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Securitization

Presented By:
Aniket Metkar 109 Arun Nambiar Harsh Sankhala 62 Harshil Jariwala 113 Lohit Sharma 105

What is Securitization?

Benefits of Securitization

Process of Securitization

Laws regarding Securitization

Characteristics of an Asset

Instruments of Securitization

RBI Guidelines

Securitization

Securitisation involves pooling of homogeneous assets and the subsequent sale of the cash flows from these asset pools to investors. Redistribution of credit risk

Provides Financial stability and liquidity


De-links the credit risk of the issuer

Benefits

Reduces Funding costs and asset liability mismatch

Opportunity to potentially
earn higher rate of return.

Investment in high quality assets

Transfer of risk

Locking in profits

Portfolio Diversification

Process of Securitization
Obligator (Borrower)
Principa l Asset Sale of Assets

Ancillary Service Provider


Issue of Securities

Originator
Consideration For asset

SPV

Interest & Principal

Investor

Subscription of Securities Credit Rating of Securities

Rating Agency

Structurer

SARFAESI Act
The Securitization And Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act). Objective - to strengthen creditor rights Chapter 1: Short Title and commencement Chapter II :Regulations
New existing company, minimum paid up 2. Cr Existing company should comply within 6 months Companies are registered with RBI, any change in management cannot be done without RBI approval Cannot carry another business activity RBI may cancel a certificate of registration

Chapter III : Enforcement of security act


It allows the secured lender to sell or lease assets The act can override certain norms of companies act 1956

Chapter IV : Central registry for the purpose of securitization Chapter V : Offences and penalties Chapter VI : Miscellaneous

Credit Enhancements
Definition
Variousmeansthatattempttobuffer investors against losses on the asset collaterisingtheirinvestments. Direct exposure on performance of assets No recourse to the originator Essential to secure a high level of credit rating

INTERNAL

EXTERNAL

Credit trenching

Over collateraliza tion Cash collateral Triggered amortisatio n

Insurance

Spread account

Third party guarantee

Letter of credit

Asset Characteristics

Cash Flow Security Distributed Risk Homogeneity No Executory Clause Independence From Originator

Instruments of Securitization
Pass through Certificates

Instruments of Securitization
Pay through Certificates

Instruments of Securitization

Stripped Securities
Interest only Principal only

RBI Guidelines on Securitization

Assets Eligible for Securitization


The underlying assets should represent the debt obligations of a homogeneous pool of obligors

Minimum Holding Period (MHP) Minimum Retention Requirement (MRR) Limit on Total retained exposure Originator may have max of 20% stake in Securities issued by SPV Booking of profit upfront Treatment of profit arising out of securitization of loans Disclosure To be made in Servicer, Investor, Trustee report True Sale Criteria

Types of securities

Mortgage backed Securities (MBS) Collateralized mortgage obligation (CMO) Derivate of mortgage pass through securities Asset Backed Securities (ABS) Collateralized Debt Obligations (CDO) Derivate of Asset Backed securities

Indian Securitization Market

Directorbilateralassignmentofretailloanpoolsisdirectsaleofa selectedloanpoolbytheOriginatortothePurchaser(orAssignee) together with limited credit support. Since FY2009, about 75-80% of the total number of ABS and RMBS transactions has been in the nature of direct assignment transactions. Most issues had simple structure with single tranche. Preferred Credit enhancement method was Cash Collateral.

References:

Financial Management : M Y Khan and P K Jain RBI Master circular- Revisions to the Guidelines on Securitisation Transactions

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