Debt Securitization - The Process To Understand

Securitization is the process of liquidating the long term assets like loans and receivables of financial institutions by issuing marketable securities against them.

- B. B. Lenka

It can be further defined as a carefully structured process whereby loans and other receivables are packaged, underwritten and sold in the form of asset backed securities.

Securitization is basically a structured financial transaction. Securities evolved out of Securitization process is different from the Conventional Securities like bonds, debentures etc. on points like Source of repayment / Structure /Nature of securities.

Securitization is liquidating long term assets in to marketable securities like Pass through certificates/ Preferred stock certificates/Asset based commercial paper. The success of securitization depends upon asset's quality, amount of amortization, default experience of original borrower, financial reputation and soundness etc. The advantages associated with securitisation can be narrated as under:

• Innovative and Low Cost Source of Fund
• Better Capital Adequacy Norms
• Creation of More Credit
• Increased Profitability
• Tool for Asset-Liability Management
• Higher Rate of Return
• Spreading of Credit Risk
• Better than Traditional Instrument

Back Ground of Securitisation:

The securitization process was first started in U.S.A, where the first structured asset securitized financing came into being in 1970. Firstly it was backed by mortgage loans, the securities issued by it were called Mortgage pass through securities. In 1985, non-mortgage collaterals started getting securitized in U.S.A. Securitization then gained popularity in UK, like America the concept was firstly backed by mortgage. Securitization of debt and the consequent debt instruments then became popular in countries like Italy, Australia, Canada, Japan, France, etc.