financial services

1. PRESENTATION
ON
SECURTIZATION & MORTGAGE LOANS
A PART OF
MERCHANT BANKING & FINANCIAL SERVICES

2. What is securitization?
What is mortgages?
Name some mortgages companies in
India.

3. INTRODUCTION
Securtization as a financing technique, is concerned with in
securities, backed by pools of mortgage loans. The securities
so created are known as Mortgages.
Securitization refers to the process of turning assets into
securities.
When used in real estate, securitization means taking
mortgages issued by the banks & other lenders & converting
them into securities that can be sold to investors.
 Financial instruments that can be readily bought & sold in
financial markets, the way that stocks, bonds & futures
contracts are traded.

4. Definition
The process of trading in the securities that are created on
the backing of pools of mortgage loans from banks & financial
institutions is called asset securitization .
 Mortgage loans include housing loans, car & truck loans,
credit card receivables, trade receivables, etc
 A technique whereby assets are converted into
securities, which are in turn converted into cash on an
ongoing basis, with a view to allow for increasing turnover of
business & profit, is known as asset securitization.
 The technique provides for flexibility in yield, pricing
pattern, issue risk & marketability of instruments, which is to
the advantage of both borrowers & lenders.

5. MORTGAGES COMPANIES IN INDIA ARE
HDFC LTD
LIC Housing finance LTD.
ICICI Home finance company LTD.
PNB Housing finance LTD.
CAN Finance homes ltd.
BOB Housing finance ltd.

6. Securitization Companies In India Are
Asset Reconstruction Company India Ltd (Arcil)
Mumbai.
Aichemist Asset Reconstruction Company Ltd
New Delhi.
Reliance Asset Reconstruction Company Pvt Ltd.
Mumbai.

7. SECURITISATION OF FINANCIAL ASSETS
Why Securitisation?
1. A convenient mechanism to suit changing
needs of borrowers and lenders
2. Matches supply of funds with demand
demands for funds through floating
negotiable securities

8. SECURITISATION OF FINANCIAL ASSETS
Genesis and Growth:
1. Severe financial crisis faced by certain states
in US during 1969-70
2. Federal government restriction on inter-state
lending and borrowing
3. Raised funds from surplus states by issuing
instruments backed by mortgaged properties

9. SECURITISATION OF FINANCIAL ASSETS
Elements of Securitisation:
1. Conversion of existing illiquid assets like
loans, advances and receivables into tradable
security
2. Reconverting them into fresh assets through
capital market operations

10. SECURITISATION OF FINANCIAL ASSETS
Benefits of Securitisation:
1. Separates the credit risk of the assets from
the credit risk of the Originator
2. Illiquid assets converted into marketable
securities and thus provide alternate funding
source

11. SECURITISATION OF FINANCIAL ASSETS
Benefits of Securitisation :
3. Remove assets from balance sheet and thus
improve capital adequacy
4. Dependability of cash flows from the assets as
signified by the ageing of the portfolio

12. SECURITISATION OF FINANCIAL ASSETS
The Players and their Role:
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. Credit Enhancer: To reduce the overall credit risk of a
security issue by providing senior subordinate structure,
over-collateralization or a cash collateral

13. SECURITISATION OF FINANCIAL ASSETS
The Players and their Role:
4. Credit Rating Agency: To provide value addition
to security
5. Insurance Company / Underwriters: To provide
cover against redemption risk to investor and /
or under-subscription
6. Obligors: Whose debts and collateral constitute
the underlying assets of securitisation
7. Investor: The party to whom securities are sold

14. SECURITISATION OF FINANCIAL ASSETS
Requirements for Eligible Collaterals:
1. Assets to be securitised to be homogeneous in
terms of:
2. Underlying assets
3. Maturity period
4. Cash flow profile

15. SECURITISATION OF FINANCIAL ASSETS
Eligible Collaterals:
1. Housing finance
2. Term loan finance
3. Car loan
4. Credit card receivables
5. Export credit etc...

16. SECURITISATION OF FINANCIAL ASSETS
Structure of Securitisation:
Pass Through Certificates:
– Sale of asset to SPV
– Investors purchase interest in the assets of
SPV
– Cash flow (interest and principal) passed
through as and when occurred without any
reconfiguration
– Payments made are most often on monthly
basis

17. ANCILLARY SERVICE
PROVIDER
SPV
RATING AGENCY
STRUCTURER
OBLIGOR
ORIGINATOR
Issue Of
Securities
INVESTORS
Interest &Principal
Sale Of Assets
Consideration For Asset
Purchased
Credit Rating Of
Securities
Subscription Of
Securities

18. SECURITISATION OF FINANCIAL ASSETS
Securitisation Process:
1. Selection of assets by the Originator
2. Packaging of designated pool of loans and
advances (assets)
3. Underwriting by underwriters
4. Assigning or selling to of assets to SPV in
return for cash
5. Conversion of the assets into divisible
securities

19. SECURITISATION OF FINANCIAL ASSETS
6. SPV sells them to investors through private
placement or stock market in return for cash
7. Investors receive income and return of capital
from the assets over the life time of the securities
8. The risk on the securities owned by investors is
minimized as the securities are collateralisied by
assets
9. The difference between the rate of the borrowers
and the return promised to investors is the
servicing fee for originator and SPV

20. SECURITISATION OF FINANCIAL ASSETS
Legislations / Enactments and their impact on securitisation
transactions:
The Companies Act 1956 affect the SPV in the following
manner:
1. Framing of Memorandum and Article of Association of
the SPV and formation of SPV as a Limited Company
2. Management of affairs viz. Board of Directors,
Borrowing Powers / delegation of powers for recovery of
receivables etc.
3. Share Capital Structure
4. Issuance of Bonds / Debentures etc. to investors (whether
by public issue or private placement) and servicing the
investors

21. Features of securtization
Marketability
Merchantable quality.
Wide distribution.
Homogeneity.
Commoditization.
.

22. Need for securtization.
Helping small investors.
Facilitating liquidity.
Utility of instruments.
Special purpose vehicle(SPV).

23. Asset securtization Mechanism
Origination.
Asset identification & pooling.
Security creation.
SPV’S task
Security issue
Security purchase.
Receipt of benefits.
Rating & trading.

24. PURPOSES
To improve the return on capital.
To raise finance when other forms of finance
are unavailible.
•To improve return on assets,
•To diversify the sources of funding which can
be assessed.

25. Economic functions of securtization
Creating financial market.
Diversification.
Promoting savings.
Diversified risks.
Focus on use of resources

26. Limitations of securtizations.
Debility to central bank,
Heightened volatility.
Pressure on profitability.

27. By
Moula hussain K