Source: BS
Context:
Securitisation activity (sale of loans through structured transactions) is projected to remain subdued in Q2FY26 (July–September 2025), with estimated volumes of ₹63,000 crore, compared to ₹70,000 crore in the same quarter last year.
What is Securitisation?
Securitisation is a financial process in which illiquid assets such as loans, receivables, or mortgages are pooled together and converted into tradable securities. These securities are then sold to investors, allowing the originator (bank or financial institution) to raise funds immediately.
Key Objective:
- To free up capital for banks and NBFCs.
- To transfer credit risk to investors.
- To improve liquidity in the financial system.
Securitisation Process
- Originator/Asset Holder
- Typically a bank, NBFC, or financial institution holding assets such as mortgages, car loans, or credit card receivables.
- These are assets expected to generate future cash flows.
- Pooling of Assets
- Similar loans or receivables are grouped together into a pool to diversify risk.
- Example: Pooling 1,000 home loans of ₹30 lakh each.
- Special Purpose Vehicle (SPV)
- The originator sells the asset pool to a Special Purpose Vehicle (SPV).
- SPV is a separate legal entity created solely for this transaction to isolate the assets from originator’s balance sheet risk.
- Issuance of Securities
- SPV issues securities backed by the cash flows of the asset pool (called Asset-Backed Securities (ABS) or Mortgage-Backed Securities (MBS)).
- These securities are rated by credit rating agencies and sold to investors.
- Investors
- Institutional investors like mutual funds, insurance companies, banks, or high-net-worth individuals purchase these securities.
- They receive periodic interest payments and principal repayment as per the underlying assets’ cash flows.
- Servicing
- The originator or a third-party servicer collects payments (EMIs, interest, principal) from the borrowers of the pooled assets.
- Payments are then transferred to the SPV, which distributes them to investors.
Key Features of Securitisation
- Liquidity Creation: Converts illiquid loans into cash.
- Risk Transfer: Credit risk is shifted from the originator to investors.
- Diversification: Investors gain exposure to diversified loan pools, reducing idiosyncratic risk.
- Capital Relief: Helps banks comply with regulatory capital requirements.
- Structured Instruments: Can be structured into tranches based on risk-return preferences (senior, mezzanine, junior).
