Securitisation of debt

By: Hiren Lathiya

 Meaning

 Securitisation of debt or asset refers to the process of
liquidating the illiquid and long term asset like loans
and receivables of financial institution like banks by
issuing security against them.
 Defination

 A carefully structured process whereby loans and
other receivables are packaged, underwritten and
sold in the form of asset backed security.
 Securitisation is nothing but liquifying assets
comprising loans and receivables of an institution
through systematic issuance of financial instruments.
 Parties involved

 The originator
 The special purpose vehicle (SPV)
 A merchant and investment banker
 A credit rating agency
 The originator
 Stages involved in
Securitisation

 Identification stage
 Transfer stage
 Issue stage
 Redemption stage
 Credit rating stage
 Stages involved in
Securitisation

 Identification stage
the bank or any other institution decide to go for
Securitisation called originator. He pick up the pool of
asses of homogenous nature, considering the
maturities, interest rated involved and frequency of
repayment and marketability.
 Stages involved in
Securitisation

 Transfer process
selected pool of asset is passed through the other
institution which is ready to help the originator to
convert those pools asset into securities. This institution
called SPV.
 Stages involved in
Securitisation

 Issue process
SPV split the packaged into individual securities of
smaller values and they are sold to the investing public.
The securities issued by SPV is called different names
like ‘pay through certificate’, ‘pass through certificate’,
‘interest only certificate’, ‘principal only certificate’.
 Stages involved in
Securitisation

 Redemption process
the redemption and payments of interest on these
securities are facilitated by the collections received by
the SPV from securitise asset.
 Stages involved in
Securitisation

 Credit rating process
since pass through certificate issue publically require
credit rating agency to rate so that it become more
attractive.
 Benefit


 Additional source of fund
 Greater profitability
 Enhancement of capital adequacy ratio
 Spreading of credit risk
 Lower cost of funding
 Higher rate of return
 Prevention of idle capital
 Better than traditional instrumentsw
Causes for unpopularity

 New concept
 Heavy stamp duty and registration fees
 Cumbersome transfer process
 Difficult to assignment of debt
 Absence of standardize loan document
 Inadequate credit rating facility
 Absence of proper accounting procedure
 Absence of proper guidelines


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