Securitization

In securitisation portfolio of assets is transferred from the balance sheet of the originator to a special purpose vehicle (SPV), which refinances itself by issuing securities on this reference portfolio to capital markets at a margin

Steps in Securitization

Before going for process, let’s first understand who normally go for securitization.
Answer is Banks and financial institutions those have huge pool of advances or loans either by way of credit card, loan or by any similar assets class.

Let’s take example of ICICI “India largest Private sector bank”.

Now suppose ICICI total advances is INR 500000 crors by way of different assets pool, which will liquidate in on an average period of 10 years, however ICICI need that money within a year to support its business expansion plan.

Now here securitization start - in order to do so ICICI first contacts rating agencies to get rating of their assets like CRISIL in India or S&P in World.

Before going to rating agency ICICI will classify its entire assets pool of INR 500000 Crors in different assets class. Then ask from rating agencies to give their rating to different assets class.

Now depending on Risk & rewards factor credit agencies will give their rating to those assets from AAA to CCC.

Those rating have their different risk and rewards, assets with “AAA” rating have less risk hence easily salable in market at less cost; vice versa, assets class with rating “CCC” is most risky and bank have to bear huge cost to sell these assets class.

Once rating is done it means these assets pool are ready for sale in market

Hence ICICI bank will go for underwriting for issuing securities to sell these assets pool in market

After selling of these assets in market ICICI will get it money in first year itself with certain loss due to securitization

And purchaser of these securities (assets) will get money as and when borrower will make those payments to ICICI by way of special purposes vehicle (SPV). In case of default investor (purchaser) will bear the loss

This entire process is called securitization.