Section 5 of the securitisation and reconstruction of

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  • 1. Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement Security Interest Act,2002, mandates that only banks and financial institutions can securitise their financial assets.
  • 2. Acquisition of rights or interest in assets & affects of acquisition any financial assets acquired by the securitisation company or the reconstruction company, then on such acquisition, by the said securitisation company or reconstruction company shall be deemed to be the lender.
  • 3. EXAMPLE OF SECURITISATION • CONSIDER A BANK, XYZ BANK. THE LOAN GIVEN OUT BY THIS BANK ARE ITS ASSETS. THUS THE BANK A POOL OF THESE ASSETS ON ITS BALANCE SHEET AND SO THE FUNDS OF THE BANK ARE LOCKED UP IN THESE LOANS. THE BANK GIVES LOANS TO ITS CUSTOMERS.THE CUSTOMERS WHO HAVE TAKEN A LOAN FROM THE XYZ BANK ARE KNOWN AS OBLIGORS.
  • 4. To free these blocked funds the assets are transferred by the originator (the entity who holds the assets, XYZ Bank in this example) to a special purpose vehicle (SPV)
  • 5. The SPV (any securitisation company or reconstruction company) is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator.
  • 6. 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 giving new loans.
  • 7. For an originator (XYZ bank in the example) securitisation is an alternative to corporate debt for meeting its funds requirements. As securitised instruments can have a better credit rating than the company.
  • 8. The originator can get funds from new investors and additional funds from existing investors at a lower cost than debt.
  • 9. ARC can take the following for the purposes of asset reconstruction – Proper mangement of the business of the borrower, by change in, or take over of the management of the business of the borrower.
  • 10. the business of the borrower. Rescheduling of payment of debts payable by the borrower. Enforcement of security interest in accordance with the provisions of the Act.
  • 11. Settlement of dues payable by the borrower. Taking possession of secured assets in accordance with the provisions of the Act.
  • 12. Securitisation or Reconstruction Company may do the following also in accordance with Section 10 of the Act: (a) act as an agent for any bank or financial institution for the purpose of recovering their dues from the borrower on payment of such fees or charges as may be mutually agreed upon between the parties.
  • 13. (b) act as a manager referred to in clause (c) of Sub-section 13 on such fee as may be mutually agreed upon between the parties (c) act as receiver if appointed by any court or tribunal.
  • 14. It is must for securitisation or reconstruction company which has been granted a certificate of registration cannot commence or carry on any business other than that of securitisation or asset reconstruction without prior approval of the Reserve Bank.
  • 15. The Reserve Bank has issued the Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003 and Guidelines on sale of financial assets to securitisation/reconstruction company and related issues.
  • 16. Pass Through Certificate (PTC) A document that allows the holder to receive payments of principal and interest from the underlying pool of mortgages. PTC are issued by banks as a safeguard against risks.
  • 17. In simple manner the banks, through PTCs, transfer some of their longterm mortgaged assets (receivbles) on to other investor like NBFCs and Mutual Funds.
  • 18. Why do they do this? They do this because they want to share some of their risks with other players. Investor get interested because they stand to earn more for sharing the risk.
  • 19. The transfer is done by meant of a Special Purpose Vehicle (SPV) which mediates between the investor and borrower. The PTC ensures that the loan repayment is made to the investor instead of the bank.
  • 20. Thus the borrower is accountable to the investor instead of the bank. What happens when the borrower starts to default. If the borrower starts defaulting, the SPV sells off the mortgaged asset & recovers the money