This action might not be possible to undo. Are you sure you want to continue?
The concept of Funding & Risk sharing
are termed asset-backed securities (ABS). For decades before that. Banks. Asian markets grew to a size of $10 billion in the year 2000. In Indian economy since there is a shortage of resources for 2 . But after World War II. Hence. as well as other financial intermediaries sensing a market opportunity. they held loans until they matured or were paid off.S. auto loans and home equity take an active part in securitization pools. Although it took several years to develop efficient mortgage securitization structures. The name "securitization" is derived from the fact that the forms of financial instruments used to obtain funds from the investors are securities. and Asia. Securitization has become so important in a countries economy that legal revisions are being made to popularize securitization as it is a low cost and better funding style. These loans were funded principally by deposits. which are the outcome of securitization processes. loan originators quickly realized the process was readily transferable to other types of loans as well”2 Recent Trends: The market of securitization is getting higher in U. To attract investors. History: "Asset securitization began with the structured financing of mortgage pools in the 1970s. sought ways of increasing the sources of mortgage funding. which was a direct obligation of the bank (rather than a claim on specific assets). and sometimes by debt.” 1 All assets can be securitized so long as they are associated with cash flow. segmented the credit risk. banks were essentially portfolio lenders. Credit card loans. the securities. investment bankers eventually developed an investment vehicle that isolated defined mortgage pools. depository institutions simply could not keep pace with the rising demand for housing credit. which involves pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors. and structured the cash flows from the underlying loans.Securitization: “Securitization is a structured finance process.
usually trusted by the owner (but can be another form of trust or a corporation). but more commonly the Securities are issued to the Originator or Intermediate SPE as payment for the Receivables and then sold to the Investors.developing large scale infrastructure which needs to grow at a rate of 25% annual rate in the next few years to sustain a 7-8% long term growth of the Indian economy. or purchases and assembles portfolios of Receivables (in that sense. and other "qualified investors.An entity. appointed pursuant to a Trust Agreement. Investors -The ultimate purchasers of the Securities.Usually a bank or other entity authorized to act in such capacity.The entity that either generates Receivables in the ordinary course of its business. that issues securities and avoids taxation at the entity level (see discussion below under "Foreign Securitizations"). Trustees . The Trustee. all of whom require legal representation to some degree. In many structures there are two Trustees. the Securities are purchased directly from the Issuer. for example the "originator" is often referred to as the "issuer" or "seller". or in the case of an underwriting. holds Receivables. insurance companies.4 Major Players : The major "players" in the securitization game. Securitization alone can come to the rescue for providing this long term finance. not a true originator). usually a bank that actually holds the Receivables as agent and bailee for the Trustee or Trustees. Issuer .The special purpose entity. created pursuant to a Trust Agreement between the Originator and the Trustee. Originator . Usually banks." In some cases. are as follows (this terminology is typical. but different terms are used. to the Underwriters. 3 . Custodian . Its counsel works closely with counsel to the Underwriter/Placement Agent and the Rating Agencies in structuring the transaction and preparing documents and usually gives the most significant opinions. receives payments on the Receivables and makes payments to the Security holders.
g. The bank lends loan to the borrowers e. the concept of securitization works in the following stages :Stage 1: The bank is the loan originator and servicer (ICICI BANK). SPV issues bonds on this asset to investors to raise money. 4 ICICI Securitizes loan through SPV SPV (e. ICICI SECURITIES Ltd) 1 2 3 4 5 Now SPV holds the asset i. Process of Securitization: ORIGINATOR (e.Moody's. recovery rights from Y Ltd. pays discounte d amount to ICICI Bank . Y Ltd. the Rating Agencies frequently are active players that assist in structuring the transaction. and repays bonds and interests to investors. which is generally coordinated by Merchant or Investment banker GENERAL INVESTORS SPV receives money on bond issue.Rating Agencies .g XYZ LTD) In simple words. Sunil Pullyakot on August 06. S&P.g.e. ICICI BANK) BANK) BORROWER (e. In Securitizations. 2008 ICICI SECURI TIES Ltd. In many instances they require structural changes and mandate changes in servicing procedures.g. Diagram based on the discussion with Mr. Later SPV recovers loan from Y Ltd. Loan principal plus interest payments from the bank balance sheet are removed over to next stage. Fitch IBCA and Duff & Phelps.
The Securities issued in the Securitization are more highly rated by participating rating agencies. and those with fixed interest rate Receivables. which itself is usually an intended. thus improving the Originator's balance sheet and resulting in gain or loss. eliminating the need for hedges. thus reducing the cost of funds to the Originator when compare to traditional forms of financing. the loan package will be an investment banker who underwrites and packages the securities for sale and collects fees for the service. Disadvantages: May reduce portfolio quality: If the AAA risks for example are being securitized out. The Originator does not have to wait until it receives payment of the receivables to obtain funds to continue its business and generate new Receivables. 2. rating fees and ongoing administration. and not as significant with short term Receivables. underwriting fees. etc. assets and related liabilities can be matched. In non-revolving structures. legal fees. beneficial consequence. This is more significant when the Receivables are relatively long term. 4.The loan principal plus interest payments are further passed through to the third stage. In many cases this is essential.Stage 2 : In this stage. and a role otherwise filled by more traditional methods of financing. including factoring. such as: 1. such as with real property mortgages. auto loans.The SPV buys the loans from the bank and issues the securities. Advantages: The Securitization structure is intended to provide significant advantages to Originators. 3. An allowance for unforeseen costs is usually essential in securitizations. especially if it is an atypical securitization. The Receivables are moved "off balance sheet" and replaced by a cash equivalent (less expenses of the Securitization). Costs: Securitizations are expensive due to management and system costs. 5 . student loans. Stage 3 : In this stage. Stage 4 : The party in this stage is the individual investor (individuals or banks) who buys the securities for cash flow claims. this would leave a materially worse quality of residual risk. such as trade and credit card Receivables.. a Special Purpose Vehicle (SPV) will be the loan purchaser.
Securitize Indian Banks’ Future. 2008. Vol. 2008 from Wikipedia website: http://en.wikipedia. Retrieved August 2.securitization. Retrieved August 2. The ICFAI Journal of Applied Finance. 62-63. No. 8. Feb2008. Vol.org/wiki/Securitization#History 3.org/wiki/Securitization http://www. Market Factors: “Sanz warns: A strong potential supply of securitized bonds needs to be met by the demand of dedicated emerging market or structured finance investors. p62. from EBSCO HOST Research Databases. 2002)." 3 In the time of recession in the economy it happens that there are no investors willing or able to buy securities leading to a downfall of the securitization market Bibliography: 1. Item Number: 31328753 Retrieved August 02. 5.html 6 .Size limitations: Securitizations often require large scale structuring. and at this point there is no sign of investors returning to this market.com/4445/securitization. Structured Finance. Subrahmanyam Ganti (Sept.asp http://www.investopedia. 4. Securitization. 2008 from Wikipedia website: http://en.com/ask/answers/07/securitization.wikipedia. 1c.wikipedia. Other web resources you may refer to: http://en. and thus may not be cost-efficient for small and medium transactions.net/ http://www.investorwords.org/wiki/Securitization 2. Securitization. 39 Issue 466. 2/3p. Section: EEMEA Euromoney.
membersocieties.http://www2.com/spf/csv/equity/JP%20Securitization%20Structures.pdf http://www.ca/conference/2004/presentations/c_kilgour.org/srilanka/linked%20files/Securitisation.pps http://www.standardandpoors.pdf 7 .tmac.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.