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securitization-definition-theory-process.html
 Meaning and Definition
⚫ Securitization of debt or asset refers to the process of
liquidating the illiquid and long term assets like
loans and receivables of financial institutions like
banks by issuing marketable securities against them.
The definition can be stated as “A
carefully structured process where by loans and
other receivables are packaged , underwritten and
sold in the form of asset backed securities”.

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Securitization is also differs from
factoring, on following points.
Securitization Factoring
⚫ Associated with loans ⚫ Associated with book debts
⚫ Deals with loans ⚫ Deals with bills receivables
⚫ Nature is medium or long ⚫ Nature is short term
term
⚫ Collection work is done by ⚫ Collection work is done by
originator or agency factor himself
⚫ Part of credit risk can ⚫ Whole credit risk is on
be absorbed by the shoulder of factor
originator

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Modes of Operation
In securitization following parties are required
1. Originator : An entity making loans to borrowers or having
receivable from customers.
2. Special purpose vehicle(SPV) : The entity which buys assets
from originator and packages them in to security for
further sale.
3. Investment Bank : A body that is Responsible for
conducting
the documentation work
4. Credit rating agency : To provide value addition to
security .
5. Insurance company/under writer : To provide cover against
redemption risk to investor and /or under subscription
6. Obligator : Company that gives debt to other company as
a result of borrowing (debtor)
7. Prospective investor : The party to whom securities are
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Stages in securitization
There are 5 stages involved in the working
of securitization
1. Identification stage/ process
2. Transfer stage/ process
3. Issue stage/ process
4. Redemption stage / process
5. Credit rating stage/ process

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Process of Securitization
Originator

Asset Pool

SPV Credit enhancement

Issue
proceeds Class A Notes
Investor
Note issue
Class B Notes

Class C Notes
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Securitization : Operational
Mechanism
The crucial link in the Securitization chain is the
creation of a special purpose vehicle (SPV). The SPV
intermediates between the primary market for the
underlying asset and the secondary market for the
asset backed security .The SPV is a separate entity ,
incorporated in consonance with prevailing laws . The
basic process can be split up into 3 function.
1 .The originator function
2 .The pooling function
3 .The securitization
function
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Methods of Securitization
As stated earlier, securitization is liquidating
long term assets in to marketable securities, the
asset’s quality , amount of amortization , default
experience of original borrower, financial reputation
and soundness etc ., is vital
There are 3 important Methods of
Securitization 1 .Pass through and Pay through
certificates
2 .Preferred stock certificates
3 .Asset based commercial paper
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Pass through certificate
⚫ Cash flows are ‘passed through’ to the holders of the
securities in the form of monthly payments of
interest, principal & pre-payments
⚫ They reflect ownership right in the assets backing
the securities
⚫ Pre-payment precisely reflects the payment on the
underlying mortgage . If it is a home loan with
monthly payments, the payments on securities
would also be monthly but at a slightly less coupon
rate than the loan.

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Pay through certificate
⚫ This permits the issuer to restructure receivables
flow to offer investment maturities to the investors
associated with varied yields and risk .The issuer
owns the receivables and sells the debt backed by the
assets.
⚫ The cash flows can be remade into various
debt tranches with different maturities.

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⚫ Preferred stock certificates : it is issued by a
subsidiary company against the trade debts and
consumer receivables of its parent company
⚫ Asset-based commercial papers : The SPV
purchase portfolio of mortgages from different
sources (various lending institutions) and they are
combined into a single group on the basis of interest
rates, maturity dates and underlying collaterals .
Then it transferred in to trust and issue mortgage
backed securities.

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 Types of Securitization
1. Mortgaged Backed securitization (MBS)
2. Mortgage pass through securitization
3. Auto loan securitization (ALS)
4. Credit card segment
5. Trade receivable
6. Non asset based securitization
7. Asset based securitization (ABS)

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The following assets are generally
securitized by financial institutions
1. Term loans to financially reputed companies
2. Receivables from government departments
and companies
3. Credit card receivables
4. Hire purchase loans like vehicle loans
5. Lease finance
6. Mortgage loans etc..;

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Benefit of securitization
Securitization provides benefits to all the parties such
as, the originator, investor and the regulatory authorities .
Some of them are as below
1. Additional source of fund
2. Greater profitability
3. Enhancement of capital adequacy ratio
4. Spreading of credit risk
5. Lower cost of funding
6. Provision of multiple instrument
7. Higher rate of return
8. Prevention of idle capital
9. Better than traditional instrument.

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History of securitization in India
⚫ Securitization in India began in the early 1990’s ,with CRISIL
rating the first securitization program in 1991-1992, of an auto
loan . City bank securitized auto loans and placed a paper
with GIC mutual fund worth about Rs 16 cores.
⚫ Securitization began with the sale of consumer loan pools, and
originators directly sold loans to buyers. They acted as
servicers and collected installments due on the loans.
⚫ Creation of transferable securities backed by pool receivables
(known as PTCs) becomes common in late 1990 through most
of the 90’s securitization of the Indian markets .
⚫ From 2000 till today ABS& RMBS have fuelled the growth of the
Indian securitization market.

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Housing finance
⚫ Shelter being one of the 3 basic needs , every human
being aspires to own a home.
⚫ Homes are not just houses-they are environments which
project the aspirations of individual families to live a better life.
⚫ In India ,up to the late 1970’s housing finance was a key
constraint to ownership of a house.
⚫ The concept of housing finance was pioneered by
housing development finance corporation(HDFC)in
Oct .1977.
⚫ Housing finance is a business of financial intermediation
wherein the money raised through various sources such as
public deposits , institutional borrowings , refinance from NHB
and their own capital , is lend to borrowers for purchasing
house.
⚫ These intermediaries lend money by accepting mortgage by
deposit of title deeds of the residential property .
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Types of housing loans in markets
⚫ Home - equity loans: A form of finance to the customer
by way of mortgage of existing property to the financier
for taking a loans for some other purpose .Current
market value basis of the property to provide loans
⚫ Home –extension loans
⚫ Home –improvement loans
⚫ Home - purchase loans
⚫ Land purchase loans
⚫ Home loans to self-help groups (SHGs)/Micro
finance institutions (MFIs)
⚫ Loans to NRIs

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Residential Mortgage-Backed
Securitization ( MBSs)
⚫ NHB launched the pilot issues of MBSs in AUG
2000.
⚫ The primary lenders create mortgages against
loans provided by them to the purchasers of
houses
⚫ The mortgages held as assets generate cash flows
represented by repayment of both principal as well
as interest on the loans.
⚫ The secondary mortgage market involves the
conversion of mortgages into financial instruments
and the sale of these instruments to prospective
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Reverse- Mortgage Loan ( RML)
⚫ There has been an increase in the residential-house price in
the past few years , which have created considerable ‘home
equity wealth’.
⚫ For most senior citizens, the house is the largest component of
their wealth.
⚫ Reverse mortgage seeks to monetize the house as an asset and
,specifically, the owner’s equity in the house.
⚫ It is a mortgage loan for senior citizens(over 60 years),who
generally are not eligible for any form of mortgage loan .The
loan is given on single or joint basis with the spouse , even if one
of the spouses is below 60 years .
⚫ Reverse mortgage is a loan that allows senior citizens to convert
home equity into cash , without leaving their homes and
without making monthly – mortgage payments.

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⚫ The borrower can repay loan and accumulated
interest and have mortgage released without resorting
to sale of the property
⚫ Maximum period of loan will be 15 years, the
payment will not be made by the lender.
⚫ Borrower will be responsible for paying property tax
, housing- insurance premium
⚫ Senior citizens owing a house but having inadequate
income to meet their needs such as renovation
/repair
/hospitalisation,etc
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Trends in housing finance
⚫ Retail home loan market is well integrated in to
the broader financial sector and the capital
market
⚫ Large market segment dependent on formal
financial system for credit availability
⚫ Technology to be packaged with financing
⚫ A parallel intervention in terms of mortgage guarantee
has been introduced for mitigating the credit risk
associated with the segment
⚫ Union budget support(fiscal) towards Housing and
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THANK YOU

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