Securitization

Securitization
Securitisation is the conversion of existing or future

cash flows into tradable securities that can be sold to

investors.
Securitisation is the process of pooling and
repackaging of homogenous illiquid financial assets
into marketable securities that can be sold to
investors

Securitisation defined
It is the process by which assets such as loan

receivables, hire purchase debtors, lease receivables,

trade debtors are transformed into securities.
It fundamentally involves conversion of long term
assets into cash/illiquid assets.

Parties to an issue
Originator

The initial owner of the loans.

Sells them to the SPV

SPV
Special purpose
Vehicle

Set up specifically for transaction.

Purchases assets from Originator.
Company/Trust/ Mutual Fund

Obligors

The loan customers.

Pay cashflows that are securitised

Investors

Subscribe to securities
issued by SPV

Parties to an issue (contd.)

Collection
Agent

Collects money from Obligors,

monitors and maintains assets.
Usually the originator

Credit Rating
Agency

Provides a rating for the deal

based on structure, rating of parties
& portfolio, legal and tax opinion et

Why securitize assets?

Release of Locked-up funds

Cost of funds is reduced
Improved Ratios
Improved CAR
Matching of Assets and Liabilities

What type of assets can be securitized?

Any type of asset with a reasonably predictable

stream of future cash flows can be securitized.

Assets that are easiest to securitize are those: that
occur in large pools; for which past experience can be
used to predict default rates; for which
documentation is standardized; and for which
ownership is transferable.

Types of Securitization
MBS (Mortgage based securitization ) :

Securitisation based on immovable fixed assets is

Known as backed by mortgage.
ABS (Asset based securitization) :
Securitisation against the current and moveable
fixed assets is known as Securitisation Backed by
assets.

Benefits to Originator
Off balance sheet financing
Regulatory capital relief
Improvement of RoCE
Multiple alternative sources of funding
Conversion of illiquid assets into liquid securities

Benefits to Investor
Enjoys low cost operations and servicing due to

economies of scale of the originator

Credit risk is minimized

Exposure on rated, low-risk housing loans

Expertise of originators helps maintain quality of underlying
assets

Benefits to Financial System

Cleaner books due to expertise of originators
Systematically solves the ALM problems in the

sector
Encourages an efficient market

SECURITISATION -INDIAN CONTEXT

First deal in India between Citibank and GIC Mutual Fund, in 1990
for Rs. 160 million.
Securitisation of cash flow of high value customers of Rajasthan
State Industrial and Development Corporation in 1994-95,
structured by SBI cap.
Securitisation of overdue payments of UP government to HUDCO by
issue of tax-free bonds worth Rs. 500 million
Securitisation of Sales Tax deferrals by Government Of Maharashtra
in August 2001 for Rs. 1500 million.
First deal in power sector by Karnataka Electricity Board for
receivables worth Rs. 1940 million and placed them with HUDCO.
Mega securitisation deal of Jet Airways for Rs. 16000 million
through offshore SPVs.
Data indicate that ICICI had securitised assets to the tune of Rs.
27500 million in its books at end March 1999.

Some of the companies that have been

Involved in this are
Ashok Leyland finance
Cholamandalam investment & finance
Esanda finance
Sakthi finance
Tata finance

MBS - A Win-Win for All

Originators

Churn higher returns on lower capital base

Investors
Can invest in low-risk rated home loans paper without
hassles of origination/ servicing
Financial system as a whole
Expertise of Specialists helps maintain quality of
underlying assets and reduces ALM mismatches
Home Loan Customers
Access to cheaper funds

Committee involved in Securitization

Narasimham committee I & II
Andhyarujina committee

Recommendations made by them

Empower banks & FIs to take the possession of the assets & to sell
them wihout the intervention of the court, was enacted.

When the bill was passed?

The Securitisation and Reconstruction of Financial

Assets and Enforcement of Security Interest

Ordinance, 2002. on 21.06.2002.
It received the assent of the President on 17.12.2002
and has now become an Act.

Some Important Provisions of the Securitisation

Act, 2002
This act empowers Banks and FIs (Secured

Creditors) and provides that the secured creditors

after 60 days notice :

Take possession of the securities and dispose them off

Take over the management of the assets
This act empowers the Bank and financial institutions to
directly enforce their right and need not approach any court.

Process of Enforcing the Securities

The process of enforcement of securities can be done

either :

By the banks/financial institutions

Through the Asset Reconstruction Companies created and
registered under the act

Pre-requisite to start securitisation Activity

Securitisation company must be registered
Existing companies to apply for registration within 6

months
Has minimum net owned funds of Rs 2 Crore or 15%
of the value of assets to be securitised
RBI to conduct inspection
Company should not have incurred losses in any of
the three preceding financial years
Co has made adequate arrangement for the
realisation of assets.

Pre-requisite to start securitisation Activity

Contd.
Directors should have adequate professional

experience
Rejection of Registration : opportunity of hearing
Prior Approval : Required in case of substantial
Change in the management or place of business.

Pre-requisite to start Securitisation Activity

Contd..
Cancellation of Registration

Cease to carry on business of securitisation

Fails to follow the directives of RBI
Fails to maintain accounts in the manner prescribed by RBI
Fails to submit the returns or offer documents for inspection

Filing of appeal : Within 30 days to Central Govt.

Process of take over of assets

Bank/FI will give notice of tarnsfer of assets to the

obligor
Upon receipt of notice, obligor hence forth will make
the payment to the company
Where no such notice is given and the payment has
been given to the original, same will be held in the
form of trust and will be transferred to the company

Positive Effects of Securitisation Act

Speedy Recovery of NPAs
Opening of New Business Area
Development of Securitisation Business
Reconstruction of Sick Units