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Asset Securitsation

Chapter 6 : Merchant Banking. Asset Securitsation. MEANING.

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Asset Securitsation

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  1. Chapter 6 : Merchant Banking Asset Securitsation

  2. MEANING • Securitisation is a process by which the assets of homogenous nature are picked up (cherry picking) from the balance sheet, budled together and converted into securities of convenient size and issued in the market through a merchant banker known as special purpose vehicle (spv)

  3. Securitisation Process • The originator (company) identifies the assets for securitisation purposes and transfers to the special purpose vehicle (SPV) • SPV issues pass Through certificate • Pass through certificates are sold in the market and financial institutions invest in it. • The collection agent collects the assets on the maturity dates and transfer to the spv • The SPV will make payment to investors

  4. Advantages • Companies having low credit rating can issue asset backed securities with higher credit rating and at lower interest cost. • Conversion of illiquid assets into liquid assets • Improved capital adequacy

  5. Advantages • Operation in a particular business area/portfolio can be increased without increasing the total exposure to that of the area of assets • More economies of scale of operations • Additional income to the originator when acts as collection agent • Spread between interest rate offered to the investors and the interest earned on the assets constitutes the profit

  6. Credit Rating • Securities are to be rated by credit rating agencies • Minimum rating bbb • Rating agencies rate the transaction and evaluate the aggregate risk from the four major areas: • collateral risk • structural risk • legal risk • third party risk

  7. Securitisation in India • Originated by icici in 1991 by securitising the bills receivables under the sellers lines of credit • Subsequently,the car loans were securitised • Since then, over 300 asset pools aggregating more than 500 crores have been securitised

  8. Problems • Lack of investors with liabilities matching the assets • Statutory agencies like insurance companies, epf are not allowed to invest in pass through certificates • Interest rate is not attractive compared to the maturity period • Court intervention is required for repossession of the mortgaged assets • Spv is assessed for income tax at the maximum marginal rate • Stamp duty is to be paid on the transfer transactions

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