Seminar on

Securitization of Banks
in India
Presented By,
Manjunath Shetty
Shrinivasa

What is Securitization?
Securitization is a process that involves the conversion of
receivables(loans and advances) into marketable
securities that can be traded in the financial market.

PLAYERS INVOLVED IN SECURITIZATION

1. ORIGINATOR :
An entity making loans to borrowers or having receivables from
customers
2. SPECIAL PURPOSE VEHICLE :
The entity which buys assets from originator and packages them into
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.

PLAYERS INVOLVED IN SECURITIZATION(contd)

5. Insurance Company / Underwriters :
To provide cover against redemption risk to investor and / or under-subscription
6. Obligors :
Company that gives debt to other company as a result of borrowing.( debtor)
7. Investor :
The party to whom securities are sold

TYPICAL SECURITIZATION
STRUCTURE

TYPES OF SECURITIZATION

MBS (Mortgage based securitization)

Mortgage-backed securities are bonds that are backed by pools of
mortgage loans. Examples Mortgage papers, house papers, land and
Property papers.

ABS (Asset based securitization)

Asset-backed securities are the bonds or notes backed by some
financial assets. These assets consist of receivables such as mortgage
loans, credit card receivables, auto loans, manufactured-housing
contracts and home- equity loans.

TYPES OF SECURITIZATION
Collateralized Debt Obligation (CDO) :
In CDO transactions, the debt securities issued by the SPV are backed by a
diversified loan or bond portfolio. There is thus a basic difference between
CDOs and ABS, the latter being homogeneous pools of assets such as
mortgages or credit card receivables, in contrast to the diversified portfolios
backing CDOs.
Collateralized Loan Obligations :

Where the originating bank transfers a pool of loans, the bonds that emerge
are called collateralized loan obligations or CLOs.
Collateralized Bond Obligations :
Where the bank transfers a portfolio of bonds and securitizes the same, the
resulting securitized bonds could be called collateralized bond obligations
or CBOs.

BENEFITS OF SECURITIZATION
1- For the originator, securitization converts non-performing assets into liquid assets.
Securitization thus lead to greater recycling of funds which, in turn, improve the
business as well as profitability of the originator.
2- Securitization has a built-in-risk reduction mechanism that lowers the cost of funds
3- Securitization enables organization, particularly banks, to convert the higher risk
weighted assets to lower risk weighted ones.
4- Once the non-performing assets are securitized, they can be removed from the
balance sheet of the originator. This increase the capital adequacy of the originator.
5- Securitization helps organization to diversify their funding base and reach out to
new investors without increasing their financial leverage.

BENEFITS OF SECURITIZATION (contd)

6-

Organizations benefit on account of possible gains arising from

improvement in their credit and operating processes with securitization.

7-

By securitization, new kinds of securities are made available to investors,

widening the choice of securities foe the investing public.

8-

In the free interest-rate market, securitization eliminates interest rate risk.

9-

Securitization helps in better management of the balance sheet. Bank and

financial institutions can minimize the mismatch of their assets and
liabilities through securitization.

10- Cash inflows arising on the sale of non-performing assets can be used for
repayment of borrowings of the originator, resulting in a better debt-eqity
ratio.

SECURITIZATION IN USA

Introducer of the securitization concept in 1970s.

In 1985, non-mortgage collaterals were securitised.
The US secondary mortgage market is considered to be most developed
mortgage securitization market

SECURITIZATION IN UK
Securitization concept started with mortgage securitization in 1985.
The first mortgage securitization issue for the international market was
MINI in London 1985.
By the end of year 2001, UK was on top position in Europe - in fact,
UK's contribution was about 35% of total European securitization in
2001, though the percentage was 44% in 2000.
UK is the largest market in Europe
securitisation of TV rights revenues of Formula One racing business
made history with USD 1.4 billion issue.

SECURITIZATION IN CHINA
AND SOUTH KOREA

SECURITIZATION IN INDIA

First securitization deal in India between Citibank and GIC Mutual Fund
in 1991 for Rs 160 million.

L&T raised Rs 4,090 million through the securitization of future lease

rentals to raise capital for its power plant in 1999.

Securitization of aircraft receivables by Jet Airways for Rs 16,000 million

in 2001 through offshore SPV.

Indias largest securitization deal by ICICI bank of Rs 19,299 million in

2007. The underlying asset pool was auto loan receivables

The major originators in India are private sector banks, National Housing
Bank(NHB) and other housing finance companies.

Indias first securitisation of personal loan by Citibank in 1999 for Rs 2,841

mn.
Indias first mortgage backed securities issue (MBS) of Rs 597 mn by NHB
and HDFC in 2001
Indias first floating rate securitisation issuance by Citigroup of Rs 2,810 mn
in 2003. The fixed rate auto loan receivables of Citibank and Citicorp Finance
India included in the securitisation
Indias first securitisation of sovereign lease receivables by Indian Railway
Finance Corporation (IRFC) of Rs 1,960 mn in 2005. The receivables consist
of lease amounts payable by the ministry of railways to IRFC