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Securitization

Dr Kishor Bhanushali

Securitization
Tremendous growth of due to liberalization Financial development Innovative financial techniques Innovative financial instruments Asset securitization

Underlying assets
Securitization, as financial technique, is

concerned with trading in securities, backed by pool of mortgage loans Share in income and principal payments generated by the underlying mortgages

Securitization defined
Assets securitization is the process of separating

certain assets from the balance sheet and using them as collateral for the issuance of securities. Securities may then be rated and sold based upon the economic quality of the assets. Raising fund through the sale of this commercial paper can provide substantial savings over the traditional term loans

Securitization defined
Securitization may be defined as a method of

funding any kind of receivables (mortgage debts, leases, loans, credit card balances etc). It involve producing bearer assets backed securities which can freely traded secured on a portfolio of receivables.

Features of securitization
Marketability : (a) legal system and systematic

possibility of marketing instruments (b) the existence of market Merchantable Quality: rating Wide Distribution Homogeneity Commoditization: cresting an instruments which can be placed in the market Integration and Differentiation De-construction

Need for Securitization


Helping small investors

Facilitating liquidity
Utility of Instruments

Special Purpose Vehicle (SPV)


Entity between originator of the receivable and

the end-customers Special Purpose Vehicle / Special Purpose Entity / Special Purpose Company Repository of the assets or claims which is being securitized

Securitization Mechanism
Origination

Asset Identification and pooling


Security Creation SPVs Task Security Issue Security Purchase Receipts of Benefits Rating and Trading Redemption

Assets Characteristics
Cash Flow

Security
Distributed Risk Homogeneity No Executory Clauses Capacity Independent from Originator

Benefits of Securitization:
Off balance sheet financing

Credit enhancement
Low costs Assess to market Benefits to investors

Economic Functions of Securitization


Creating financial market

Diversification
Promoting savings Reduced costs Diversified risks Focus on use of resources