferred
to NHB/SPV Trust, HDFC will continue to physically hold the title documents in
respect of the housing properties, obtained as security on the loans issued, in the
capacity of a custodian to NHB/SPV Trust.
Rating Of The PTCs And Explanation Of The Rating
The Credit Rating Information Services of India Limited (CRISIL) has assigned
AAA(so) rating to the Class A PTCs, indicating highest degree of safety with
regard to the timely payment of the financial obligations on the instruments. The
rating by CRISIL is for an amount of Rs.60.29 crores.
70
FINANCING.
PART B
THE SECURITISATION STRUCTURE
Entering Into Memorandum Of Agreement
HDFC and NHB entered into a Memorandum of Agreement on 7 th July 2000, to
entitle NHB to take necessary steps to securitize the said housing loans, including
circulation of the Information Memorandum and collection of subscription amount
from investors.
Acquisition of the housing loans by NHB
On 1st September 2000, NHB acquired the amount of balance principal of the
housing loans outstanding as on the cut-off date, i.e., 31 st May 2000, along with
the underlying mortgages/other securities thereof, under a Deed of Assignment.
There was an absolute transfer of all risks and benefits in the housing loans to
NHB (through the Deed of Assignment), and subsequently to the SPV Trust
(through the Declaration of Trust). The housing loans selected for securitisation
were chosen in accordance with the pool selection criteria specified by CRISIL.
Pool Valuation And Consideration For The Assignment
The assets (receivables pool) held in Trust consist of a pool of retail housing loans,
each of which is secured by mortgage charge on the property, financed in part
through the loan. The loans in the pool comply with the following criteria:
1. The loans were current at the time of selection
2. The loans have a minimum seasoning of 12 months
3. The pool would consists of loans where the underlying property is situated
in the states of Gujarat, Karnataka, Maharashtra and Tamil Nadu.
4. The borrowers in the pool are individuals.
71
FINANCING.
5. Maximum LTV (loan to value) ratio is 80%.

6. Instalment (EMI) to gross income ratio is less than 40%.
7. EMIs should not be outstanding for more than one month.
8. Loan size is in the range of Rs. 18,000 to Rs. 10 lacs.
9. Borrowers in the pool have only one loan contract with HDFC.
10. HDFC has not obtained any refinance with respect to these loans.
Registration Of Deed Of Assignment And Stamp Duty
Subsequent to the above purchase from HDFC, the receivables pool were recorded
as an asset in the books of NHB, till such time as it makes an express declaration
of trust in respect of the pool. Subsequently, NHB held the assets in its capacity as
a Trustee for the benefit of the PTC holders. Once the Trust had been declared, the
assets ceased to be reflected in the books of NHB. The entire process of buying the
receivables pool along with the underlying mortgage security and declaring the
trust was legally completed on the same day, i.e., 1st September 2000. The
housing loans acquired by NHB were registered with the sub-registrar of a district.
NHB proposed to register the Deed of Assignment in the State of Karnataka,
where the stamp duty is payable @ 0.1% ad valorem, subject to an absolute limit
of Rs. 1 lac. Stamp duty on issue of the PTCs was also paid at the applicable rate.
Declaration Of Trust
NHB is empowered under the NHB Act 1987, to create trust(s) and transfer loans
and advances (along with underlying securities where necessary) to such trust(s).
Accordingly, after acquiring the housing loans, NHB made an express Declaration
of Trust in respect of the pool, by setting apart and transferring the housing loans
along with the underlying securities. It also appointed itself as the Trustee, to hold
and administer the housing loans as trust property for the benefit of the PTC
holders. However, for loans in respect of properties located in the State of
72
FINANCING.
Maharashtra, the underlying mortgage charges remained with HDFC, and were
held in trust by HDFC for the benefit of the main SPV Trust declared by NHB.
Issue of Pass Through Certificates
Once the housing loans were declared as property held in trust, NHB in its
corporate capacity as also Trustee for the SPV Trust issued Pass Through
Certificates (PTCs) to investors. The two classes of securities were issued i.e.
Class A and Class B PTCs. Class A PTCs were issued to investors, while Class B
PTCs were issued to HDFC (the Originator). Class B PTCs are subordinated to
Class A PTCs for receipt of principal and interest/income in the manner detailed
Equal to outstanding
principal balance as
on cut-of date
84 months
Loan #
below, thus acting as a credit enhancement to Class A PTCs.
Total Class A
principal
Total Class B
principal
PTC holders will be serviced by way of monthly pay-outs. The principal payment
to the PTC holders would be linked to the aggregate principal component of the
EMIs actually received from the Borrowers each month. Thus, the aggregate
principal amount in each scheduled monthly payout to the investors will match the
aggregate principal component in the EMI receivables of the SPV trust at the
beginning of the transaction.
73
FINANCING.
PART C
PARTIES TO THE TRANSACTION
1. The SPV Trust
The NHB/SPV Trust is a trust formed under the Indian Trusts Act pursuant to a
Declaration of Trust settled by the NHB who would also act as the Trustee.
2. National Housing Bank
The National Housing Bank (NHB) was established on 9th July 1988 under an Act
of the Parliament viz. the National Housing Bank Act, 1987 (the Act) to function
as a principal agency to promote Housing Finance Institutions and to provide
financial and other support to such institutions. The Act also envisaged
formulation of policies relating to mobilisation of resources and credit for housing,
regulating the working of housing finance institutions, co-ordinating their
activities as also those of other agencies engaged in housing finance and extending
financial support to housing finance intermediaries. Thus, the Bank was set up
with a view to create a sound and effective delivery system for housing credit in
the country.
3. Housing Development Finance Corporation Ltd (Originator )
Housing Development Finance Corporation Limited (HDFC) was promoted in
October 1977 as a public limited company which specialises in the provision of
housing finance to individuals, co-operative societies and the corporate sector.
4. The Servicing & Paying Agent
HDFC would act as the Servicing & Paying (S & P) Agent for the issue.
74
FINANCING.
5. The Registrar &Transfer Agent

NHB will act as the Registrar and Transfer (R & T) Agent for the issue.
75
FINANCING.
PART D
RISK FACTORS
Absence Of Secondary Market For The PTCs
This being the first issue of the type by the issuer, there has been no formal market
for the certificates. The absence of a secondary market for the PTCs could limit an
investors ability to resell them. No assurance can be given regarding an active or
sustained trading in the PTCs after their listing.
However, in future, NHB may consider making arrangements for market making
in order to provide liquidity to the investors.
Prepayments On Receivables
An investor may receive payment of principal on the PTCs earlier than scheduled.
Prepayments shorten the life of the PTCs to an extent that cannot be fully
predicted. The rate of prepayments on the receivables may be influenced by a
variety of economic, social and other factors. No prediction can be made as to the
actual prepayment rates that will be experienced on the receivables.
HDFC will be required to repurchase a loan from the SPV Trust, if there is any
breach of representations and/or warranties made by it with respect to the loan.
Bankruptcy Of The Housing Finance Company
If HDFC becomes subject to bankruptcy proceedings and the court in the
bankruptcy proceeding concludes that the sale to NHB was not a 'true sale', then
an investor could experience losses or delays in the payments on the PTCs.
76
FINANCING.
NHB has taken steps in structuring the transaction to minimise the risk that the
sale of the receivables to NHB will not be construed as a "true sale''.
77
FINANCING.
HDFC COMPLETES ASSET BACKED

SECURITISATION
HDFC Bank has completed its largest Asset Backed Securitisation (ABS) program
till date by way of issue of Senior Pass Through Certificates (PTCs), backed by
gross receivables of Rs. 811.35 crore, demonstrating the bank's expanding retail
business in India and increased focus on securitisation. The issue, which opened
on June 4, 2004, received an excellent response from mutual funds and banks and
was subscribed on the day of opening.
The PTCs have been issued by Retail 2004 Series II, a special purpose trust settled
by IL&FS Trust Company Limited. The receivables are originated by HDFC Bank
and the Bank will continue to act as servicer for these loans.
The Trust raised the funds through issuance of three series of Senior PTCs, Series
A1, Series A2 and Series A3. Series A1 was rated A1+ (so) and both Series A2 and
A3 were rated MAAA (so) by ICRA. The ratings are based on the strength of cash
flows from the selected pool of loan contracts, the credit enhancement and the
integrity of the legal structure. The credit enhancement is available in the form of
subordinate PTCs (6.7 per cent of Senior PTC cash flows), cash collateral (1.78
per cent of Senior PTC cash flows) and subordination of opening over dues.
The underlying assets are auto and commercial vehicle loan receivables from a
pool of 26,359 loan contracts with weighted average seasoning of 9.4 months as of
April 22, 2004. The concentration on individual exposures is small and majority of
the pool is in the small and medium cars and HCV segments.
Standard Chartered Bank acted as the Book Runner and Lead Arranger for the
issue.
78
FINANCING.
CONCLUSION
Originating in the mortgage markets of the US in the 1970s securitisation has
developed and come a long way from there to spread throughout the globe to
benefit organisations
Securitisation is the buzzword in today's World of Finance. It's not a new subject
to the developed economies. It is certainly a new concept for the emerging markets
like India. The Technique of Securitisation definitely holds great promise for a
Developing Country like India.
Securitisation has worked well over the other tools of financing as it does not
increase the liability of the Originator but at the same time provides him financing.
It infact converts the NPA of the company into cash flows.
The above features help infrastructure companies to get finance easily and also
helps the banks by reducing the burden on them and helping them to concentrate
on their core business activities.
But the tool has not been utilised to its fullest in our country as cuase of the legal
complications. However a welcome step was seen in the form that securitised
papers can now be traded as assets in the market and also the reduction in the
stamp duty of the securitisation transaction.
The development till off late was slow but the future for securitisation is said to
be very bright in Asias 2nd largest economy where financing is of prime
importance and the growth potential are very high.
79
FINANCING.
BIBLIOGRAPHY
BOOKS
SECURTISATION VINOD KOTHARI
WEB SITES
WWW.VINODKOTHARI.COM
WWW.BSEINDIA.COM
WWW.FITCHINDIA.COM
WWW.NHB.ORG.IN
WWW.REDIFF.COM
WWW.ECONOMICTIMES.COM
WWW.WICKIPEDIA.COM
WWW.SOOPLE.COM
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SECURITISATION A TOOL TO MODERN

5. FORMS OF SECURITISATION STRUCTURES

6. METHOD OF TRANSFER OF ASSETS

7. MOTIVATION AND BENEFITS

THE INDIAN EXPERIENCE

2. NEED FOR SECURITISATION IN INDIA

3. MAJOR CONSTRAINTS OF SECURITISATION IN INDIA

4. FUTURE PROSPECTS OF SECURITASATION IN INDIA

BANKING & SECURITISATION

2. THE PROCESS AND PARTICIPANTS

4. IMPACT ON THE INDIAN BANKING SECTOR

SECURITISATION A TOOL TO MODERN

INFRASTRUCTURE DEVELOPMENT AND FINANCING

3. WHY IS INFRASTRUCTURE IMPORTANT?

5. FISCAL INCENTIVES FOR INVESTING IN

6. TECHNIQUE OF SECURITISATION IN INFRASTRUCTURE

7. INTRODUCTION TO THE VARIOUS SECTORS UNDER

8. RELEVANCE OF SECURITISATION TO DIFFERENT

9. CRITERIA FOR STRUCTURING A SECURITISATION

10. PRE REQUISITES FOR STRUCTURING

11. SECURITISATION IN THE PRE IMPLEMENTATION

12. SECURITISATION IN THE POST COMMISSIONING STAGE

THE NHB HDFC RMBS TRANSACTION

HDFC COMPLETES ASSET BACKED SECURITISATION

SECURITISATION A TOOL TO MODERN

Securitisation A Tool to Modern Financing

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

itself is broken into instruments of fixed denomination. This is the process of

As defined by The Securitisation and Reconstruction of Financial Assets

SECURITISATION A TOOL TO MODERN

Suppose Mr X wants to open a multiplex and is in need of funds for the

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SPV Acquires receivables

Servicer collects receivables

SPV Funding by investors

Selection and Pooling of homogeneous assets & estimation of the Cash

SECURITISATION A TOOL TO MODERN

The next step is to create an SPV.

The SPV formed (Trust / MF / Corporate Form) now issues securities/notes to

Investors - Proceeds of the issue of securities to SPV

Collections and Servicing from the Obligors:

The Originator generally performs this function. In some cases, specialized

Pass Over to the SPV:

SECURITISATION A TOOL TO MODERN

Reinvestment of Cash Flows:

Payment to the Investors:

Originators Residuary Profit:

FORMS OF SECURITISATION STRUCTURES

SECURITISATION A TOOL TO MODERN

Pass Through Structure

Figure 1. Pass Through Structure

SECURITISATION A TOOL TO MODERN

Pay Through Structure

SECURITISATION A TOOL TO MODERN

6. Thus, SPV is an active conduit.

Figure 2. Pay Through Structure

METHODS OF TRANSFER OF ASSETS

SECURITISATION A TOOL TO MODERN