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DR. RAVI INDER SINGH
Securitization is “the issuance of marketable securities backed by the expected cash flows from specific assets (receivables)”
Securitisation is the conversion of existing or future cash flows into tradable securities that can be sold to investors.
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.
Securitisation involves creation of securities
OriginatorThe initial owner of the loans.
Sells them to the SPV
ObligorsThe loan customers.
Pay cashflows that are securitised
SPVSpecial purpose
Vehicle
Set up specifically for transaction. Purchases assets from Originator.
Company/Trust/ Mutual Fund
InvestorsSubscribe to securities
issued by SPV
Collection Agent
Collects money from Obligors, monitors and maintains assets.
Usually the originator
Merchant Banker
As structurer for designing & executing the transaction and as arranger for the securities
Credit Rating Agency
Provides a rating for the deal based on structure, rating of parties& portfolio, legal and tax opinion etc
SPV Investors
Originator
ObligorsCredit
Enhancement Providers
Rating Agency
Structurer
9 Issue of securitiesCollections Credit enhancement
Rating 8 Subscription to securities
Cash flows10 11 Servicing
of securities
ContractsOngoing cash flowsInitial cash flows
Collection Agent
Original Loan
Sale of asset
Purchase consideration
Arranger
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2 3
4
5
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Release of Locked-up funds Cost of funds is reduced Improved Ratios Improved CAR Matching of Assets and Liabilities Larger Spread
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.
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.
Off balance sheet financing Regulatory capital relief Improvement of RoCE Multiple alternative sources of funding Conversion of illiquid assets into liquid
securities Systemically solves ALM problems in the
sector - mismatch due to difference in tenor and characteristics of assets (mostly fixed rate and up to 30 years) and liabilities
Enjoys low cost operations and servicing due to economies of scale of the originator
Credit risk is minimizedExposure on rated, low-risk housing loansExpertise of originators helps maintain
quality of underlying assetsCredit enhancement possible
Cleaner books due to expertise of originators
Systemically solves the ALM problems in the sector
Encourages an efficient market Results in substantial benefits to the end
customer of home loans
Receivables are sufficient to meet the payments promised by the SPV
Safeguards exist to provide for shortfalls in cash from receivables
Investors have clear legal claims on the income from receivables and have adequate protection in the case of delinquency.
Credit Enhancement Third Party GuaranteesSubordinated debtOver-CollateralizationCash Collateral Accounts
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 with a green shoe option of Rs. 75 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.
Ashok Leyland finance Cholamandalam investment & finance Esanda finance Sakthi finance Tata finance SRF finance
OriginatorsChurn higher returns on lower capital base
InvestorsCan invest in low-risk rated home loans
paper without hassles of origination/ servicing
Financial system as a wholeExpertise of Specialists helps maintain
quality of underlying assets and reduces ALM mismatches
Home Loan CustomersAccess to cheaper funds
Narasimham committee I & II
Andhyarujina committee
Recommendations made by them Empower banks & FI’s to take the possession of
the assets & to sell them wihout the intervention of the court, was enacted.
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.
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 offTake over the management of the assetsThis act empowers the Bank and financial
institutions to directly enforce their right and need not approach any court.
The process of enforcement of securities can be done either :By the banks/financial institutionsThrough the Asset Reconstruction
Companies created and registered under the act
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 lossed
in any of the three preceding financial years
Co has made adequate arrangement for the realisation of assets.
Directors should have adequate professional experience
Board Should not consist of more than half of its members as nominee of one agency
Rejection of Registration : opportunity of hearing
Prior Approval : Required in case of substantial Change in the management or place of business.
Cancellation of Registration Cease to carry on business of securitisationFails to follow the directives of RBIFails to maintain accounts in the manner
prescribed by RBIFails to submit the returns or offer
documents for inspection
Filing of appeal : Within 30 days to Central Govt.
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
Company may take any of the following measuresChange in the management of the companyTake over the management of the companySale or lease of part or whole of the
business of the borrowerReschedule the payment scheduleUndertake reinforcement of security
interest and take possession of the secured assets.
Speedy Recovery of NPAs Opening of New Business Area Development of Securitisation Business Reconstruction of Sick Units
Misuse Narrow Approach Double Protection to Creditor Entry Barrier Consortium Advances
Thank you………