Group-3 Neeraj Bhardwaj – 114 Rohit Jain – 125 Shraddha Kamat – 128 Aditya S Prakash – 143 Devang Shah – 147 Rohit K Singh - 151
Securitization: Concept, Process, Participants & ClassificationCredit Enhancement and RisksRating MethodologySecuritization in IndiaAnalysis of RBI Guidelines & Basel II impactBenefits of SecuritizationIndian Perspective
Identified pool of assets Marketable Securities Credit Arbitrage Transaction Homogeneous Sold directly or through SPV Underlying assets are mainly secured loans like housing loans, auto loans, commercial vehicle loans etc
SecuritizationABSABS(Narrow)CDOMBS
CDOABS/MBS Underlying Assets High yield bonds, emerging market corporate debt, sovereign debt, conventional ABS/MBS Credit Card Account Receivable, Car loans etc Amount of Obligors 100 or 200, or even less than 100 Thousand obligors atleast Tranche Credit TrancheTime Tranche Asset Correlation HeterogeneousHomogeneous
Overcollateralization Direct Equity Issue Cash Collateral Account (CCA) Excess Spread Internal Credit Enhancement Insurance Letter of Credit Credit Default Swap Put Option on assets External Credit Enhancement
Risk of nonpayment by underlying assets Credit Risk Interest Rate Risk Prepayment Risk Market Risk Servicer Risk Commingling Risk Counterparty Risk
Proportion of Used / Refinanced asset Asset Type Depends on Asset Manufacture / Model / Class Asset Classification Creditworthiness of borrower Borrower Profile Geographical Location also poses additional risk Geographical Distribution Indicates the willingness of borrower to repay Loan to Value Ratio
Indicates the Obligor’s willingness to pay Installment to Income Ratio Shows the tenure of the Loan Original Tenure It shows the overdue composition of Loans Payment Status Shows the distribution of risks Number of Borrowers
Securitized Exposure Standardized Approach Rated Exposure Risk Weights Unrated Capital Deduction Internal Rating Based Approach Rated Exposure Rating Unrated Exposure
Beginning of securitization in India SARFESI Act Main players in this segment NHB
Criteria for ‘True Sale’ Criteria to be met by SPV Re-purchase of Assets from SPV Disclosure to be made by SPV
Funding Alternative Replace receivables with cash and improves liquidity Balance Sheet Management Re-allocation of Risks Operating Process Efficiency Improves Operating Leverage Improves transparency Benefits to Originator
Low Event Risk Higher Yield for Similar Risks Portfolio diversification Liquidity Less Volatile and had low default rate historically Aligned as per Investor’s needs Benefits to economy Enhance the variety of debt Connects capital markets and financial markets Enhance sources of capital Benefits to Investors
Lack of Appropriate Legislation True Sale Stamp Duties Taxation & Accounting Debt Market Registration Foreclosure Laws Lack of Investor Appetite- quality of assets Obstacles in INDIA
Inadequate understanding and pricing of risks inherent in the process of transformation of risks Growing complexity and lengthening of the chain gave rise to several principal/agent problems. Fundamental modelling issues
MBS market has been relatively slow the long maturity periods, lack of secondary market liquidity and the risk arising from prepayment/re- pricing of the underlying loan. Direct assignment of single loan or retail loan pools has been gaining importance Similar to ABS but do not issue any instrument like PTC Customized deal
Costly source Uneconomical for lower requirements Passes on database to investors Leaves the entity with junk assets
Securitization may lead to some diminution in the importance of banks Increase in the volatility of asset values Competition from Non-Bank Financial Institutions Increase financial fragility
Securitization leads to better disintermediation for its advantage Redefines the intermediary's role Eliminates funds-based financial intermediaries by fee-based distributors Banks are facing the threat of disintermediation