Non performing assets

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act

Securitization
Securitisation is the process of conversion of existing assets or future cash flows into marketable securities. the conversion of existing assets into marketable securities is known as assetbacked 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.

Process and Participants

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. A bank maintains a loan as an asset on its balance sheet and monitors it for collection. Securitization helps in unblocking the funds otherwise locked in loans given.

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Bank in this case is the originator. The customer taking loan is the obligor. SPV -a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator. These securities issued by the SPV to the investors and are known as passthrough-certificates (PTCs). The difference between rate of interest payable by the obligor and return promised to the investor investing in PTCs is the servicing fee for the SPV.

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The investors can be banks, mutual funds, other financial institutions, government etc. In India only qualified institutional buyers (QIBs) who posses the expertise and the financial muscle to invest in securities market are allowed to invest in PTCs. QIB - Mutual funds, financial institutions (FIs), scheduled commercial banks, insurance companies, provident funds, pension funds, state industrial development corporations etc. The rating agency rates the securitised instruments on the basis of asset quality, and not on the basis of rating of the originator.

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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. 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.

Benefits
Securitisation also helps banks to sell off their bad loans (NPAs or non performing assets) to asset reconstruction companies (ARCs). ARCs, which are typically publicly/government owned, act as debt aggregators and are engaged in acquiring bad loans from the banks at a discounted price, thereby helping banks to focus on core activities. On acquiring bad loans ARCs restructure them and sell them to other investors as PTCs, thereby freeing the banking system to focus on normal banking activities. Asset Reconstruction Company of India Limited (ARCIL) was the first (till date remains the only ARC) to commence business in India.