Securitisation

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

Securitisation
Asset-backed securitisation: - The conversion of existing assets into marketable securities Future-flows securitisation: - The conversion of future cash flows into marketable securities

Securitisation

Some of the assets that can be securitised are loans like car loans, housing loans, et cetera and future cash flows like ticket sales, credit card payments, car rentals or any other form of future receivables

Securitisation
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, was enacted by the GOI for regulation of securitisation and reconstruction of financial assets and enforcement of security interest by secured creditors, including Securitisation or Reconstruction Companies (SC/RC)

Securitisation

Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, mandates that only banks and financial institutions can securitise their financial assets

Securitisation Process
The loan assets are transferred by the originator (the person who holds the assets i.e. Bank) to a special purpose vehicle (SPV) The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile

Securitisation Process
The SPV will act as an intermediary which divides the assets of the originator into marketable securities These securities issued by the SPV to the investors and are known as pass-throughcertificates (PTCs)
The cash flows received from the obligors are passed onto the investors (investors who have invested in the PTCs) on a pro rata basis once the service fees has been deducted

Securitisation Process
In India only qualified institutional buyers (QIBs)i.e. Mutual funds, FIs, scheduled commercial banks, insurance companies, provident funds, pension funds, SIDCs, et who posses the expertise and the financial muscle to invest in securities market are allowed to invest in PTCs

Securitisation Process
In order to facilitate a wide distribution of securitised instruments, evaluation of their quality is of utmost importance The rating agency rates the securitised instruments on the basis of asset quality, and not on the basis of rating of the originator

High rated securitised instruments can offer low risk and higher yields to investors

Securitisation Process
The administrator or the servicer is appointed to collect the payments from the obligors. The servicer follows up with the defaulters and uses legal remedies against them Normally the originator carries out this activity Once assets are securitised, these assets are removed from the bank's books and the money generated through securitisation can be used for other profitable uses, like for giving new loans

Securitisation
Securitisation also helps banks to sell off their bad loans (NPAs) to asset reconstruction companies (ARCs) ARCs are typically debt aggregators and are engaged in acquiring bad loans from the banks at a discounted price, thereby helping banks to focus on core activities

Securitization : Benefits
Improves Capital Adequacy Ratio (CAR) through transfer of risk weighted assets; Aids Asset Liabilities Management and helps long term source for deployment in housing sector; Enables better spread management, and facilitates improvement of return on assets and return on equity; Enables new source of fee based income

Securitisation of Home Loans

Housing Finance
The transactions between parties in the housing finance sector can be broadly classified as those relating to: a. primary residential mortgage market and secondary residential mortgage market

b.

Primary residential mortgage market

It mainly comprises creation of mortgages as a result of transactions between the borrowers and primary lenders 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 repayments of both principal and interest, on the loans

Primary residential mortgage market

Loan

Primary Lenders ( Banks/ HFCs)

Mortgages

Borrowers

Cash Flows (Repayment of principal & interest)

Secondary residential mortgage market

It mainly involves the conversion of mortgages into tradable financial instruments and the sale of these instruments to prospective investors

Secondary residential mortgage market

The cash flows which come as repayments from the borrowers to the originators, can be transferred to a third party with simultaneous transfer of assets to an intermediary agency (SPV) designated for the purpose of managing the bought over pool of mortgages

Primary residential mortgage market

Primary Lenders ( Banks/ HFCs) Special Purpose Vehicle (SPV)
Mortgages Cash Flows (Repayment of principal & interest)

Borrowers

Secondary residential mortgage market

These cash flows are passed on to the investors by the SPV In the process, the mortgages are converted into securities which are tradable financial instruments and sold to investors

Secondary residential mortgage market

Investors

Special Purpose Vehicle (SPV)

Securities (PTC)

Borrowers

Mortgages Cash Flows (Repayment of principal & interest)

Secondary residential mortgage market

The secondary mortgage market is thus made up of securities which are backed by mortgages (MBS) and refers to the transactions between the issuers and investors

Secondary residential mortgage market

Once the securitised mortgages are sold by the originators viz., the primary lending institutions, they are either derecognized in the originators books of account and presented in a specific manner All future transactions in the mortgage backed financial instruments then take place in the secondary mortgage market, depending up the depth of the market

Role of NHB in Securitisation

In the field of Mortgage backed securitisation, NHB launched the pilot issues of RMBS in August 2000 NHB has so far launched ten issues of RMBS with total loan size of Rs.665 crore

Role of NHB in Securitisation

a) Assignment and Transfer of a pool of housing loans along with the underlying mortgages, from the primary lending institution to NHB b) On acquiring the pool along with the underlying mortgages, an express declaration of trust will be made by NHB in respect of the mortgage debt, appointing itself as the trustee for the benefit of the investors Once the assets have been declared property in trust (the Trust), the Trust will issue PTCs to investors

Securitisation with NHB

STEP NO. 1:

Authorisation for securitisation by originator for its pool of home loans The originator (HFC / Bank) to write a formal letter to NHB indicating its intention to securitize its home loans with copies of relevant authorization of its relevant authorities (for instance Board Resolution) and proposal to go ahead with securitisation of its home loan portfolio with NHBs SPV arrangement

Securitisation with NHB

STEP NO. 2 : SELECTION OF POOL OF LOANS

The home loans should satisfy the standards for being considered for selection in the Mortgage Pool offered for securitisation Identification of Geographic Locations for Selection of Loans Initial Pool Size Decision (by Originator in consultation with NHB) Supply of Initial Pool Information to NHB

Securitisation with NHB

STEP NO. 3: DUE DILIGENCE & RATING OF THE MORTGAGE POOL

(a) Appointment of Rating Agency by Originator in consultation with NHB and award of rating by Rating Agency (b) Appointment of Auditors for Due Diligence Audit of Mortgage Pool (with consultations between NHB and Originator) and Completion of Due Diligence Audit and Certification by Auditors

Securitisation with NHB

STEP NO. 4

a. Appointment of Issue Arranger(s) by NHB (On consultations between NHB and Originator) b. Preparation of Offer Document by Issue Arrangers

Securitisation with NHB

STEP NO. 5

Issue opens Receipt of application money by NHB Issue closes Finalization of allotment by NHB and issue arrangers Issue of allottment letter to investors by NHB (immediately after finalization of allotment) Payment of consideration by NHB to originators (simultaneously with issue of allotment letter to investors)

Securitisation with NHB

STEP No. 6

Pay-outs to investors on stipulated pay-out date(s)

GOOD LUCK TO YOU