Presented by

Bibin P V
Roll No: 2
M Phil
Sms cusat

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Introduction
 The financial system all over the world is in
transforming stage . The capital, money and debt
markets are getting widened and deepened. The
development of debt market increases the efficiency of
capital market. The debt or assets securitization plays
very important role. It is the debt market which has
provided more impetus for capital formation than
equity market in the economically advance countries.
Debt or asset securitization assumes
a significant role and it is one of the most innovative
techniques introduced in the debt market.

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 Meaning and Definition
 Securitization of debt or asset refers to the process of
liquidating the illiquid and long term assets like loans
and receivables of financial institutions like banks by
issuing marketable securities against them.
The definition can be stated as “A carefully
structured process where by loans and other
receivables are packaged , underwritten and sold in
the form of asset backed securities”.

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Securitization is also differs from
factoring, on following points.
Securitization Factoring
 Associated with loans  Associated with book debts
 Deals with loans  Deals with bills receivables
 Nature is medium or long  Nature is short term
term
 Collection work is done by  Collection work is done by
originator or agency factor himself
 Part of credit risk can be  Whole credit risk is on the
absorbed by originator shoulder of factor

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Modus of Operandi
In securitization following parties are required
1. Originator : An entity making loans to borrowers or having
receivable from customers.
2. Special purpose vehicle(SPV) : The entity which buys assets
from originator and packages them in to security for further
sale.
3. Investment Bank : A body that is Responsible for conducting
the documentation work
4. Credit rating agency : To provide value addition to security .
5. Insurance company/under writer : To provide cover against
redemption risk to investor and /or under subscription
6. Obligator : Company that gives debt to other company as a
result of borrowing (debtor)
7. Prospective investor : The party to whom securities are sold

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Stages in securitization
There are 5 stages involved in the working of
securitization
1. Identification stage/ process
2. Transfer stage/ process
3. Issue stage/ process
4. Redemption stage / process
5. Credit rating stage/ process

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Process of Securitization
Originator

Asset Pool

SPV Credit enhancement

Issue proceeds
Class A Notes
Investor
Note issue
Class B Notes

Class C Notes
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Securitization : Operational
Mechanism
The crucial link in the Securitization chain is the
creation of a special purpose vehicle (SPV). The SPV
intermediates between the primary market for the
underlying asset and the secondary market for the
asset backed security .The SPV is a separate entity ,
incorporated in consonance with prevailing laws . The
basic process can be split up into 3 function.
1 .The originator function
2 .The pooling function
3 .The securitization function
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Methods of Securitization
As stated earlier, securitization is liquidating
long term assets in to marketable securities, the asset’s
quality , amount of amortization , default experience
of original borrower, financial reputation and
soundness etc ., is vital
There are 3 important Methods of Securitization
1 .Pass through and Pay through certificates
2 .Preferred stock certificates
3 .Asset based commercial paper

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Pass through certificate
 Cash flows are ‘passed through’ to the holders of the
securities in the form of monthly payments of interest,
principal & pre-payments
 They reflect ownership right in the assets backing the
securities
 Pre-payment precisely reflects the payment on the
underlying mortgage . If it is a home loan with
monthly payments, the payments on securities would
also be monthly but at a slightly less coupon rate than
the loan.

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Pay through certificate
 This permits the issuer to restructure receivables flow
to offer investment maturities to the investors
associated with varied yields and risk .The issuer owns
the receivables and sells the debt backed by the assets.
 The cash flows can be remade into various debt
tranches with different maturities.

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 Preferred stock certificates : it is issued by a subsidiary
company against the trade debts and consumer
receivables of its parent company
 Asset-based commercial papers : The SPV purchase
portfolio of mortgages from different sources (various
lending institutions) and they are combined into a
single group on the basis of interest rates, maturity
dates and underlying collaterals . Then it transferred
in to trust and issue mortgage backed securities.

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 Types of Securitization
1. Mortgaged Backed securitization (MBS)
2. Mortgage pass through securitization
3. Auto loan securitization (ALS)
4. Credit card segment
5. Trade receivable
6. Non asset based securitization
7. Asset based securitization (ABS)

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The following assets are generally
securitized by financial institutions
1. Term loans to financially reputed companies
2. Receivables from government departments and
companies
3. Credit card receivables
4. Hire purchase loans like vehicle loans
5. Lease finance
6. Mortgage loans etc..;

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Benefit of securitization
Securitization provides benefits to all the parties such as,
the originator, investor and the regulatory authorities .
Some of them are as below
1. Additional source of fund
2. Greater profitability
3. Enhancement of capital adequacy ratio
4. Spreading of credit risk
5. Lower cost of funding
6. Provision of multiple instrument
7. Higher rate of return
8. Prevention of idle capital
9. Better than traditional instrument.

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History of securitization in India
 Securitization in India began in the early 1990’s ,with CRISIL
rating the first securitization program in 1991-1992, of an auto
loan . City bank securitized auto loans and placed a paper with
GIC mutual fund worth about Rs 16 cores.
 Securitization began with the sale of consumer loan pools, and
originators directly sold loans to buyers. They acted as servicers
and collected installments due on the loans.
 Creation of transferable securities backed by pool receivables
(known as PTCs) becomes common in late 1990 through most of
the 90’s securitization of the Indian markets .
 From 2000 till today ABS& RMBS have fuelled the growth of the
Indian securitization market.

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Housing finance
 Shelter being one of the 3 basic needs , every human being
aspires to own a home.
 Homes are not just houses-they are environments which project
the aspirations of individual families to live a better life.
 In India ,up to the late 1970’s housing finance was a key
constraint to ownership of a house.
 The concept of housing finance was pioneered by housing
development finance corporation(HDFC)in Oct .1977.
 Housing finance is a business of financial intermediation
wherein the money raised through various sources such as public
deposits , institutional borrowings , refinance from NHB and
their own capital , is lend to borrowers for purchasing house.
 These intermediaries lend money by accepting mortgage by
deposit of title deeds of the residential property .

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Types of housing loans in markets
 Home - equity loans: A form of finance to the customer by
way of mortgage of existing property to the financier for
taking a loans for some other purpose .Current market
value basis of the property to provide loans
 Home –extension loans
 Home –improvement loans
 Home - purchase loans
 Land purchase loans
 Home loans to self-help groups (SHGs)/Micro finance
institutions (MFIs)
 Loans to NRIs

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Housing finance in India
The responsibility to provide housing finance largely
rested with the govt of India till the mid-eighties. The
setting up of the National housing Bank (NHB) a fully
owned subsidiary of the RBI in 1998, as the apex
institution ,marked the beginning of the emergence of
housing finance as a fund-based financial service in
the country.
It has grown in volume and depth with the entry of a
number specialized financial institutions/companies
in the public, private and joint sector, although it is at
an early stage of development.

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National housing bank
 The NHB was established in 1988 under the NHB Act
1987, to operate as a principal agency to promote
housing finance institutions (HFIs) at both local &
regional level, and to provide financial and other
support to them. The HFIs include institutions ,
whether incorporated or not, that primarily transact or
have as one of their principal objects the transacting of
the business of providing finance for housing, either
directly or indirectly

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Objective of NHB
 To promote housing financing in India
 To make housing credit more affordable
 To augment resources for the sector and channelise them
for housing
 To promote adequate housing finance institutions network
 To encourage augmentation of supply of buildable land
and also building materials for housing and to upgrade the
housing stock in the country
 To encourage public agencies to emerge as facilitators and
suppliers of serviced land , for housing

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Residential Mortgage-Backed
Securitization ( MBSs)
 NHB launched the pilot issues of MBSs in AUG 2000.
 The primary lenders create mortgages against loans
provided by them to the purchasers of houses
 The mortgages held as assets generate cash flows
represented by repayment of both principal as well as
interest on the loans.
 The secondary mortgage market involves the
conversion of mortgages into financial instruments
and the sale of these instruments to prospective
investors
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Reverse- Mortgage Loan ( RML)
 There has been an increase in the residential-house price in the
past few years , which have created considerable ‘home equity
wealth’.
 For most senior citizens, the house is the largest component of
their wealth.
 Reverse mortgage seeks to monetize the house as an asset and
,specifically, the owner’s equity in the house.
 It is a mortgage loan for senior citizens(over 60 years),who
generally are not eligible for any form of mortgage loan .The loan
is given on single or joint basis with the spouse , even if one of
the spouses is below 60 years .
 Reverse mortgage is a loan that allows senior citizens to convert
home equity into cash , without leaving their homes and without
making monthly – mortgage payments.

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 The borrower can repay loan and accumulated interest
and have mortgage released without resorting to sale
of the property
 Maximum period of loan will be 15 years, the payment
will not be made by the lender.
 Borrower will be responsible for paying property tax ,
housing- insurance premium
 Senior citizens owing a house but having inadequate
income to meet their needs such as renovation /repair
/hospitalisation,etc
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Trends in housing finance
 Retail home loan market is well integrated in to the
broader financial sector and the capital market
 Large market segment dependent on formal financial
system for credit availability
 Technology to be packaged with financing
 A parallel intervention in terms of mortgage guarantee
has been introduced for mitigating the credit risk
associated with the segment
 Union budget support(fiscal) towards Housing and
Housing finance sector
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THANK YOU

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