Debt Securitization -
An Emerging Source of Funds for Financial Institutions


Heenu Puri
Department of Management Studies
B.S. Anangpuria Institute of Technology & Management

"Securitization is nothing but liquefying assets comprising loans and receivables of an institution through systematic issuance of financial institution".
                                                                                                      Encyclopedia of management


It is nothing but the packaging of a pool of financial assets into marketable securities. It involves issue of securities against illiquid assets of financial institutions and such securities are really structured, whereby the originator transfer or sells some of the assets to a SPV which breaks these assets into tradable securities of smaller value then sold to the investing public. The general principle is that the maturities of these securities must coincide with the maturity of   the securitized loan. Mostly three types of securities are issued to the public:- Pass through & Pay through certificate, Preferred stock certificates, Asset based commercial Papers. The operation of securities are divided into the following stages:-identification stage, transfer stage, issue stage, redemption stage, and credit rating stage, interest only certificates and principal certificate. The following assets are generally securitized by financial institution:-

  • Term loans to financially reputed companies
  • Credit card receivable
  • Hire purchase loans like vehicle loan
  • Lease finance
  • Mortgage loans

Benefits of Securitization

The financial institution is benefited because it provides an additional source of funds by converting illiquid assets into ready liquidity. It provides liquid cash from medium term and long term assets immediately rather than over a longer period. This process enhances the capital adequacy ratio; after the assets are transferred to the SPV it is removed from the balance sheet. It enables to access the security market and provide a good scope for cheap funding. Securitization is a method of making the idle capital active; it provides impetus for capital formation. As compared to the investor's point of view these are better than traditional instruments as backed by the collateral security. The commercial banks are benefited in the form of creation of more credit, which improves the profitability as well as the better tool to avoid the asset liability mis-match. Through all this we can conclude that this makes the bank independent in the field of raising funds other than the money market, loan market etc.

Contribution of Securities in Indian Industries

In India it got a start through ICICI's Receivable by the Citibank in February 1991,then the hire purchase portfolio of TELCO was securitized by the Citibank, the retail residential receivable of DLF international were also securitized  by the Citibank in June 1992 .The Citibank has pioneered this trend in India. Now the HDFC came in the lead and started its operation through Housing loan portfolio around 50 crores. Infrastructure Leasing and Financial Services has entered into this field by setting up a SPV.If securitization has become popular in India, the commercial banks can remove the non-performing assets from the balance sheet and they can recycle funds which increase their profitability as well as they become able to meet their capital adequacy requirement.

Reasons of its unpopularity in India

As because of lack of awareness of this concept it has not gained much of the market. It involves heavy stamp duty and registration fees, which discourage to go in for this innovative technique of financing. The transfer procedure is also very complicated as well as cumbersome. The transfer of property calls for the transfer of property act and the irony is that the act does not entails any clause regarding the procedure of securitization. Again the lack of standardized procedure makes the working of SPV very difficult. Securitization without credit rating is not trustworthy but the difficult thing is that in India there is shortage of such agencies to take up the stupendous task of credit rating in of securitization purpose; Moreover all the working of this procedure requires active involvement of trust so that the fair accounting procedure must be adopted. The removal of asset is simple but How should one account of it is a challenge. It can be termed as a challenge before the accounting professionals to evolve suitable accounting procedure for securitization. The absence of proper guidelines by the regulatory authorities make its usage unpopular.


It is an innovative step for resource mobilization. It is used as a tool to improve the asset liability mis-match in the balance sheet. Securitization has a good scope in Mortgage, Housing Loan, Other term loan, Credit Receivable etc. The recent survey has been conducted in this field which show that nearly 70,000 crore outstanding corporate debts of financial institutions and nearly 50,000 crore could be securitized. It is a high time before the government to encourage securitization in India. It requires the amendment in the various relevant Acts like the Transfer of Property Act 1882, the Registration Act 1908, and Stamp Laws Act 1809 so as to make Asset Securitization a smooth affair. On the whole, the economy would be developed at a faster rate than what it is if securitization becomes a popular technique of financing.


* "Marketing of financial services", Avdhani.
* "Financial services", MY Khan.

Heenu Puri
Department of Management Studies
B.S. Anangpuria Institute of Technology & Management

Source: E-mail January 23, 2008


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