Securitization and its prospects in India

Abstract

The Indian financial market is maturing rapidly with the deregulation of the financial sector end consequently the entry of the foreign financial institutions and the hanks. The Indian market is also adopting the new concepts and instruments from more mature markets. The concept of securitization is also among them. This project discusses the process of securitization, the various forms of it, the requirements to initiate the process and its status in India. The term securitization refers to both switching away from bank Intermediation to direct financing via capital market, and the transformation of a previously illiquid asset like automobile loans, home mortgage loans. trade receivables etc., into negotiable instruments / liquid assets through securities. Asset I debt securitization is thus a synthetic technique of conversion of assets into securities, securities into liquidity, liquidity into assets and assets into securities on an ongoing basis To begin the process of securitization, assets like receivables. rentals and loans are formed into a pool according to their maturity and risk components. A trust is then created to act as a receiving and paying agent to prevent the investors to have a recourse to the parent company. The trust may obtain credit rating from the rating agencies to be more attractive to the investors. The securities can then be made available to the investors. The two common forms of securitization are the pass-through and the pay-through securities, a detailed discussion of which has been taken up followed by the prospects of securitization in the companies who have / are experimenting with ii. The role of credit enhancement and rating agencies is also important. These complex securities rely heavily on credit enhancements to make themselves attractive to the retail as well as wholesale investors. The forms of credit enhancement are also discussed in the chapter concerned. implications of securitization for the banking sector and the corporate sector are then concluded. it came up from the discussion that by facilitating unbundling and specialization, securitization allows banks to operate more efficiently and more profitably. Banks can now originate more loans than would have otherwise been the case. as loans can be taken out of the balance sheet. For the corporate sector the effect is not so advantageous. Other issues including the legal regulations are also discussed The attractiveness of these securities vis –a - vis other options to Invest for the retail investor are explored. Other options for financing are also discussed from the corporate point of view. The project also carries discussions on commercial paper, factoring and on conditions in the Indian debt market.