SECURITIZATION

By- Akshit Dhar

(20202303)​
TABLE OF
CONTENT
• Meaning
• Process
• Credit Enhancement
• Parties involved Securitization Transaction
• Instruments
• Securitization in India
MEANING
Securitization refers to the process of converting illiquid assets,
such as loans or other financial assets, into tradable securities
that can be bought and sold in the financial markets.
The securitization process involves pooling together similar
assets, such as mortgages or car loans, and then issuing bonds
or other securities backed by the cash flows generated from
these pooled assets. Securitization can have several potential
benefits, such as providing liquidity to illiquid assets,
diversifying risk, and enabling lenders to transfer risk off their
balance sheets.
 PROCESS OF SECURITIZATION 

1) ASSETS 3) TRANSFER 5) CREDIT 7) RATING AND 9) SERVICING

SELECTION OF ASSETS ENHANCEMENT PRICING OF ASSETS

2)FORMATION 10) ONOING

4) POOLING
OF SPECIAL 6) STRUCTURING 8) SALE OF REPORTING
AND
PURPOSE OF SECURITIES SECURITIES AND
AGGREGATION
VEHICLE (SPV) COMPLIANCE
CREDIT ENHANCEMENT
Credit Enhancement refers to the measures taken to reduce credit risk in a
securitization transaction, aiming to enhance the creditworthiness of the
securitized securities. Credit enhancement techniques are employed to mitigate
the risk of default on the underlying assets and to increase the credit quality of
the securities being offered to investors. Credit enhancement can take various
forms and can involve multiple parties in a securitization transaction.
Common types of Credit Enhancement: -
• Overcollateralization
• Subordination
• Reserve Accounts
• Letters of credit and guarantees
• Insurance
PARTIES INVOLVED IN
SECURITIZATION
Several parties are typically involved in a securitization transaction. These
parties may include:
• Originator/Seller: The originator/seller is the entity that originates or owns
the financial assets, such as mortgages, auto loans, or credit card
receivables, that are being securitized.
• SPV: The SPV or issuer is a separate legal entity established specifically for
the purpose of securitization. It acquires the financial assets from the
originator/seller and issues the securities backed by these assets.
• Credit rating agencies: Credit rating agencies assess the creditworthiness
of the securities issued by the SPV and assign credit ratings to them.
• Underwriters: Underwriters or placement agents are responsible for
assisting the SPV in marketing and selling the securities to investors.
• Investors: Investors are the entities that purchase the securities issued by the
SPV. These investors can include institutional investors, such as banks, as
well as individual investors.
INSTRUMENTS OF SECURITIZATION
There are several instruments used in securitization transactions, including:
• Asset-backed Securities (ABS): ABS are securities that represent an ownership interest in a
pool of underlying financial assets, such as mortgages, auto loans, credit card receivables, or
other types of loans. ABS are backed by the cash flows generated from underlying assets.
• Mortgage-backed Securities (MBS): MBS are a type of ABS that specifically represent an
ownership interest in a pool of mortgage loans. MBS are backed by the cash flows generated
from the mortgage loan payments made by the borrowers in the pool.
• Collateralized debt obligations (CDOs): CDOs are securities that represent ownership
interests in a pool of debt securities, such as bonds or loans. CDOs are typically structured as
multiple tranches of securities with different levels of credit risk and priority in receiving cash
flows. CDOs can be backed by a wide range of assets, including residential or commercial
mortgages, or other types of debt securities.
INSTRUMENTS OF SECURITIZATION
There are several instruments used in securitization transactions, including:
• Collateralized loan obligations (CLOs): These are a type of CDO that specifically securitize
pools of loans, typically corporate loans. CLOs are structured as multiple tranches of securities,
and the cash flows from the underlying loans are used to make principal and interest payments
to the CLO investors.
• Credit card receivable securities: These are securities that represent ownership interests in a
pool of credit card receivables, typically issued by credit card companies. The cash flows from
the credit card receivables, such as monthly payments from cardholders, are used to make
principal and interest payments to the investors in these securities.
• Other specialized securitized instruments: There are various other types of securitized
instruments that can be issued in securitization transactions, depending on the nature of the
underlying assets being securitized. These may include equipment lease-backed securities,
student loan-backed securities, trade receivable-backed securities, and others.
 SECURITIZATION IN INDIA

Securitization has gained significant attraction in India as a financing tool for

banks and financial institutions. The securitization market in India is primarily
governed by the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 (SARFAESI Act), and regulations
issued by the Reserve Bank of India (RBI) and the Securities and Exchange
Board of India (SEBI).
The first widely reported securitization deal in India dates back to 1990 when
Citibank securitized auto loans and placed a paper with GIC mutual fund. Fund
to the tune of Rs. 15 crore was raised in the transaction in which Citibank acted
as the agent of ICICI for issue and redemption of the PTC.
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