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

1

2 3

4

5

6

7

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………