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Securatisation of Banks in India

Securitisation Defined

Securitisation is a structured finance process, which involves pooling and repackaging of cash-flow producing financial assets into securities that are then sold to investors. The name “securitisation” is derived from the fact that the form of financial instruments which are used to obtain funds from the investors are securities .

Securitisation deals with the conversion of assets, which are not marketable into marketable ones. In technical terms Securitisation is the process of conversion of existing assets or future cash flows into marketable securities.

For the purpose of distinction, the conversion of existing assets into marketable securities is known as “asset-backed securitisation” and the conversion of future cash flows into marketable securities is known as “future-flows securitisation”. Some of the assets that can be securitised are loans like car loans, housing loans, etc. and future cash flows like ticket sales, credit card payments, car rentals or any other form of future receivables.

All assets can be securitized so long as they are associated with cash flow. Hence, the securities, which are the outcome of securitization processes, are termed asset-backed securities (ABS) . From this perspective, securitisation could also be defined as a financial processes leading to an emission of ABS.
Securitisation often utilizes a special purpose vehicle (SPV) (alternatively known as a special purpose entity [SPE] or special purpose company [SPC]) in order to reduce the risk of bankruptcy and thereby obtain lower interest rates from potential lenders. A credit derivative is also generally used to change the credit quality of the underlying portfolio so that it will be acceptable to the final investors.

How it works?
The diagram describes a typical transaction with this separate company (usually referred...