The document discusses securitization and asset reconstruction in India. It states that Section 5 of the Securitization and Reconstruction of Financial Assets and Enforcement Security Interest Act mandates that only banks and financial institutions can securitize their financial assets. It provides an example of how a bank called XYZ Bank can securitize its loan assets by transferring them to a special purpose vehicle, removing the assets from its books and freeing up capital for new lending. The special purpose vehicle then issues securities to investors to raise funds that are passed back to the originating bank.

1. Section 5 of the Securitization and
Reconstruction of Financial Assets
and Enforcement Security Interest
Act,2002, mandates that only banks
and financial institutions can
securitize their financial assets.

2. Acquisition of rights or interest in assets &
affects of acquisition
any financial assets acquired by the
securitization company or the reconstruction
company, then on such acquisition, by the said
securitization 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
management of the business of the
borrower, by change in, or take
over of the management of the
business of the borrower.

10. The sale or lease of a part or whole of
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 long term
mortgaged assets (receivables) 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