Steps in process of securitization, Financial Management

Assignment Help:

Process

The process of Securitization involves the following steps:

  1. Transfer of assets by the originator (person holding the assets) to an entity (company or a trust) specially created for the purpose called Special Purpose Vehicle (SPV). Special Purpose Vehicle is a separate entity formed exclusively for charting this deal and providing funds to the originator. The SPV may be formed as a company under the Companies Act or a trust under the Indian Trusts Act.

  2. The assets transferred should preferably be homogenous in nature in terms of the risk attached to them and/or maturity such that the pooling of such assets would be convenient. SPV divides this pool of assets transferred by the originator into marketable securities called Pay or Pass-Through Certificates and resells them to various investors.

  3. Investors may either be banks, mutual funds or state or the central government. The investor may even be the parent company or the financier of the originator.

  4. The issue of securities is managed by a merchant banker, who may underwrite the whole issue, or a syndicate of merchant bankers. The originator continues to administer the loan portfolio for some fee and he passes the collections to the trust which services the securities.

Apart from the SPV, a trustee is normally appointed to oversee the process of securitization. An escrow account is created for the purpose of distributing the receivables to the investors in the deal. The trustee maintains such an escrow account.

Figure 

754_process of securitization.png

In India, mutual funds are allowed to invest not more than 5% of their total corpus in the securitized instruments. Also, unlike in the West, insurance companies are not allowed to invest in securitization deals. This, however, is expected to be relaxed with the entry of private insurance players.

Theoretically, any resource with predictable cash flows can be securitized:

  1. Future rentals of a fishing boat.

  2. Remuneration that is paid to a movie star.

  3. Bills that are made to a five-star hotel.

  4. Tickets that are to be sold at a cinema hall.

  5. Future billings for an airline.

  6. Dues that have to be paid by the state electricity boards to the power generating companies.

  7. Credit card receivables.

  8. Loans that are to be paid to the housing finance company.

  9. Mortgages in lieu of future payment.

  10. Hire purchase receivables.

  11. Non-performing assets of a financial entity.


Related Discussions:- Steps in process of securitization

Active management of portfolio, Investors, who do not believe in Effi...

Investors, who do not believe in Efficient Market Hypothesis (EMH), adopt active management strategies. Such investors incur more search costs (with regard to tim

Define cash management, Cash Management: - Cash management comprises mainta...

Cash Management: - Cash management comprises maintaining optimum cash balance and efficient collection and disbursement of cash. Methods or else Devices of Cash Management: - Th

Panera bread company, Analysis of the financial statements and accounting p...

Analysis of the financial statements and accounting policies of "Panera" Bread company, in APA format, containing: Financial Statements -Discuss the main financial statemen

Types of mortgages, Types of Mortgages 1. Traditional...

Types of Mortgages 1. Traditional Mortgages 2. Non -  Traditional Mortgages 3.  Graduated-Payment Mortgages (GPMs) 4.  Pledged-Account Mortg

Diffrence between present values of future cash, Q. Diffrence between prese...

Q. Diffrence between present values of future cash ? The difference among the present values of future cash inflows generated by an asset and its cost is known as net present v

Explain the features of new public management, Question 1: "The governa...

Question 1: "The governance of modern states demands that a relentless struggle be waged against the scourge of corruption." Discuss. Question 2: Explain clearly how th

Explain the operating profit margin - performance ratios, Operating profit ...

Operating profit margin Operating profit margin    =   (PBIT / Turnover) x 100% This is the ratio of operating profit to turnover or sales. A high operating profit margin is

Show objections against profit maximization, Q. Show objections against pro...

Q. Show objections against profit maximization? 1) Profit cannot be ascertained well in advance to express the. Probability of return as future is Uncertain. It is not at all p

Resource acquisition and resource planning, 1. List five different types of...

1. List five different types of resource that a company might consider hiring or leasing. Explain why the might choose these option instead of outright purchase 2. List three di

Explain the principles of taxation and double taxation, Question 1 ) A Glob...

Question 1 ) A Globalization is a procedure of international integration that arises due to increasing human connectivity as well as the interchange of products, ideas and other ph

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd