ASSET SECURITIZATION

Prathyush Raj.K 2010-45-104

SECURITIZATION

Securitization is “the issuance of

marketable securities backed by theexpected cash flows from specific assets(receivables)”

WHY SECURITIZE ASSETS?

•More efficient financing•Improved balance sheet structure•Better risk management

WHAT TYPE OF ASSETS CAN BESECURITIZED?

•Any type of asset with a reasonablypredictable stream of future cash flowscan be securitized.

•Assets that are easiest to securitize arethose: that occur in large pools; for whichpast experience can be used to predictdefault rates; for which documentation isstandardized; and for which ownership istransferable.

TYPES OF SECURITIZATION

•MBS (Mortgage based securitization )

•ABS (Asset based securitization)

BENEFITS TO ORIGINATOR

•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 thesector - mismatch due to difference in tenorand characteristics of assets (mostly fixedrate and up to 30 years) and liabilities

BENEFITS TO INVESTOR

Enjoys low cost operations and servicing

due to economies of scale of the originator Credit risk is minimized Exposure on rated, low-risk housing loans Expertise of originators helps maintain quality

of underlying assets Credit enhancement possible

BENEFITS TO FINANCIAL SYSTEM

•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

WHAT IS REQUIRED FOR A SUCCESSFULASSET SECURITIZATION?

Robust financial infrastructure

–The Legal Environment–The Accounting Environment–The Regulatory Environment–The Taxation Environment–Back-office Systems

DRIVERS OF STRONG INVESTOR DEMAND

Receivables are sufficient to meet the payments

promised by the SPV Drivers of Strong Investor Demand Safeguards exist to provide for shortfalls in cash

from receivables Investors have clear legal claims on the incomefrom

receivables and have adequate protectionin the case of delinquency.

STRONG INVESTOR DEMAND CONTD… Credit Enhancement

–Third Party Guarantees–Subordinated debt–Over-Collateralization–Cash Collateral Accounts

COMMITTEE INVOLVED INSECURITIZATION

•Narasimham committee I & II

•Andhyarujina committee

Recommendations made by them

Empower banks & FI’s to take the possession ofthe assets & to sell them without the intervention of the court, was enacted.

WHEN THE BILL WAS PASSED?

•The Securitisation and Reconstruction ofFinancial Assets and Enforcement ofSecurity Interest Ordinance, 2002. on21.06.2002.

•It received the assent of the President on

17.12.2002 and has now become an Act.

THANK YOU!!!