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Securitization

Securitization - L-17 Securitization This lesson deals...

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1 L-17: Securitization This lesson deals with:- 1. Introduction to Securitization 2. Origin of Securitization 3. What can be securitized 4. Parties to Securitization 5. Types of Securitization 6. Importance of Securitization
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2 1. Introduction to Securitization Securitization involves taking a pool of financial assets that produces reliable and largely predictable cash flows and repackaging it as tradable securities that can be sold to investors. Securitization refers to conversion of illiquid assets to liquid assets by converting long duration assets into shorter ones and distributing them to a broad range of investors through capital markets. Thus, securitization creates markets in financial claims. The assets may be anything ranging from airline and cinema tickets, credit card receivables, auto loans, equipment leases, hire purchase deals to housing loans and Project Loans including non- performing assets (NPAs ).
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3 2. Origin of Securitization Securitization is an innovative structured finance transaction which was born out of the necessity faced by savings and loan associations of USA, to save themselves from impending bankruptcy in 1970s. Negative spreads, asset liability mismatch, excess demand for loans over the deposits collected were the major problems of banks at that time. The solutions to these problems were found in Securitization of Debt. Today, Securitization is an innovative banking product as a mode of financing and is in wide-spread use the world over and has made a good beginning in India, too. In December, 2002, a legal framework was provided in India through "Securitization and Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (SARFAESI Act).
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4 3. What can be securitized Project and other loans by Banks/FIs NPAs of financial entities Housing Loans Credit Card receivables Airline and Cinema tickets Mortgages in lieu of future payments Auto loans Equipment leases Hire-purchase deals Bills made at 5-star hotels
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5 4. Parties to Securitization
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