Debts

Securitisati
on
By-Rajendra
P rasad Diwak
ar

 Securitisation of Debts History
0 Securitization of financial assets, both mortgage-
backed securities (MBS) and asset-backed securities
(ABS), is a form of structured finance initially
developed in the US in the early 1980’s and it
developed into a huge industry there alone. By 30th
June 2001, the securitized assets in the country
were over US$5 trillion. It was 25% of all debts
outstanding. Virtually, all forms of debt obligations
and receivables have been securitized. Residential
mortgages; home equity loans; housing loans; time
share loans; auto, truck, aircraft and boat loans;
leases; credit card receivables; lottery winnings etc.
are some of the examples of such receivables.
MEANING OF SECURITISATION
0 Securitization” in the widest sense implies
every such process which converts a financial
relation into 'a transaction. It is a device of
structured financing where an entity seeks to
pool together its interest in identifiable cash
flows over time, transfers the same to
investors either with or without the support
of further collaterals, and thereby achieve the
purpose of financing.
 DEFINITION OF SECURITISATION
0 Securitisation is pooling of homogenous financial,
cash flow producing, illiquid assets and issuing
claims on those assets in the form of marketable
securities. Using securitisation, financial institutions
and industrial firms can make certain assets suitable
for sale in the capital market.
0 Securitisation can be defined as a method of funding
receivables of whatever kind (mortgages, debts,
leases, loans, credit card balances etc.). It involves
producing bearer assets- backed securities which
can be freely traded and secured on a portfolio of
receivables.
 PARTIES TO THE SECURITISATION
TRANSACTION

0 The process of securitisation involves six basic

parties namely :
0 (1) The Originator.
0 (2) Special Purpose Vehicle (SPV).
0 (3) Obligors or Debtors.
0 (4) Credit Rating Agency.
0 (5)Servicing Agency or Administrator or Servicer.
0 (6) Investors.
 Originator

0 The entity on whose books the assets to be

securitised exist, it is the prime mover of the
deal. He sells the assets on its books and receives
Originator- It is the entity that generates
and pools receivables in the ordinary course
of its business. With the help of
securitisation transaction, an originator can
transfer the credit and other risks
associated with the pool of assets
securitised to the issuer or special purpose
vehicle.
 Issuer
0 Issuer- It is a special purpose entity created
pursuant to a trust agreement or pooling or
servicing agreement between the originator and
the trustee. It can be a trust, a grantor, business
corporation or fund. This is called a special
purpose vehicle (SPV) or special purpose entity
(SPE) or, if such entity is a company, special
purpose company (SPC). the funds generated from
such a sale. In a true sale, the originator transfers
both the legal and the beneficial interest in the
assets to the SPV.
 Special Purpose Vehicle (SPV)
0 Also known as SPE (Special Purpose Entity) or SPC
(Special Purpose Company), it is the entity that
would buy the assets to be securitised from the
originator. The SPV is typically a low- capitalised
entity with narrowly defined purposes and
activities, and usually has independent
trustees/directors. As one of the main objectives of
securitisation is to remove the assets from the
balance sheet of the originator, the SPV plays a
very important role in as much as it holds the
assets in the books and makes the upfront
payment for them to the originator.
 Obligors or Originator’s
Debtors
0 Obligors or Originator’s Debtors- The
amount outstanding from than is the
asset that is transferred to the SPV. The
credit standing of the debtor’s is of
outmost importance in a securitisation
transaction.
 Credit Rating Agency
0 Credit Rating Agency- Since the investors
take the risk on the asset pool than the
originator, an external credit rating agency
plays an important role. The rating process
would assess the strength of the cash flow and
the mechanism designed to ensure full and
timely payment by : selecting the loans of
appropriate credit quality, and assessing the
credit and liquidity support required.
 Servicer
0 Servicer- It collects the payments due from
the original debtors called the passes them
on to the SPV, follows up with delinquent
borrowers and pursues paying agent. Legal
remedies, wherever required, against the
defaulting borrowers. Since it receives the
instalments and pays them to the SPV, it is also
called the receiving and paying agent.
 Investors
0 Investors- The investors may be
individuals or institutional investors like
banks, financial institutions, mutual
funds, provident funds, pension funds,
insurance companies etc. They buy a
participating interest in the total pool of
receivables and receive their payment in
the form of interest and principal as per
agreed pattern.
MANMEET
KAUR..
 Securitisable Assets – Meaning of Security
 Purpose of Securitisation
 Steps of Securitisation Transaction
 Difference between Securitisation & Corporate Finance
 Difference between Securitisation & borrowing
 Post Examples of Securitisation in India

Manmeet Kaur
Securitisable Assets – Meaning Of Security
It means a financial claim which is generally manifested in the form of a document, its
essential feature being marketability. To ensure marketability, the instrument must have
general acceptability as a store of value.
Of the different types of securitised assets, the most common are:
1. Residential mortgages
2. Commercial and multifamily mortgages
3. Home equity loans
4. Manufactured housing loans
5. Automobile loans
6. Student loans
7. Credit card receivables
8. Equipment leases
9. High yield bonds
10.Bank loans
11. Boat loans
12.Recreational vehicles
13.Export receivables
Purpose Of Securitisation
1. Higher Return on Capital 

2. Helps to Raise Finance

 
3. Improves Return on Assets
 
4. Diversification of Source of Funding
 
5. Reduces Credit Exposure

6. Match-Fund
 
7. Risk reducing
Steps Of Securitization Transaction
The securitisation transaction has the following steps/features:
1. Transfer of Assets

2. Issue of Pass through Certificates

3. Credit Rating
 
4. Timing of the issue

5. Payment

6. Collection

7.Credit Enhancement 
 Difference between Securitisation & Borrowing
Basis of Securitization Borrowing
Difference
1.Treatment for Not treated as borrowing from Treated as borrowing from public.
regulatory public.
purpose
2. Failure of the Depends upon recourse feature; Investors will not be affected:
debtors of the normally investors will suffer a they have a claim against the
originator loss. originator.
3. Bankruptcy of Investors beneficially own the Investors have a claim against the
the originator pool of assets transferred to the originator: usual
SPV. bankruptcy/distressed company
protection available to the
originator.

4. Relation with Transfers claims against No connection with the debtors of

the debtors of the debtors/costumers of the the originator.
originator originator.
Post Example of Securitisation in India
o First Securitization deal in India between Citibank And GIC Mutual Fund in 1991For Rs 160
million.

o India’s first securitization of personal loan by Citibank in1999 for Rs 2,841 million

o India’s first mortgage backed securities issue (MBS) of Rs 597 mn by NHR and HDFC in
2001.

o Securitization of aircraft receivables by Jet Airways for Rs 16,000 mn in 2001 through SPV.

o India’s first sales tax deferrals securitization by Govt. of Maharashtra in 2001 for Rs 1,500
mn.

o India’s first deal in the power sector by Karnataka Electricity Board for receivables worth Rs
1,940 mn and placed them with HUDCO.

o India's first Collateralized Debt Obligation (CDO) deal by ICICI bank in 2002.

o India’s first floating rate of securitization issuance by Citi group of Rs 2,810 mn in 2003, The
fixed rate auto loan receivables of Citibank and Citicorp Finance India included in the
securitization.
SHARDA PR
ASAD
THAWAIT

SECURITISATION OF DEBT (LOAN ASSETS)
0 The banks, financial institutions and finance
companies need not now keep their term loans
on their books, waiting for recovery. The
procedure, earlier was attached with risks:
—of liquidity
—default in repayments
—loss due to uneconomic working of the
borrower-unit.
Securitisation of debt involves the
following steps as :
 Packaging of the long-term loans.
 Offering packaging to investors.
 Selected/approved investors have liquid funds.
 Long term loans are distributed among the selected investors and
the * reverse fund flows liquidate the term loans.
 The investors are given coupons or Pass through Certificates
(PTCs).
 Investors can also be given marketable securities through Special
Purpose Vehicles (SPVs).
0 Prorata distribution of amount of loans recovered among the
coupon holders as mentioned in issuing document.
 TYPES OF
SECURITISATION
Backed by Assets or Assets Backed
Securitisation (ABS).
0 Mortgage Backed Securities (MBS).
 OPERATIONAL MECHANISM
0 The following procedure is followed :
(1)The lender institution creates loan assets in its books ;
(2)As per credit standing of the borrowers, some loans are segregated
for selling to the issuer of securities ;
(3)The issuer pays the loan amounts to the lender institution, net of
discounts/charges/fees ;
(4)The issuer converts these loans into pool of security for issuing
PTCs. (Pass through Certificates);
(5)The PTCs are sold to the individual investors, waiting to make
investments ;
(6)Meanwhile, the original lending institution receives payments ;
(7)Lender institution keeps sending prorata amount of instalments to
the issuer.
(8)Issuer passes on the recovery amounts to individual investors.
 ADVANTAGES OF SECURITISATION

0 Release of Locked-up Funds.

0 Cost of Funds is Reduced.

0 Improved Ratios

0 Increase in Capital Adequacy Ratio (CAR)

0 Matching of Assets & Liabilities.

0 Risks Eliminated

0 Larger Spread.
RICHA RAJE
…
::
 THE SECURITISATION
ACT, 2002
0 The Securitisation and Reconstruction of
Financial Assets and Enforcement of Security
Interest Act, 2002 has come into force w.e.f. 21st
June, 2002, the date on which the ordinance was
first promulgated. The Act aims to regulate
securitisation and reconstruction of financial
assets and enforcement of security interest and
for the matters connected therewith or incidental
thereto.
 Purpose of the Act
0 Under section 13(4), the secured creditors may, after
60 days notice :
 Take possession of the assets and dispose
them of.
 Take over the management of the assets.
 Claim an amount from the acquirer of the
security who owes a sum on that account to
the borrower.
Short Summary of the Act
(1)Pre-requisites to form registered securitisation
company /asset reconstruction company.
A securitisation company can commence the
business of securitisation of asset reconstruction if:
 It is registered under this Act.
 Any existing Securitisation or Reconstruction
Company shall make an application for
registration to RBI within 6 months from the
commencement of this Act and may continue to
carry on the securitisation/asset reconstruction
work until a certificate is granted or rejected.
  The form and manner of the application are to be
prescribed by the RBI.
 The company should not have incurred losses in any of
three preceding financial years.
 The directors have adequate professional experience
related to finance.
 The board of directors should not consist of more than
half of its total members as nominees of any sponsor.
0 2) Rejection of Application.
The registration to the securitisation company shall be granted on
such term and conditions as RBI may deem fit. The RBI may reject
the application after giving the applicant a reasonable opportunity of
being heard.
(3) Cancellation of Certificate of Registration.
The RBI may cancel the certificate of registration granted
to a securitisation company if the company :
0 ceases to carry on business of securitisation;
0 ceases to receive or hold any investment from a
qualified institutional buyer (i.e. investor in the
company);
0 fails to follow any of the other prudential/pecuniary
norms of the RBI;
0 fails to submit or offer for inspection its books of
account or other relevant documents when so demanded
by the RBI;
0 fails to obtain prior approval of RBI u/s 3(6) of the Act.
0 (4) Filing of an Appeal.
The securitisation company aggreived by the
order of cancellation of registration above may
file an appeal with the Central Govt. with in a
period of 30 days from the date of the service of
the notice. The application may be rejected but
only after giving the applicant reasonable
opportunity of being heard.
 POSITIVE ASPECTS OF THE ACT
1. Development of Securitisation Market.
0 The ordinance would help in the development of
securitisation market in India. The ordinance brings
clarity on some of the important areas in the
securitisation deals.
2. Speedy Recovery of NPAs.
0 The Act by empowering the bank/FIs to unlock their
NPAs on their own has untied their hands.
3. Boost to Private Sector.
0 The Act opens up a completely new areas of private
sector in the form of securitisation companies or asset
reconstruction companies.
 THE GAPS AND THE
COMPLICATIONS/SOME ISSUES
0 Misuse of the Act

0 Narrow in Approach

0 Double-Protection to the Creditor

0 Involves additional expenditure

0 No immediate recovery
VINITA SIN
GH
THAKUR..

 Scenario of securitization
Global Scenario:
0 Securitization originated in the US with the promotion of residential
mortgage markets. The US Government provided active support to the
development and growth of securitization through agencies such as
Federal National Mortgage Association (FNMA), Government National
Mortgage Association (GNMA).
0 These agencies bought residential mortgage loans which were crated and
issued against guaranteed payment of principal and interest. Next to the
US, the only place to have fairly developed market is the UK. In the UK, it
is the bank of England that has issued various guidelines and helped in
developing securitization as a financial service. Securitized debt
instruments are now popular in Italy, Australia, Canada, France, Spain,
Japan and many other countries and most of them have passed new
legislations to assist the process.
 Indian Scenario:
0 The Indian scenario in securitization as a financial service is
recent. A few players dominate the market. Public response to
this service has been lukewarm. Citibank, HDFC and ICICI made
the first securitization deal in India, in February 1991. The main
motive of NBFCs to go for securitization has been to unlock
investment in all liquid assets recycle cash and exploit new
business opportunities. In India, securities are created against
the backing of truck loans and LCVs receivables.
0 Against the backdrop of the poor popularity of the securitization
as a financial service, a number of measures are being initiated
by the government to make this service popular and as a low
cost source of financing.
 The need for securitization
in India
1. In Indian context, securitization is the only ray of hope for
funding resources -starved infrastructure sectors such as
power. As on 31 December, 1998, the overall State
Electricity Board dues to the central agencies alone were Rs.
184 billion. According to reports, the power sector in India
needs a funding of about $17 billion over the next 10 years.
2. Securitization can help Indian borrowers with international
assets in piercing (sharp) the sovereign rating and placing
an investment grade structure.
3. MBS in India can help HFCs in churning their portfolios and
focusing on what they know best- fresh assets origination .
Indian HFCs have traditionally relied on bond finance and
loans from NHB. MBS can provide an important source .
 Securitization activities in
India
1. ABS. These are the most general class of securitization transaction. In
this type of securities, the assets could vary from auto loan, lease, hire
purchase, credit card, consumer loan, student loan to even future
assets receivables.
In the India there has been moderate amount of activities on the auto loan
securitization front. companies such as TELCO, Ashok Leyland
Finance, Kotak Mahindra and Magma leasing have been securitizing
their portfolio of auto loans to buyers, namely, ICICI and citibank.
2. MBS. In the US, MBS constitute about 76% of the securitized market. But
the market in India is at infancy. The NHB, in partnership with HDFC
and LIC housing finance, issued India’s first MBS issuance in August
2000. However its potential in India is huge. Its market in India could
soon overtake the other securitization transactions in the country.
0 3. CDOs. In this era of Bank consolidation(to unite) CDOs
can help banks manage proactively their portfolio. CDOs
can help banks in restructuring their stressed assets. Its
market in India is, however, likely to grow slowly.
0 4. ABCPs. It is usually issued by special purpose entities
set up and administered by banks to raise cheaper
finances for their clients. India’s securitization market is
currently not matured for instruments like ABCPs.
 Success in Recovery
Management
Indian banking is facing the most difficult challenges of
managing NPA. Assets Reconstruction Company Ltd is the
only company that has been initiated business in India in the
year 2003. ARCIL has been promoted by important players in
the financial sectors namely ICICI bank Ltd. State bank of
India industrial Development bank of India(IDBI), HDFC bank
Ltd. housing development finance corporation Ltd.
ARCIL aims at providing a market for bad debts.
Share holding patter- ARCIL has been established as a private
sector body with more than 50% of its equity capital being
held by private sector banks.
share holding pattern of ARCIL
10%
20% PNB
ICICI bank
karur vsya bank Ltd.
citicorp finance Ltd.
other private sector entities
29% HDFC bank Ltd.
State bank of India
20%
IDBI

6% 6%
4% 4%
 Series 1
others
diamonds
hotel
auto & anciliary
food
cable
chemical
aluminium
packaging Series 1
construction
paper
cement
engineering
Iron & steel
Consumer Product
Pharma
Textiles
0 500 10001500200025003000350040004500

Industry wise distribution of assets

Acquired
nature of the NPAs acquired

22%

non-operating
partly operating
oparating
10%

68%
 Conclusion
The securitization market in India, though in its infancy,
holds great promise especially in the MBS area. While
more complex securitization transaction and public
issuance paper are still a dream, appropriate
legislation and investor education can give its market
in India a much needed thrust.
 Thank you..
 ..
