Securitisation

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SECURITISATION A TOOL TO MODERN
Index
EXECUTIVE SUMMARY INTRODUCTION TO SECURITISATION
1. INTRODUCTION 2. MEANING 3. HISTORY 4. BASIC PROCESS 5. FORMS OF SECURITISATION STRUCTURES 6. METHOD OF TRANSFER OF ASSETS 7. MOTIVATION AND BENEFITS 8. RISK PROFILE 9. PARTIES TO SECURITISATION 10. TYPES OF ASSETS THAT CAN BE SECURITISED
3 5
5 7 9 11 13 16 18 23 27 30
THE INDIAN EXPERIENCE

1. SECURITISATION IN INDIA
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33 35 36 39
2. NEED FOR SECURITISATION IN INDIA

3. MAJOR CONSTRAINTS OF SECURITISATION IN INDIA 4. FUTURE PROSPECTS OF SECURITASATION IN INDIA
BANKING & SECURITISATION

1. THE CONCEPT
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41 41 44 46
2. THE PROCESS AND PARTICIPANTS 3. IMPACT ON BANKS 4. IMPACT ON THE INDIAN BANKING SECTOR
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INFRASTRUCTURE DEVELOPMENT AND FINANCING

1. INTRODUCTION 2. WHAT IS INFRASTRUCTURE? 3. WHY IS INFRASTRUCTURE IMPORTANT? 4. KEY ISSUES
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50 50
51 52 54 55 57 59 62
5. FISCAL INCENTIVES FOR INVESTING IN INFRASTRUCTURE PROJECTS FINANCING

7. INTRODUCTION TO THE VARIOUS SECTORS UNDER 6. TECHNIQUE OF SECURITISATION IN INFRASTRUCTURE
INFRASTRUCTURE 8. RELEVANCE OF SECURITISATION TO DIFFERENT SECTORS OF INFRASTRUCTURE
9. CRITERIA FOR STRUCTURING A SECURITISATION TRANSACTION
10. PRE REQUISITES FOR STRUCTURING 11. SECURITISATION IN THE PRE IMPLEMENTATION
64 65 66
STAGE
12. SECURITISATION IN THE POST COMMISSIONING STAGE
THE NHB HDFC RMBS TRANSACTION HDFC COMPLETES ASSET BACKED SECURITISATION CONCLUSION BIBLIOGRAPHY
67 77 78 79
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Securitisation A Tool to Modern Financing

EXECUTIVE SUMMARY
The objective of this study is to understand the concept of Securitisation, its history, and its importance in the field of financing in an ever booming global economy. Securitisation is the process of conversion of existing assets or future cash flows into marketable securities. In other words, securitisation deals with the conversion of assets which are not marketable into marketable ones. The meaning of "Securitisation" is to create a multiple assets generation at a lower Cost of Capital while protecting the Beneficial Interest of the Investors. It is a financial instrument for various investment projects. Securitisation in simple words can be defined as "Structured Project Finance. Thus it can be said with ease that the objective of "True Securitisation" is to create a multiple assets generation at a lower Cost of Capital while protecting the Beneficial Interest of the Investors. The study also gives an overview on the Indian experience of securitisation, its help in financing infrastructure projects & building credit off stake for banks and its importance and future in the Indian economy Provision of quality infrastructure services at a reasonable cost, is a necessary condition for achieving sustained economic growth. In fact, one of the major challenges being faced by the Indian economy is to enhance infrastructure investment and to improve the delivery system and quality of services. There is a huge critical importance of the infrastructure sector and high priority for development of various infrastructure is being given these days. Investments in
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these sectors involve high risk, low return, lumpiness of huge investment, high incremental capital/output ratio, long payback periods, and superior technology. The Infrastructure Sector, it is the biggest Capital Deficit Sector of Indian Economy; it requires Financial Engineering and Innovations to Fund the Infrastructure Projects. One of best the solutions to this problem is "Securitisation." The need of securitisation is not only felt by the infrastructure sector but also the banking sector. Other than freeing up the blocked assets of banks, Securitisation can transform banking in other ways as well - it helps in the growth of credit off stake of banks thus funding for release of more loans. This will benefit investors as they will have a claim over the future cash flows. The Originator will also benefit as loan obligations will be met from cash flows generated. The reasons why Securitisation gains over other forms is its low capital costs for high asset generation, an alternative source of fund and minimal risks involved. Therefore Securitisation can be viewed as a major tool for financing the various projects over different sectors in the present as well as for the years to come
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INTRODUCTION TO SECURITISATION
INTRODUCTION
"Securitisation will be the major financial instrument for the next decade," -by ICICI chairman K V Kamat. Recent years have witnessed the wide spread of Western financial innovations into developing markets. Globalisation and integration of capital markets, started in the 1990s, have made it possible for such big global players as India to adopt new financial strategies which allow increasing liquidity and accelerating development of the capital markets. One of these financial innovations is securitisation, the process of transformation of illiquid assets into a security which can be traded in the capital markets. Securitisation is the buzzword in today's World of Finance. It's not a new subject to the developed economies. It is certainly a new concept for the emerging markets like India. The Technique of Securitisation definitely holds great promise for a Developing Country like India. Funds of a firm get blocked in various types of assets such as loans, advances, receivables etc. To meet its growing funds requirements, a firm has to raise additional funds from the market while the existing assets continue to remain on its books. This adversely affects the capital adequacy and debt equity ratio of the firm and may also raise its cost of capital. An alternative available is to use the existing illiquid assets for raising funds by converting them into negotiable instruments. E.g. a housing loan finance company, which has a portfolio of loan advances having periodic cash flows, may convert this portfolio to instant cash. Though the end result of securitisation is financing, it is not financing as such since the firm securitizing its
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assets is not borrowing money, but selling a stream of cash flows that are otherwise to accrue to it. Securitisation is "Structured Project Finance". The financial instrument is structured or tailored to the risk-return and maturity needs of the investors, rather than a simple claim against an entity or asset. The popular use of the term Structured Finance in today's financial world is to refer to such financing instruments where the financier does not look at the entity as a risk: but tries to align the financing to specific cash accruals of the borrower. The actual and a current meaning of securitisation is a blend of two forces that are critical in today's world of Finance: Structured Project Finance and Capital Markets. The process of Securitisation creates a strata of risk-return and different maturity securities and is marketable into the capital markets as per the needs of the investors. The basic idea is to take the outcome of this process into the market, the capital market. Thus, the result of every securitisation process, whatever might be the area to which it is applied, is to create certain instruments, which can be placed in the market. Securitisation is the process of de-construction of an entity: If one envisages an entitys assets as being composed of claims to various cash flows, the process of securitisation would split apart these cash flows into different buckets, classify them, and sell these classified parts to different investors as per their needs. Thus securitisation breaks the entity into various sub-sets. Securitisation is the process of integration and differentiation: The entity that securitizes its assets first pools them together into a common hotchpot assuming it is not one asset but several assets. This is the process of integration. Then, the pool itself is broken into instruments of fixed denomination. This is the process of differentiation.
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MEANING
Securitization is the process of homogenizing and packaging financial instruments into a new fungible one. Acquisition, classification, collateralization, composition, pooling and distribution are functions within this process
As defined by The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002:
Securitisation means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise. Securitisation is the process by which, financial assets such as household mortgages, credit card balances, hire-purchase debtors and trade debtors, etc., are transformed into securities by the owner (the Originator) in return for an immediate cash payment and/or deferred consideration through a Special Purpose Vehicle (SPV) created for this purpose. The pooling standard prescribes that the asset portfolio has to be homogeneous in terms of underlying financial asset, maturity and risk profile. This ensures an efficient analysis of the credit risk of the asset portfolio and a common payment pattern. It means only one type of asset (e.g. car loans) of similar duration (e.g. 20 to 24 months) having uniform risk (whose repayment is continuous during the first 10 to 12 months of the loan) will be bundled for creating one securitized instrument. The Special Purpose Vehicle finances the assets transferred to it by the issue of debt securities such as loan notes or Pass through Certificates, which are generally monitored by trustees. Pass through Certificates are certificates acknowledging a
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debt where the payment of interest and/or the repayment of principal are directly or indirectly linked or related to realisations from securitised assets. Let us consider some examples: 1) Suppose Mr X wants to open a multiplex and is in need of funds for the
same. To raise funds, Mr X can sell his future cash flows (cash flows arising from sale of movie tickets and food items in the future) in the form of securities to raise money. This will benefit investors as they will have a claim over the future cash flows generated from the multiplex. Mr X will also benefit as loan obligations will be met from cash flows generated from the multiplex itself. 2) A finance company with a portfolio of car loans can raise funds by selling
these loans to another entity. But this sale can also be done by securitizing its car loans portfolio into instruments with a fixed return based on the maturity profile (the period for which the loans are given). If the company has Rs 100 crore worth of car loans and is due to earn 17 per cent income on them, it can securitize these loans into instruments with 16 % return with safeguards against defaults. These could be sold by the finance company to another if it needs funds before these loan repayments are due. The principal and interest repayment on the securitised instruments are met from the assets which are securitised, in this case, the car loans. Selling these securities in the market has a double impact. One, it will provide the company with cash before the loans mature. Two, the assets (car loans) will go out of the books of the finance company, a good thing as all risk is removed.
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HISTORY
Securitization in its present form originated in the mortgage markets in USA. It was promoted with the active support of the government. The government wanted to promote secondary markets in mortgages to allow liquidity for mortgage finance companies. Government National Mortgage Association (GNMA) was the first one to buy mortgages from mortgage companies and to convert them into pass through securities - this was 1970. GNMA were passing through securities backed by Mortgage insured by FHA. These pass through have the full credit and the backing of the US government, since GNMA has guaranteed both the repayment of the principal and timely payment of the interest. The 1970 program (GNMA -I) is still in operation. In 1983, GNMA launched another pass through program called GNMA - II. These programs are further classified based on the type of mortgages pooled therein, such as single family (SF) loans, mobile home (MH) loans, project loans (PL) etc. Other US government agencies, FNMA and Freddie Mac jumped in later. The first FNMA Mortgage Backed Securities (MBS) was issued in 1981. The agency played a crucial role in promoting securitisation of Adjustable-Rate Mortgages (ARMs) and Variable Rate Mortgages (VRMs). FHLMC was created in 1970 to promote an active national secondary market in residential mortgages and has been issuing mortgage-backed securities since 1971. The first securitisation of receivables outside the mortgage markets happened in 1975 when Sperry Corporation securitised its computer lease receivables. Another mortgage funding device, slightly different from the US-type Pass through Certificates, has existed in Europe for almost two centuries in the past. In Denmark, for example, mortgage bonds are more than 200 years old. Germany also has a long
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history of mortgage bonds and it is stated that there have been no defaults on these instruments for all these years. Other countries in Europe have been relatively slow starters, though regulatory and legislative changes in Germany, France, Belgium and Spain have been fashioned to assist development of securitisation. In Japan, the securitisation market was not well developed until recently; the Government had restricted securitisation to the assets of leasing, consumer loans and credit card companies. The Government has, however, amended laws to allow full-scale securitisation in May 1997.
India
The first widely reported securitisation deal in India occurred in 1990 when auto loans were secured by Citibank and sold to the GIC mutual fund. However, the sound legal framework for securitisation was not drafted until 2002 when the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Ordinance (Ordinance) was promulgated by the president of India. According to this law, securitisation was defined as acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising funds by such securitisation or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided interest in such financial assets or otherwise. The notion of financial assets for the above definition is stated as any debt or receivables. Non-surprisingly, it follows that the definition of securitisation in India is very close to that of western countries, especially taking into account that the experience of the UK is of special relevance to India.
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BASIC PROCESS
The basis process of Securitisation is explained in the following steps:
OriginatorAssets to Securitize. SPV Formation.

SPV passes collection to investorPass TC SPV invests to payoff at stated intervalsPay TC
SPV Funding by investors & issue of securities. SPV Acquires receivables under agreement. Servicer appointed generally is originator.
Servicer collects receivables (escrow account) & gives to SPV.
1) Selection and Pooling of homogeneous assets & estimation of the Cash Flows: Securitization in its basic form consists of the pooling of a group of homogeneous assets. Homogeneity is necessary to enable a cost efficient analysis of the credit risk of the pooled asset and to achieve a common payment pattern. The originator estimates the cash flows from the underlying assets. The payment of interest and principal on the securities is directly dependent on the cash flows arising from the underlying pooled assets. For this purpose, the originator uses his historical data. Appropriate and accurate calculations are done keeping in view of the pre payment rates, amortization, etc for estimation of the cash flows.
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2) Creation of SPV: The next step is to create an SPV. The basis logic behind the creation of an SPV is a) To isolate the underlying assets from the originator. This is an important step in the whole process as the ultimate result of this is "Bankruptcy Remoteness" from the Originator.
b) Aggregation of the underlying assets into a Pool. Thus the assignment of the
cash flow to the SPV is done in this manner.

3) SPV issues securities/notes to the Investors:
The SPV formed (Trust / MF / Corporate Form) now issues securities/notes to the investors to invest in the securitised exercise done by the originator. 4) Investors - Proceeds of the issue of securities to SPV
The collection from the investors for their investment in the securitised instrument is forwarded to the SPV. The SPV, in turn, channelises these proceeds to the Originator. 5) Collections and Servicing from the Obligors:
The Originator generally performs this function. In some cases, specialized servicing agents are appointed to collect and service from the loan obligors. 6) Pass Over to the SPV:
In this step the Servicing agent passes the collected payments from the obligors to the SPV less his fees.
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7)
Reinvestment of Cash Flows:
The SPV if permitted reinvests the proceeds from the Servicing agent (Generally in the Pay through Structures) and in turn receives the reinvestment proceeds also. If the structure of the instrument is the Pass Through Structure then Step no. 8 is followed directly after Step no. 6. 8) Payment to the Investors:
The Investor earns on his investments by receiving the proceeds from the SPV. Depending upon the structure of the Instrument the payment of the investment is made to the Investors. 9) Originators Residuary Profit:
After the payments are made to the Investors if any residue is left, it is passed on the Originator as his residuary profit, which is generally maintained, by the originator for the over-collaterisation and guarantee purpose.
FORMS OF SECURITISATION STRUCTURES

The financial structure of the securitized product is a function of the type of the instrument to be issued: 1. Pass Through Structure 2. Pay Through Structure.
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Pass Through Structure

1. Investors get a proportional interest in the pool of receivables.
2. Monthly Collections are divided proportionally among the Investors. 3. All the investors receive proportional payments - no slower or faster payments. 4. Refinement can be done in the form of 'Senior' or 'Junior' investors to enhance the credit rating of the transaction. 5. Pre-payments are passed on to the Investors. 6. No reinvestment of cash collected. 7. Thus, SPV is a passive conduit.
Figure 1. Pass Through Structure
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Pay Through Structure

1. Structure is almost similar to the Debt instrument, but with an off balance sheet treatment to the originator
2. Investors get a proportional interest in the pool of receivables.
3. SPV reinvests the amount collected generally in a AAA rated paper (Guaranteed Investment)
4. Investors are serviced on the dates of the schedule payment; the payment for
this is released from the Receiving and the Paying Bank Account. 5. Pre-payments are reinvested in the Guaranteed Investment Paper. 6. Thus, SPV is an active conduit.
Figure 2. Pay Through Structure
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METHODS OF TRANSFER OF ASSETS

There could be three basic methods of transfer of assets, viz., 1. Novation, 2. Assignment and 3. Sub-participation.
1. Novation is the clearest way of selling a loan and effectively transferring
both the rights and obligations. In novation, the existing loan between the originator and the borrower is cancelled and a new agreement between the investor and the borrower is substituted. The buyer steps into the shoes of the original lender or seller who ceases to have any obligations to the borrower. The loan, is therefore, excluded from the balance sheet of the seller.
2. An assignment transfers from the seller to the buyer, all rights to principal
and interest. Assignments for the purpose of disposing off assets may fall into two basic legal categories. The first is statutory assignment, transferring both legal and beneficial title. A statutory assignment will pass and transfer from the seller to the buyer all the legal rights to the principal and the interest. In most cases, it will also pass on all the legal remedies available against the borrower to ensure discharge of debt. In other words, the buyer acquires the full legal and beneficial interest in the loan. The second is equitable assignment, transferring only beneficial title. It does not transfer legal rights. Thus, a buyer may not be able to proceed directly against a
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borrower. The seller must be joined in action. However, the seller is not liable for debt.
3. Sub-participation does not transfer any of the seller's rights, remedies or
obligations against the borrower to the buyer. But, it is an entirely separate, back-to-back, non-recourse funding arrangement, under which the buyer places funds with the seller. In return, the seller passes on to the buyer, payments under the underlying loan, which the borrower makes to him. But, the loan itself is not transferred.
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MOTIVATION AND BENEFITS

TO THE ISSUER
Any company with a minimum of $400 million in sales and working capital needs of at least $50 million should consider trade receivable securitisation, according to the experts. "The securitisation structure is well established and is the logical next step for companies who are approaching a half billion dollars in sales," says Dan Hom, Senior Vice President, GE Capital Commercial Finance. "This mechanism can either entirely support working capital needs, or it can become an integral part of the total capital structure."
1. Capital requirement: The issuer can raise funds of longer maturities than he would have been able to through the conventional routes like bonds or term loans. For instance, in the case of toll roads, the financing costs can normally be recovered only over a very long period of time. A loan where repayments can be made over a long period may not be easily available. Here, securitisation can provide a solution. For instance, conventional loans are generally backed by the borrowers existing assets. In many cases, the borrower may not be in a position to offer the required collateral. The process of securitisation allows the borrower to raise funds against future cash flows rather than existing assets.
Securitisation keeps the other traditional lines of credit undisturbed. Hence, it increases the total financial resources available to a firm.
2. Off balance sheet financing: This off balance sheet feature could be looked at either, from accounting viewpoint, or from regulatory viewpoint. The tendency of financial institutions and others to
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prefer off balance sheet funding over on-balance sheet funding is because the former allows higher returns on assets, and higher returns on equity, without affecting the debt-equity ratio. Securitisation allows a firm to create assets, make income thereon, and yet put the assets off the balance sheet the moment they are transferred through the securitisation device. 3. Influence on Financial Ratio: By being able to market an asset outright securitisation avoids the need to raise a liability, and hence, it improves the capital structure. Alternatively if securitisation proceeds are used to pay off existing liabilities, the firm achieves a lower debtequity ratio. Securitisation also leaves the firm with a healthier balance sheet and reduced risk. 4. Raising funds at cheaper rates: Cost reduction is one of the most important motivations in securitisation. Securitisation seeks to break an originating companys portfolio into echelons of risks, trying to align them to different investors risk appetite. This alchemy supposedly works - the weighted overall cost of a company that has securitised its assets seems lower than a company that depends on generic funding. It is important to note that one of the most tangible effects of securitisation is to reduce the extent of risk capital or equity required for a given volume of asset creation. Assuming that equity is the costliest of all sources of capital, lower equity requirements do result into lower costs. 5. Providing Market access: Securitisation enables a financial intermediary to retail-market its assets to a large section of investors.
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6. Perfect matching of assets and liabilities: As a liability is created (in the real sense, no liability is created: only an asset is disposed off) perfectly matching up an asset, it avoids the need to manage maturity mismatches. 7. Makes the issuer rating irrelevant: Being an asset based financing, securitisation may make it possible even for a lowrated borrower to seek cheap finance, purely on the strength of the asset quality. Hence, the issuer makes himself irrelevant in a properly structured securitisation exercise. 8. Multiplies asset creation ability: Securitisation makes it possible for the issuer to create any amount of asset with given equity. The extent of assets that he can create is solely dependent on the conversion cycle, that is, the period that elapses between the date an underlying receivable is created and is marketed. 9. Helps in capital adequacy requirements: Capital adequacy requirements are the requirements relating to minimum regulatory capital for financial intermediaries. One of the very strong motivations for securitisation is that it allows the financial entity to sell off some of its on-balance sheet assets, and thus, remove them from the balance sheet, and hence reduce the amount of capital required for regulatory purposes. Alternatively, if the amount raised by selling on-balance-sheet assets is used for creating new assets, the entity is able to increase its asset-creation without a haircut for its capital.
10. Risk trenching / Unbundling:
Securitisation has also been used by many entities for reducing credit concentration. Concentration either sectoral, or geographical, implies risk. Securitisation by
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transferring a non-recourse basis exposure by an entity has the effect of transferring the risk. 11. Avoids interest rate risks: One of the primary motives in securitisation of mortgage receivables was to transfer interest rate risk to the investors. The lenders were subject to the risk since the mortgages carried a fixed rate of return while the loans taken by the lenders had a variable rate. When the mortgages were securitised, the lender made an instant spread on the basis of a fixed rate, and therefore, completely avoided the price risk. 12. Escapes taxes based on interest: For technical purposes securitisation would not be treated as interest on loans. Hence, if there are taxes based on interest earnings, the same would not be applicable to investors earnings in securitised products.
TO THE INVESTOR
1. Yield premiums: Securitised offerings have offered good yields with adequate security. Empirical data about securitisation offerings reveal that an investor who maintained a good balance of the emerging market and developed market offerings has been able to come out with good rates of return. 2. Diversification: Securities issued by SPEs are typically backed by numerous assets. By investing in a pool of assets rather than in an individual asset, investors can diversify their risk. This is similar to the difference between investing in mutual funds as opposed to individual stocks. 3. Liquidity:
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From the point of view of the financial system as a whole, securitisation increases the number of debt instruments in the market, and provides additional liquidity in the market. There is an active secondary market in many types of ABS and MBS, whereas there is relatively little trading in the underlying assets themselves. It could widen the market by attracting new players on account of superior quality assets being available.
4. Varying investor needs: Securitized instruments can be designed, or structured to meet different investor needs. For example, some investors require shorter-term investments, while others wish to make longer-term investments. Investors looking for a safe high-grade investment can pick up a senior most a-type product, while those looking for a mediocre risk but with a higher rate of return can opt for a B-type option. 5. Stability:
The securitisation market has exhibited very stable credit performance overall, and has experienced relatively few adverse credit events such as downgrading or default of SPE securities or bankruptcy of SPEs.
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RISK PROFILE
The inherent nature of the securitized instrument makes it less risky. The cash flow from the securitized instrument is backed by tangible identified financial assets earmarked exclusively for an instrument and is independent of the originator. Dependability of these cash flows is further strengthened as signified by the ageing of the portfolio. This means, an asset having a cash flow for three years would be monitored for the first 8 to 10 months to determine its historic loss profile. Earmarking a specific pool of aged assets is the core feature contributing to lowering the risk associated with securitized product. Further, the pool of borrowers creates a natural diversification in terms of capacity to pay, geography, type of the loan etc and thereby lowers the variability of cash flows in comparison to cash flows from a single loan. So, lower the variability, lower is the risk associated with the resulting securitized instrument. Understanding of risk enhancement measures, which at times are used in combination, is also necessary to analyze the risk profile of securitized product. Normally, these risk enhancement measures are provided to cover the historic risk profile (first level risk) of the financial assets and some percentage of losses, which may be higher than the historic risk profile (second level risk). Internal risk enhancement measures like over- collateralization, liquidity reserve, corporate undertaking, senior / sub-ordinate structure, spread account etc. cover the first level risk. External risk enhancement measures like insurance, guarantee, and letter of credit are used to cover the second level risk. Over-collateralisation means for servicing an instrument of Rs. 100/- cash flow from underlying asset valuing Rs. 110/- are earmarked. Similarly, cash worth Rs. 5/called Liquidity Reserve may be separately earmarked for servicing an instrument of
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Rs. 100/-. These features cover investors against the likely default in cash flow from the borrower to the extent of Over-collateralisation / Liquidity Reserve. In case of Senior/Sub-ordinate debt, cash flows from two groups of borrowers are independently used to bundle two sets of securities. These two trenches of securities are issued with a pre-determined priority in their servicing. This means the senior trench has prior claim on the cash flows from the underlying assets so that all losses will accrue first to the junior securities up to a pre-determined level. Thereby, the losses of the senior debt are borne by the holders of the sub-ordinate debt, normally the originator. The difference between yield on the assets and yield to investors is the spread, which is the gain to the originator. A portion of the amount earned out of this spread is kept aside in a spread account to service investors. This amount is taken back by the originator only after the payment of principal and interest to investors. Other third party credit enhancement measures such as insurance, guarantee and letter of credit are also used by originator to get a better credit rating for the instruments. With such multiple options for risk reduction and natural diversification inherent in the product, can a securitized instrument be presumed to be risk free? No. Primary risks associated with securitized product are pre-payment risk and credit risk. The pre-payment means refinancing at lower rate of interest or early repayment of the loan amount in part or in full. This risk is associated with mortgaged backed products using the Pass Through Structure (PTC). Generally, loan agreements allow the borrower to make an early payment of the principal amount. The risk originates from the possibility of obligor making such early payment of principal amount and thereby disturbing the yield and the investment horizon of the investors.
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For premium securities, accelerated pre-payment reduces the average life and yield since the principal is received at par which is less than the initial price. Opposite is the case of securities purchased at a discount. Consequently, investors have to predict the average life of such securities and may have to look for alternate investment opportunities in a changed interest rate scenario. The Act provides for PTC as the securitized instrument and so the pre-payment risk will exist in Indian market. Factors affecting pre-payment and corresponding prepayment models to evaluate this risk will have to be developed in order to make investment decisions. Credit risk reflects the risk that the obligor may not be able to make timely payments on the loans or may even default on the loans. In case of defaults, internal and external risk enhancement measures will come into play. Finally, the mortgaged backed securitized products in the foreign markets are backed by a guarantor who guarantees to the investors the timely payment of interest and principal. As of now, such guarantees do not exist in Indian market. However, National Housing Board (NHB) is working in this direction to guarantee securitisation of housing loan mortgages. Transaction Legal Risk represents the possibility that some of the fundamental legal assumptions in the transaction are proved invalid. For example, a court may disregard the SPVs title over the receivables recharacterising the whole transaction as a financial transaction. Or, the SPV may be consolidated with the originator, and so on. Tax uncertainties may sometimes affect the investors. If the SPV is liable to entity level taxes and payments to investors are treated as payment to equity holders, the entire cash flows in the transaction may be subjected to unprecedented taxes. Sometimes, the underlying cash flows may be subjected to a withholding tax
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requirement. These are risks that concern the investors, and they need to study these risks carefully.
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PARTIES TO SECURITISATION
The number of players in the securitisation process is large. They can be grouped in two categories the main players and the facilitators. The main players and their role are as follows
1. The SPV
Special Purpose Vehicle (SPV) is a legal entity in the form of a trust or company created for the purpose of securitisation. By its very nature, an SPV must be distanced from the sponsor both in terms of management and ownership, because if the SPV were to be owned or controlled by the sponsor, there is no difference between a subsidiary and an SPV. It buys assets (loans / receivables etc.) from originator and packages them into security for further sale to investors. In securitisation, one of the primary concerns of participants is to ensure nonbankruptcy of the SPV. In order to make SPV bankruptcy proof its registration net worth, corporate governance requirements are specified.
2. The Originator
The Originator is an entity owning the financial assets that are the subject matter of securitisation. Originator is normally making loans to borrowers or is having receivables from customers. It is the originator who initiates the process for securitisation and is the major beneficiary of it. Only banks and financial institutions can securitize their financial assets thereby restricting the Originators of securitisation. So, it may not be possible to securitize assets and receivables of other business entities having such assets and receivables from credit card, export earnings, sale of tickets, car rentals, electricity and telephone bill etc. within the parameters of the Act.
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3. The Investor
The Investor is the entity buying the securitized instrument. Principally, large and sophisticated institutional investors, such as Private pension funds, Credit unions, Government pension funds, Insurance companies, Government agencies, Money market funds, Banks, Mutual funds, Bank trust departments. This is a new product only big investors informed and capable of taking risk shall be allowed to invest in it.
4. The obligor(s)
The Obligor (borrower) takes the loan or uses some service of the originator that he has to return. His debt and collateral constitutes the underlying financial asset of securitisation.
5. The Rating agency

Credit Rating Agency provides rating to the securitized instrument and thus provides value addition to security.
6. Receiving and Paying Agent

Receiving and Paying Agent is the entity responsible for collecting periodic payment from obligors and paying it to investors. Normally, the originator performs this activity.
7. Agent and Trustee

The Trustee acts on behalf of the investors and has priority interest in the financial asset supporting the securitized product. Trustee oversee the performance of other parties involved in securitisation transaction, review periodic information on the status of the pool, superintend the distribution of the cash flow to the investors and
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if necessary declare the issue in default and take legal action necessary to protect investors interest.
8. Facilitators
Facilitators play a very crucial role in the securitisation chain. Their services are instrumental in enhancing the credit worthiness of the product which is one of the prime reasons apart from collateral for the run away success of securitized products.
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FINANCING.
TYPES OF ASSETS THAT CAN BE SECURITISED

Any asset having a cash flow profile over a period of time can be securitized. Some of the assets which may be securitised are housing loans, car loans, term loans, export credits, and future receivables like credit card payments, toll collections from roads or bridges, and sales of petroleum-based products from oil refineries, ticket sales, album sales, car rentals, electricity and telephone bill receivables etc. In fact, artists have even raised funds by securitizing the royalty they will get out of future sales of their records. For example, David Bowie securitized royalties from his music catalogue. Thus, any present or future receivables in part or in whole can be securitised. The most readily securitizable assets are those which display the following characteristics: Predictable cash flows; Isolation from the Originator. Consistently low delinquency and default experience; Total amortization of principal at maturity; Many demographically and geographically diverse obligors; and Underlying collateral with high liquidation value and utility to the obligors.
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The securitisation market can be split into following broad areas:

Securitisation Market
Asset Backed Securities (ABS)
Mortgage Backed Securities (MBS, RMBS, CMBS)
Asset Backed Commercial Paper (ABCP)
Collateralized Debt Obligations (CDO, CLO, CBO)
1.
Asset Backed Securities (ABS) Asset backed Securities are the most general class of securitisation transactions. The asset could vary from Auto Loan/Lease/Hire Purchase, Credit Card, Consumer loan, student loan, healthcare receivables and ticket receivables to even future asset receivables.
2.
Mortgage Backed Securities (MBS, RMBS, CMBS) MBS constitutes about 76% of the securitized debt market in the US. In contrast, the MBS market in India is nascent - National Housing Bank (NHB), in partnership with HDFC and LIC Housing Finance, issued Indias first MBS.
3.
Asset Backed Commercial Paper (ABCP)

Asset Backed Commercial Paper (ABCP) is usually issued by Special Purpose Entities (ABCP Conduits) set up and administered by banks to raise cheaper finances for their clients. ABCP conduits are usually ongoing concerns with new CP issuances taking out the previous ones. Apart from legal requirements, an active ABCP market requires a large
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FINANCING.
number of investors who understand the instrument and have appetite. Indias securitisation market may not be mature currently for instruments like ABCPs.
4.
Collateralized Debt Obligations (CDO, CLO, CBO)
In this era of bank consolidations, CDOs can help banks to proactively manage their portfolio. CDOs can also help banks in restructuring their stressed assets. ICICI made an aborted attempt to do a CBO issuance in August 2000. The CDO market in India is, however, likely to grow slowly owing to its complexities. The taxation and accounting treatment for CDOs needs to be clarified.
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FINANCING.
THE INDIAN EXPERIENCE

SECURITISATION IN INDIA
While there has been a lot of discussion about the potential of securitisation in India, actual deal activity has not kept pace. While some early adopters like ICICI, TELCO and Citibank have been actively pursuing securitisation, almost all the transactions in the market so far have been privately placed with a majority of them being bilateral fully bought out deals. Lack of appropriate legislation and legal clarity, unclear accounting treatment, high incidence of stamp duties making transactions unviable, lack of understanding of the instrument amongst investors, originators and, till recently, even rating agencies are some of the glaring reasons for the lack of activity in the area of securitisation in India. In India By Securitisation bill parties which are allowed to securitise assets are Banks, FIs & NBFCs Last year volume was expected to be low as in Feb 2006 RBI came with guidelines on regulatory capital treatment for securitisation. This has dealt a blow to Securitisation market as it prohibits profit booking in securitisation transactions. Standard & Poors report says securitisation market will boom. India is only second to South Korea in this ex-Japan Asia.
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FINANCING.
250 Rs.(in Billion) 200 150 100 50 0 FY02 FY03 FY04 FY05 FY06 Financial Year ABS MBS CDO
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FINANCING.
Need for Securitisation in India

The generic benefits of securitisation for Originators and investors have been discussed above. In the Indian context, securitisation is the only ray of hope for funding resource starved infrastructure sectors like Power. For power utilities burdened with delinquent receivables from state electricity boards (SEBs), securitisation seems to be the only hope of meeting resource requirements. As on December 31, 1998, overall SEB dues only to the central agencies were over Rs. 184 billion. Securitisation can help Indian borrowers with international assets in piercing the sovereign rating and placing an investment grade structure. An example, albeit failed, is that of Air Indias aborted attempt to securitize its North American ticket receivables. Such structured transactions can help premier corporates to obtain a superior pricing than a borrowing based on their non-investment grade corporate rating. A market for Mortgage backed Securities (MBS) in India can help large Indian housing finance companies (HFCs) in churning their portfolios and focus on what they know best fresh asset origination. Indian HFCs have traditionally relied on bond finance and loans from the National Housing Bank (NHB). MBS can provide a vital source of funds for the HFCs. After the merger of Indias largest financial institution ICICI with ICICI Bank, ICICI, faced with SLR and other requirements, is actively seeking to launch a CLO to reduce its overall asset exposure. It appears to be only a matter of time before other Public Financial Institutions merge with other banks. Such mergers would result in the need for more CDOs in the foreseeable future.
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FINANCING.
MAJOR CONSTRAINTS OF SECURITISATION IN INDIA

The Obstacles & Policy recommendations
1) Lack of appropriate legislation
Though THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002 has given the much needed relief in terms of a law framed for securitisation transactions. The following are the key areas where legislation is required: a) True Sale (Isolation from bankruptcy of the Originator) The central idea of a securitisation transaction is to isolate the assets of the Originator from Originators balance sheet and seek a higher credit rating than the Originators own rating. A key requirement for that is to achieve a true sale of the assets to the Special Purpose Entity. b) Tax neutral bankruptcy remote SPE The special purpose entity that buys assets from the Originator should be a bankruptcy remote conduit for distributing the income from the assets to the investors. While banks have experimented with company revocable trust and mutual fund structures, no clear vehicle has emerged for performing securitisation. This should be addressed by the Securitisation act. c) Stamp Duties Stamp Duty is a state subject in India. Stamp Duties on transfer of assets in securitisation can often make a transaction unviable. While five Indian states have recognized the special nature of securitisation transactions and have reduced the stamp duties for them, other states still operate at stamp duties as high as 10% for transfer of secured receivables. The Working Group of RBI has recommended a uniform rate of 0.1% duty on all transactions. The acceptance of these
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recommendations by other states can boost the securitisation activity in India especially in the MBS area. d) Taxation & Accounting At present there are no special laws governing recognition of income of various entities in a securitisation transaction. Certain trust SPE structures actually can result in double taxation and make a transaction unviable. The Securitisation Act, when it comes to force, should address all taxation matters relating to securitisation. Securitisation legislation should also specify requirements for off balance sheet treatment for securitisation and regulatory capital requirements for Originator and Investors. e) Eligibility Only recently Mutual funds have been allowed to invest in PTCs. The government should lay down norms governing investment eligibility for various securitisation instruments.
2)
Debt market
Lack of a sophisticated debt market is always a drawback for securitisation for lack of benchmark yield curve for pricing. The appetite for long ended exposures (above 10 years) is very low in the Indian debt market requiring the Originator to subscribe to the bulk of the long ended portion of the financial flows. The development of the Indian debt market would naturally increase the securitisation activity in India.
3)
Lack of Investor Appetite
Investor awareness and understanding of securitisation is very low. RBI, key drivers of securitisation in India like ICICI and Citibank and rating agencies like CRISIL and ICRA should actively educate corporate investors about securitisation. Mandatory rating of all structured obligations would also give investors much
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FINANCING.
needed assurance about transactions. Once the private placement market for securitized paper gathers momentum, public retail securitisation issuances would become a possibility.
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FINANCING.
FUTURE PROSPECTS OF SECURITISATION IN INDIA

A big boost for securitisation has been the introduction of the `Securitisation and Reconstruction of Financial Assets And Enforcement of Security Interest Ordinance 2002 that was promulgated in May, has given a more acceptability to this product. With the Ordinance, securitisation as an activity has got a legal status and now it is possible to define securitisation under the laws of the land. Its very existence will change the boisterous and evading attitude of the commercial dealers and defaulters in our economy The traditional drivers of securitisation have seen the desire of the issuer to raise funds without adding to borrowings. This helped companies which had high debt equity ratio. The motivating factor in some securitisation transaction in the past was the ability to book profits upfront. While these could continue to be the drivers demanded for securitisation. Securitisation is likely to be increasingly used for better asset liability management. As securitisation replaces long to medium term assets by cash, the weightage average maturity of assets of the company comes down. This is a big comfort, as typically, NBFCs were funding three-year assets with one year fixed deposits. Further, the NBFCs, which are required to bring down the excess deposit level, could use the proceeds of securitisation to retire the fixed deposits. Traditionally in the fund based business segment of the financial services sector in India, a single entity was engaged in the entire gamut of activities viz raising funds, locating borrowers, credit appraisal of the borrowers, servicing of the loans and recovery. Owing to the rapidly changing environment, some kind of realignment is
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likely to happen in this sector. One could see some specializations emerging in the market. In developed economies, particularly in the mortgage market, there is a lot of specialization. Typically in these markets a single entity could not perform more than one or two of the activities mentioned earlier. This is also in line with the increasing emphasis on "core competence". Instead of an entity engaging in all the activities, it makes sense to focus on a few areas where it has competitive advantage. The trend is already visible in the auto loan sector. Owing to many regulatory changes, many NBFCs are finding it difficult to raise funds at competitive rates. These NBFCs, however, have a relatively low cost distribution network in place to originate and service loans. On the other hand, large companies and Foreign Banks find that it is not economical to create a large distribution network in terms of extensive branch network across the country due to their high cost structure. However, these companies, given their size, parent support, managerial talent and a high credit rating have a much stronger funding capability. Securitisation could be effectively used to combine these two complementary pool of resources. NBFCs could originate loans and securities them and sell to large companies. And they could use the proceeds of the sale to originate more loans and the process could go on. The small NBFCs could continue to service the loans which would ensure a steady flow of fee income. While many transactions are under way in the auto loan sector, this trend has also extended to housing sector also. In housing finance the funding required is of a much longer tenure and thus far more difficult to rise.
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FINANCING.
BANKING AND SECURITISATION

'Banks
will have to unload bad loans to Asset Reconstruction Companies by
FY2007' read a leading business newspaper headline sometime back.
The concept
In the traditional lending process, a bank makes a loan, maintaining it as an asset on its balance sheet, collecting principal and interest, and monitoring whether there is any deterioration in borrower's creditworthiness. This requires a bank to hold assets (loans given) till maturity. The funds of the bank are blocked in these loans and to meet its growing fund requirement a bank has to raise additional funds from the market. Securitisation is a way of unlocking these blocked funds. Section 5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, mandates that only banks and financial institutions can securitise their financial assets
The process and participants

Consider a bank, ABC Bank. The loans given out by this bank are its assets. Thus, the bank has a pool of these assets on its balance sheet and so the funds of the bank are locked up in these loans. The bank gives loans to its customers. The customers who have taken a loan from the ABC bank are known as obligors. To free these blocked funds the assets are transferred by the originator (the person who holds the assets, ABC Bank in this case) to a special purpose vehicle (SPV).
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The SPV is a separate entity formed exclusively for the facilitation of the securitisation process and providing funds to the originator. The assets being transferred to the SPV need to be homogenous in terms of the underlying asset, maturity and risk profile. What this means is that only one type of asset (eg: auto loans) of similar maturity (eg: 20 to 24 months) will be bundled together for creating the securitised instrument. The SPV will act as an intermediary which divides the assets of the originator into marketable securities. These securities issued by the SPV to the investors and are known as pass-throughcertificates (PTCs).The cash flows (which will include principal repayment, interest and prepayments received ) received from the obligors are passed onto the investors (investors who have invested in the PTCs) on a pro rata basis once the service fees has been deducted. The difference between rate of interest payable by the obligor and return promised to the investor investing in PTCs is the servicing fee for the SPV. The way the PTCs are structured the cash flows are unpredictable as there will always be a certain percentage of obligors who won't pay up and this cannot be known in advance. Though various steps are taken to take care of this, some amount of risk still remains. The investors can be banks, mutual funds, other financial institutions, government etc. In India only qualified institutional buyers (QIBs) who posses the expertise and the financial muscle to invest in securities market are allowed to invest in PTCs. Mutual funds, financial institutions (FIs), scheduled commercial banks, insurance companies, provident funds, pension funds, state industrial development corporations, et cetera fall under the definition of being a QIB. The reason for the
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same being that since PTCs are new to the Indian market only informed big players are capable of taking on the risk that comes with this type of investment. In order to facilitate a wide distribution of securitised instruments, evaluation of their quality is of utmost importance. This is carried on by rating the securitised instrument which will acquaint the investor with the degree of risk involved. The rating agency rates the securitised instruments on the basis of asset quality, and not on the basis of rating of the originator. So particular transaction of securitisation can enjoy a credit rating which is much better than that of the originator. High rated securitised instruments can offer low risk and higher yields to investors. The low risk of securitised instruments is attributable to their backing by financial assets and some credit enhancement measures like insurance/underwriting, guarantee, etc used by the originator. The administrator or the servicer is appointed to collect the payments from the obligors. The servicer follows up with the defaulters and uses legal remedies against them. In the case of ABC bank, the SPV can have a servicer to collect the loan repayment installments from the people who have taken loan from the bank. Normally the originator carries out this activity. For an originator (ABC bank in the example), securitisation is an alternative to corporate debt or equity for meeting its funding requirements. As the securitised instruments can have a better credit rating than the company, the originator can get funds from new investors and additional funds from existing investors at a lower cost than debt.
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Impact on banks
Other than freeing up the blocked assets of banks, securitisation can transform banking in other ways as well. The growth in credit off take of banks has been the second highest in the last 55 years. But at the same time the incremental credit deposit ratio for the past one-year has been greater than one. What this means in simple terms is that for every Rs 100 worth of deposit coming into the system more than Rs 100 is being disbursed as credit. The growth of credit off take though has not been matched with a growth in deposits. So the question that arises is, with the deposit inflow being less than the credit outflow, how are the banks funding this increased credit offtake? Banks essentially have been selling their investments in government securities. By selling their investments and giving out that money as loans, the banks have been able to cater to the credit boom. This form of funding credit growth cannot continue forever, primarily because banks have to maintain an investment to the tune of 25 per cent of the net bank deposits in statutory liquidity ratio (SLR) instruments (government and semi government securities). The fact that they have been selling government paper to fund credit off take means that their investment in government paper has been declining. Once the banks reach this level of 25 per cent, they cannot sell any more government securities to generate liquidity.
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And given the pace of credit off take, some banks could reach this level very fast. So banks, in order to keep giving credit, need to ensure that more deposits keep coming in. One way is obviously to increase interest rates. Another way is Securitisation. Banks can securitise the loans they have given out and use the money brought in by this to give out more credit. Not only this, securitisation also helps banks to sell off their bad loans (NPAs or non performing assets) to asset reconstruction companies (ARCs). ARCs, which are typically publicly/government owned, act as debt aggregators and are engaged in acquiring bad loans from the banks at a discounted price, thereby helping banks to focus on core activities. On acquiring bad loans ARCs restructure them and sell them to other investors as PTCs, thereby freeing the banking system to focus on normal banking activities.
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Impact on the Indian Banking Sector

The growth in credit off take of banks has been the second highest in the last 55 years. But at the same time the incremental credit deposit ratio for the past one-year has been greater than one. Asset Reconstruction Company of India Limited (ARCIL) was the first (till date remains the only ARC) to commence business in India. ICICI Bank, Karur Vyasya Bank, Karnataka Bank, Citicorp (I) Finance, SBI, IDBI, PNB, HDFC, HDFC Bank and some other banks have shareholding in ARCIL. A lot of banks have been selling off their NPAs to ARCIL. ICICI bank- the second largest bank in India, has been the largest seller of bad loans to ARCIL last year. It sold 134 cases worth Rs.8450 Crore. SBI and IDBI hold second and third positions. ARCIL is keen to see cash flush foreign funds enter the distressed debt markets to help deepen it. What is happening right now is that banks and FIs have been selling their NPAs to ARCIL and the same banks and FIs are picking up the PTCs being issued by ARCIL and thus helping ARCIL to finance the purchase. A recent report in a business daily quotes , Rajendra Kakkar, ARCIL's Chief Executive as saying, "We have got a buyer, we have got a seller, it so happens that the seller is the loan side of the same institutions and buyer is the treasury side." So the risk from the balance sheet of banks and FIs is not being completely removed as their investments into PTCs issued by ARCIL will generate returns if and only if ARCIL is able to affect recovery from defaulters. A recent survey by the Economist magazine on International Banking, says that securitisation is the way to go for Indian banking.
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As per the survey, "What may be more important for the economy is to provide access for the 92% of Indian businesses that do not use bank finance. That represents an enormous potential market for both local and foreign banks, but the present structure of the banking system is not suitable for reaching these businesses. Securitising micro-loans- bundling many loans together and selling the resulting cash flow- may be the way of achieving economies of scale. One private bank, ICICI, securitised $4.3 million of micro-loans last year. But most Indian banks are more interested in competing for affluent customers".
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Problems faced by the Banking Sector in India

1)
Lack of Proper Legal Measures on part of the Govt. In spite of various legislative measures, there are hardly any securitisation transactions undertaken pursuant to amended legislations. The SARFAESI Act was enacted with specific object of facilitating securitisation of healthy/standard assets, but RBI has taken a stand that the SARFAESI Act is intended only for dealing with stressed assets and there are no RBI regulations for standard assets. Amendments to the SCRA Act have been done very recently and the object of the amendments is to facilitate securitisation of financial assets by raising funds from investors. While SCRA amendments contemplate issue of securitised debt instruments to the pubic, the SARFAESI Act restricts issue of security receipts only to Qualified Institutional Payers. The SARFAESI Act equates a securitisation company with any bank or financial institution and confers powers of recovery of defaulted loans without the intervention of the court on the securitisation companies. The SCRA amendment, on the other hand, makes no provision for recovery of defaulted loans by special purpose distinct entity (SPDE) and such SPDEs are required to file suits in civil courts. The SCRA covers any kind of debt or receivables for securitisation but SARFAESI is restricted to loans and advances. 2) Lack of Proper Legal Awareness regarding Securitisation Norms
In spite of all the legislative measures, till RBI issued directives to banks last year, securitisation transactions were being undertaken under the general law applicable to private trusts and the Indian Contracts Act, 1872. The RBI directives to banks are restrictive and some constraints discouraging securitisation are: On securitisation of financial assets, banks cannot book profits upfront and Investors are not permitted to treat the investment in securitised debt instruments as exposure to underlying debts.
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3)
Confusion and Complexities over Stamp Duty
To add to the confusion and complexities, there is a major issue of stamp duties payable as per State laws on securitisation transaction. While some States have reduced stamp duties on securitisation, there is no uniformity. Some have reduced duty on housing loans securitisation while others have done it only for SARFAESI securitisation. The Reserve Bank, SEBI and the Ministry of Finance need to take a total view of this matter and facilitate securitisation of any assets by banks and FIs without any impediments whether legal or regulatory. There is a need for the Parliament to enact a comprehensive new law for securitisation of debts and receivables, by treating assignment of debts and receivables as a new kind of transfer of property. Since such debt-instruments issued pursuant to securitisation have to be provided characteristic of transferability by endorsement and delivery, the new Law can also provide for rates of stamp duties for documents effecting assignment of debts and receivables for securitisation and issue of debt instruments, overriding any State Laws on stamp duties.
Conclusion
Securitisation is expected to become more popular in the near future in the banking sector. Banks are expected to sell off a greater amount of NPAs to ARCIL by 2007, when they have to shift to Basel-II norms. Blocking too much capital in NPAs can reduce the capital adequacy of banks and can be a hindrance for banks to meet the Basel-II norms. Thus, banks will have two options- either to raise more capital or to free capital tied up in NPAs and other loans through securitization.
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Infrastructure And
INTRODUCTION
Development Financing
The availability of adequate infrastructure facilities is imperative for the overall economic development of the country. Infrastructure adequacy helps determine success in diversifying production, expanding trade, coping with population growth, reducing poverty and improving environmental conditions. Today, it is necessary to broaden one's concern from increasing the quantity of infrastructure stocks to improving the quality of infrastructure services. In recent years, there has been a revolution in thinking about who should be responsible for providing infrastructure stocks and services, and how these services should be delivered to the users. One of the bottlenecks in infrastructure development in India is the conflict arising out of the confusion over the government's role in being licensers for infrastructure development, an infrastructure developer and operator, and finally a regulator. A clear separation of these roles would be essential. To further aid this process, the financial, insurance and legal sectors would have to play a significant role.
WHAT IS INFRASTRUCTURE?
As per India Infrastructure Report: "Infrastructure is generally defined as the physical framework of facilities through which goods and services are provided to public. Its linkages to the economy are multiple and complex, because it affects production and consumption directly, creates negative and positive spillover effects (externalities) and involves large flow of expenditure.
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Infrastructure contributes to economic development, both by increasing productivity and by providing amenities which enhance the quality of life. The services provided lead to growth in production in several ways: Infrastructure services are intermediate inputs to production and any reduction in these input costs raises the profitability of production, thus pertaining higher levels of output, income and or employment. These raise the productivity of other factors including labour and other capital. Infrastructure is thus often described as an "Unpaid Factor of Production", since its availability leads to higher obtainable from other capital and labour.
WHY IS INFRASTRUCTURE IMPORTANT?

As per India Infrastructure Report: "The availability of adequate infrastructure facilities is imperative for the overall economic development of the country. Infrastructure adequacy helps determine reducing poverty and improving environmental conditions." "Research indicates that total infrastructure stocks increase by 1% with each 1% increment in per capita GDP."
KEY ISSUES IN INFRASTRUCTURE DEVELOPMENT AND FINANCING

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The Key issues in infrastructure development are: 1. Privatization The importance of privatization is because it brings along with it a) Additional resources and b) Improved managerial efficiency in asset creation, asset utilisation and customer service leading to better financial health, due to stake holding. 2. Unbundling and Project Structuring Unbundling is a necessary condition before attracting private participation is unbundling the infrastructure into logical sub activities which can be privatised separately to enable private parties not to have to bite more than what they can chew. To enable unbundling necessary acts shall have to be overhauled. Regulatory reform would also be essential to provide increased autonomy, especially for capital investment, even as a precursor to unbundling. Another reason for regulatory reform is to exercise controls over implicit monopoly situations. Project Structuring is also a key issue as since projects have to be structured small enough to make them investment friendly, and at the same time "Commercial" viable. 3. Project Appraisal and Financing The key issue here is one of appraising the project against future cash flows rather than an asset base or collaterals. Various forms of revenue, control over revenue and risk guarantees would also be related concerns. A vital banking infrastructure to complement all this would be essential. 4. Project Implementation
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Speed of project implementation would be imperatives, in the context of environmental and other regulatory issues.
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FISCAL
INCENTIVES
FOR
INVESTMENT
IN
INFRASTRUCTURE
PROJECTS
The Government of India has sought to alleviate some of these concerns/issues by providing certain fiscal incentives, concessions and policy reforms. Some of these reforms have been: 1. Income Tax exemptions under Section 10 (23)(g) for interest and capital gains income earned for infrastructure projects 2. Income Tax exemptions under Section 54 (EA/EB) for capital gains which can be reinvested in infrastructure project companies 3. Deduction under Section 88 for investment in infrastructure projects - Deduction available for individual investors. 4. Exemption from Minimum Alternative Tax 5. Concessional import duties and port charges for project-related imports. 6. Increased limits for External Commercial Borrowings. 7. Five year tax holiday to be claimed within 12 years of operation. For the balance years, a 30% exemption is available.
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FINANCING.
TECHNIQUE
OF
SECURITISATION
IN
INFRASTRUCTURE FINANCING
Securitisation of wholesale assets refers mainly to the use of securitisation as a technique for infrastructure financing. Securitisation works on the principle of unbundling the cash flows, customizing risk and evolving superior credit structure in Infrastructure Financing.
Securitisation will benefit infrastructure financing because it: 1. Permits funding agencies whose sector exposures are choked, to continue
funding to those sectors.

2. Permits the participation of a much large number of investors by issue of
marketable securities.
3. Lowers the cost of funding infrastructure projects; long term funding ( a sine quo
non for most infrastructure projects) is more feasible in securitised structures than conventional lending.
4. Facilities risk participation amongst intermediaries that specialise in handling
each of the components of risks associated with infrastructure funding (while these may initially be borne by regular financial intermediaries and insurance companies, it is expected that specialized institutions would develop over time)
5. Shifts focus of funding agencies of to evaluation of credit risk of the transaction
structure rather than overall project risk. This is because the other components of project risk would be borne by specialized intermediaries at a fee cost.
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FINANCING.
Thus, in a nut shell securitisation will change the project evaluation parameters to an exposure driven by Credit Rating of a transaction structure rather than overall project risk and also securitisation will facilitate participation of a large number of investors by ensuring tradability of issued Negotiable Instrument (Participation Certificates). Thus these considerations would facilitate the process of financial intermediation for resource raising of fund Infrastructure Projects. The outcome of which will reduce the cost of funding for Infrastructure Projects in the long run. Diagrammatic Representation of the technique:
Securitisation works on the principle of unbundling cash flows Customizing risk and Evolving Superior credit structure
The Conventional financing pattern is:
- Driven by credit extended in the form of non-tradable loans - Project risk compensated by high cost of debt - Sponsor comfort and "right" to project cash flows - Key driver
Securitisation in Infrastructure Financing will:
- Disseminate risk by identifying risk parameters

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- Allocate cash flows to lenders/investors - Leverage on structure of infrastructure projects - Quasi Government risk - Lending driven by Credit Rating of Structure rather than overall project risk - Participation of a large number of investors - Tradability of loans - Participation /Pass thru Certificates
Thus the whole mechanism results in the reduction in cost of capital for the Infrastructure Projects.
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FINANCING.
INTRODUCTION TO THE VARIOUS SECTORS THAT COME UNDER INFRASTRUCTURE SECTORAL FRAMEWORK BACKGROUND AND ISSUES
1. Power Sector:
The generation of power is a key input for industrial and agricultural efficiency. Availability of Power is also a basic requirement for the common amenities such as lighting of roads and housing. Traditionally, India has been a power deficit state and has operated on the principal of subsidising power for certain priority sectors. The onus of setting up power generating capacity was on State and Central governments through Public Sector Enterprises such as NTPC, NPC, NHPC and various State Electricity Boards (SEBs). The power segment in terms of generation, transmission and distribution is primarily controlled by states through their respective State Electricity Boards. 2. Road Sector Adequacy and efficiency of a road network is essential for smooth and efficient movement of cargo and people. The responsibility of maintaining and netting up of a road network rests with the National Highway Authority of India (NHAI), the State Government and its constituents. The resource allocation to this sector is primarily based on budgetary considerations against the State which imposes levies such as vehicle tax, road tax, octroi, cess on diesel/petrol.
3. Port
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India has a long coastal line dotted with over 11 major ports and 140 minor ports. Major Port Trust of India manages the major ports and the minor ports are managed by State Maritime Boards. The port sector in India is governed under the Indian Port Act, 1908 and the Major Port Trust Act, 1963. These acts have permitted private sector investment in the following manner: 1. Setting up of major ports at several locations across the coastline. The states of Maharashtra, Gujarat and Andhra Pradesh have embarked on development initiatives in this segment. 2. Privatisation of support services at major ports. Government of Gujarat has identified 10 Greenfield Port Projects and has seen substantive Investment from the Private sector for the development of the Port Sector in the sate of Gujarat 4. Urban Infrastructure Urban Infrastructure requirements comprise of diverse services such as water supply, sewage management, garbage disposal, town planning, housing and local transportation services. The pace of urbanization has increased demand for such services. This segment is covered by the State Governments and Municipal Corporations. Housing Finance is already under the purview of the private sector and in addition services such as supply of water and sanitation, local transportation are being sought to be privatized.
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RELEVANCE OF SECURITISATION TO DIFFERENT SECTORS OF INFRASTRUCTURE

1. Power Sector: -
The short term financial position of various SEBs is key concern for various PSUs which are in generation and financing power sector initiatives viz. NTPC, NHPC, REC, PFC, PGCIL. These Institutions have a high financial exposure to various SEBs, some of which are sub-standard since several SEBs have inadequate solvency for meeting obligations on the due date. Securitisation in this sector can be envisaged in the segments of: SEB Receivables of various PSUs viz, NTPC, REC, PFC, etc securitised to reduce/rebalance financial exposure of the PSUs
Securitisation of SEB revenues for raising resources.
2. Road Sector: -
Private Sector road projects are expected to earn revenues from toll collections and concessions. However these projects carry multiple level risks which could be summarised as under:
Construction Risk - In event of inordinate delays in procuring land and completing implementation.
Traffic Estimation Risk - Accuracy of estimating traffic in various segments i.e. Commercial vehicle, buses, passenger cars, two wheelers and achieving desired traffic estimates.
Toll collection risk - Intent and willingness of users to pay requisite toll for usage. Considering the multiple level of risk, securitisation could be used to
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splice various levels of risk and thereby facilitate financial closure at an optimal cost of capital.
3. Port Sector: -
The revenues of typical port projects would be in the nature of stowage and loading revenues levied on ships which stop at the port of call. In addition, ports tend to provide storage facilities for chemicals, cargo, petroleum products, etc. to several large companies. The port authority/operator contract such storage facilities for a long tenure. The port revenues of this nature are amenable to securitisation.
4. Urban Infrastructure: -
Primarily opportunities in urban development are in the area of housing loans. Globally, the home loans in the form of "Mortgage Backed Securities" comprise a prime segment in the securitisation market. The issuance of "Mortgage Backed Securities" results in dissemination of portfolio risk for Housing Finance Companies and facilities participation of a breadth of financial investors such as provident
CRITERIA FOR STRUCTURING A SECURITISATION TRANSACTION
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1. Assets or Cash flows should be of an operative nature and they should be
likely to be translated into a cash flow at a future date with minimal risk of performance.
2. Isolating Credit risk of the Originator (Owner of such assets or receipt of
cash flow) from that of the Obligor (Payer for the obligations/asset sought to be securitised) 3. Evolving a "bankruptcy" remote structure for the transaction i.e. a transaction structure which will not be impacted by the bankruptcy/default of the Originator of the cash flows. This is conventionally achieved through:
"True Sale" of cash flow or the "right to receive cash flow.
Setting up of an independent "Special Purpose Vehicle" which would provide an appropriate framework for capital market participation. Credit enhancement based on the following principles: a. Credit rating/standing of the Obligor b. Providing adequate collateral for investors participating in the "securitised" paper c. Evolving a suitable risk framework compromising of "Senior" investors who have the first "right" on cash flows and "Sub-ordinate" investors who would bear significant portion of the credit risk on the Obligor. The advantage for Originators would be realising an upfront cash flows in exchange of future receipts which would be "securitised" in favour of the SPV and its investors. The following diagram explains structuring of the securitisation transaction for the Infrastructure Project: 62
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Diagram: Structuring a Securitisation Transaction

Based on the structuring of the Transaction, securitisation can be applied in the PreImplementation Stage and also in the Post Commissioning Stage.
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PRE REQUISITES FOR STRUCTURING

In absence of conventional asset cover, for the lenders - Trust and Retention Account are created so that prioritizing of the cash flows can be done in Infrastructure Financing. The following Diagram Explains the concept of Prioritizing of the Cash flow in Infrastructure Financing for a Toll Road Project: -
Diagram: - Prioritizing of Cash Flow in a Toll Road Infrastructure Project
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SECURITISATION IN THE PRE-IMPLEMENTATION STAGE

In an Infrastructure Project, the Project Risk is the Highest in the PreImplementation Stage. In the Pre-Implementation Stage there is high degree of uncertainty of the Project and the Project Sponsors carry the highest amount of risk. The Prime concern of the Sponsor is to reduce the cost of capital in the PreImplementation stage. Diagrammatic Representation: Diagram: - Project Funding Pre-Implementation Stage
SECURITISATION IN THE POST COMMISSIONING STAGE

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In the Post Commissioning Stage, Multiple Project Risk Participation can be attracted to optimize the cost of fund. The Project Risk is almost diminished in the Post Commissioning Stage. Thus in this manner a large number of Investors can be attracted in the Financing of the Infrastructure Projects. The diagram below explains the process of securitisation in the post commissioning stage.
Diagram: - Securitisation in the Post Commissioning Stage
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THE NHB-HDFC RMBS TRANSACTION

INTRODUCTION
As part of its role as the apex body in India for promotion of housing finance, the National Housing Bank (NHB) made a Financial Milestone in the Indian Financial World by issuing India's First Residential Mortgage Based Securities (RMBS) for India's Premier Housing Finance Company i.e. Housing Development Finance Corporation (HDFC) through a Private Placement Structured and Lead Managed By SBI Capital Markets Limited. The Pilot Issue of NHB was of Rs. 88.32 Crores, NHB issued the investors Class A PTCs (Rs. 59.7 Crores) and to the HDFC (the originator) Class B PTCs (Rs. 28.62 Crores) by forming a Special Purpose Vehicle.
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PART A
TERMS OF THE ISSUE
Principal Terms Of The Pass Through Certificates (PTCs)
NHB in its corporate capacity as also in its capacity as sole Trustee of the SPV Trust issued securities in the form of Class A and Class B Pass Through Certificates (PTCs). Class B PTCs are subordinated to Class A PTCs and act as a credit enhancement for Class A PTC holders. Only Class A PTCs were available for subscription. Class B PTCs were subscribed by HDFC itself (the Originator). Issue Details Target Amount
The issue was for 600 Class A PTCs aggregating to Rs. 59.70 crores. The amount was based on the outstanding principal balance in the receivables pool as on the cutoff date, i.e., 31st May 2000, and is equal to the principal amortisation of the pool for the first 84 months. Authority For The Issue
NHB was authorised under the National Housing Bank Act, 1987, to undertake securitisation of the housing loans of housing finance companies and scheduled banks.
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Principal Terms Of The Securities (Class A Pass Through Certificates) Denomination Of Ptcs Each Class A PTC had face value of Rs. 9,94,998/-. Security
NHB in its capacity as trustee will hold all underlying securities including mortgages, except for mortgages pertaining to loans in respect of properties located in Maharashtra, which shall be held in trust by HDFC for the benefit of the SPV Trust declared by NHB. The SPV Trust would in turn hold the mortgages also for the benefit of the PTC holders. While the receivables will be legally transferred to NHB/SPV Trust, HDFC will continue to physically hold the title documents in respect of the housing properties, obtained as security on the loans issued, in the capacity of a custodian to NHB/SPV Trust. Rating Of The PTCs And Explanation Of The Rating The Credit Rating Information Services of India Limited (CRISIL) has assigned AAA(so) rating to the Class A PTCs, indicating highest degree of safety with regard to the timely payment of the financial obligations on the instruments. The rating by CRISIL is for an amount of Rs.60.29 crores.
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PART B
THE SECURITISATION STRUCTURE Entering Into Memorandum Of Agreement HDFC and NHB entered into a Memorandum of Agreement on 7th July 2000, to entitle NHB to take necessary steps to securitize the said housing loans, including circulation of the Information Memorandum and collection of subscription amount from investors. Acquisition of the housing loans by NHB On 1st September 2000, NHB acquired the amount of balance principal of the housing loans outstanding as on the cut-off date, i.e., 31st May 2000, along with the underlying mortgages/other securities thereof, under a Deed of Assignment. There was an absolute transfer of all risks and benefits in the housing loans to NHB (through the Deed of Assignment), and subsequently to the SPV Trust (through the Declaration of Trust). The housing loans selected for securitisation were chosen in accordance with the pool selection criteria specified by CRISIL. Pool Valuation And Consideration For The Assignment The assets (receivables pool) held in Trust consist of a pool of retail housing loans, each of which is secured by mortgage charge on the property, financed in part through the loan. The loans in the pool comply with the following criteria: 1. The loans were current at the time of selection 2. The loans have a minimum seasoning of 12 months 3. The pool would consists of loans where the underlying property is situated in the states of Gujarat, Karnataka, Maharashtra and Tamil Nadu. 4. The borrowers in the pool are individuals.
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5. Maximum LTV (loan to value) ratio is 80%. 6. Instalment (EMI) to gross income ratio is less than 40%. 7. EMIs should not be outstanding for more than one month. 8. Loan size is in the range of Rs. 18,000 to Rs. 10 lacs. 9. Borrowers in the pool have only one loan contract with HDFC. 10. HDFC has not obtained any refinance with respect to these loans. Registration Of Deed Of Assignment And Stamp Duty Subsequent to the above purchase from HDFC, the receivables pool were recorded as an asset in the books of NHB, till such time as it makes an express declaration of trust in respect of the pool. Subsequently, NHB held the assets in its capacity as a Trustee for the benefit of the PTC holders. Once the Trust had been declared, the assets ceased to be reflected in the books of NHB. The entire process of buying the receivables pool along with the underlying mortgage security and declaring the trust was legally completed on the same day, i.e., 1st September 2000. The housing loans acquired by NHB were registered with the sub-registrar of a district. NHB proposed to register the Deed of Assignment in the State of Karnataka, where the stamp duty is payable @ 0.1% ad valorem, subject to an absolute limit of Rs. 1 lac. Stamp duty on issue of the PTCs was also paid at the applicable rate. Declaration Of Trust NHB is empowered under the NHB Act 1987, to create trust(s) and transfer loans and advances (along with underlying securities where necessary) to such trust(s). Accordingly, after acquiring the housing loans, NHB made an express Declaration of Trust in respect of the pool, by setting apart and transferring the housing loans along with the underlying securities. It also appointed itself as the Trustee, to hold and administer the housing loans as trust property for the benefit of the PTC holders. However, for loans in respect of properties located in the State of Maharashtra, the
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underlying mortgage charges remained with HDFC, and were held in trust by HDFC for the benefit of the main SPV Trust declared by NHB. Issue of Pass Through Certificates Once the housing loans were declared as property held in trust, NHB in its corporate capacity as also Trustee for the SPV Trust issued Pass Through Certificates (PTCs) to investors. The two classes of securities were issued i.e. Class A and Class B PTCs. Class A PTCs were issued to investors, while Class B PTCs were issued to HDFC (the Originator). Class B PTCs are subordinated to Class A PTCs for receipt of principal and interest/income in the manner detailed below, thus acting
Equal to outstanding principal balance as on cut-off date Total Class B principal
as a credit enhancement to Class A PTCs.

Loan # 84 months Total Class A principal
PTC holders will be serviced by way of monthly pay-outs. The principal payment to the PTC holders would be linked to the aggregate principal component of the EMIs actually received from the Borrowers each month. Thus, the aggregate principal amount in each scheduled monthly payout to the investors will match the aggregate principal component in the EMI receivables of the SPV trust at the beginning of the transaction.
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PART C
PARTIES TO THE TRANSACTION 1. The SPV Trust The NHB/SPV Trust is a trust formed under the Indian Trusts Act pursuant to a Declaration of Trust settled by the NHB who would also act as the Trustee. 2. National Housing Bank The National Housing Bank (NHB) was established on 9th July 1988 under an Act of the Parliament viz. the National Housing Bank Act, 1987 (the Act) to function as a principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions. The Act also envisaged formulation of policies relating to mobilisation of resources and credit for housing, regulating the working of housing finance institutions, co-ordinating their activities as also those of other agencies engaged in housing finance and extending financial support to housing finance intermediaries. Thus, the Bank was set up with a view to create a sound and effective delivery system for housing credit in the country. 3. Housing Development Finance Corporation Ltd (Originator ) Housing Development Finance Corporation Limited (HDFC) was promoted in October 1977 as a public limited company which specialises in the provision of housing finance to individuals, co-operative societies and the corporate sector. 4. The Servicing & Paying Agent HDFC would act as the Servicing & Paying (S & P) Agent for the issue. 5. The Registrar &Transfer Agent
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NHB will act as the Registrar and Transfer (R & T) Agent for the issue.
PART D
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RISK FACTORS Absence Of Secondary Market For The PTCs This being the first issue of the type by the issuer, there has been no formal market for the certificates. The absence of a secondary market for the PTCs could limit an investors ability to resell them. No assurance can be given regarding an active or sustained trading in the PTCs after their listing. However, in future, NHB may consider making arrangements for market making in order to provide liquidity to the investors. Prepayments On Receivables An investor may receive payment of principal on the PTCs earlier than scheduled. Prepayments shorten the life of the PTCs to an extent that cannot be fully predicted. The rate of prepayments on the receivables may be influenced by a variety of economic, social and other factors. No prediction can be made as to the actual prepayment rates that will be experienced on the receivables. HDFC will be required to repurchase a loan from the SPV Trust, if there is any breach of representations and/or warranties made by it with respect to the loan. Bankruptcy Of The Housing Finance Company If HDFC becomes subject to bankruptcy proceedings and the court in the bankruptcy proceeding concludes that the sale to NHB was not a 'true sale', then an investor could experience losses or delays in the payments on the PTCs. NHB has taken steps in structuring the transaction to minimise the risk that the sale of the receivables to NHB will not be construed as a "true sale''.
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HDFC COMPLETES ASSET BACKED SECURITISATION

HDFC Bank has completed its largest Asset Backed Securitisation (ABS) program till date by way of issue of Senior Pass Through Certificates (PTCs), backed by gross receivables of Rs. 811.35 crore, demonstrating the bank's expanding retail business in India and increased focus on securitisation. The issue, which opened on June 4, 2004, received an excellent response from mutual funds and banks and was subscribed on the day of opening. The PTCs have been issued by Retail 2004 Series II, a special purpose trust settled by IL&FS Trust Company Limited. The receivables are originated by HDFC Bank and the Bank will continue to act as servicer for these loans. The Trust raised the funds through issuance of three series of Senior PTCs, Series A1, Series A2 and Series A3. Series A1 was rated A1+ (so) and both Series A2 and A3 were rated MAAA (so) by ICRA. The ratings are based on the strength of cash flows from the selected pool of loan contracts, the credit enhancement and the integrity of the legal structure. The credit enhancement is available in the form of subordinate PTCs (6.7 per cent of Senior PTC cash flows), cash collateral (1.78 per cent of Senior PTC cash flows) and subordination of opening over dues. The underlying assets are auto and commercial vehicle loan receivables from a pool of 26,359 loan contracts with weighted average seasoning of 9.4 months as of April 22, 2004. The concentration on individual exposures is small and majority of the pool is in the small and medium cars and HCV segments. Standard Chartered Bank acted as the Book Runner and Lead Arranger for the issue.
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CONCLUSION
Originating in the mortgage markets of the US in the 1970s securitisation has developed and come a long way from there to spread throughout the globe to benefit organisations Securitisation is the buzzword in today's World of Finance. It's not a new subject to the developed economies. It is certainly a new concept for the emerging markets like India. The Technique of Securitisation definitely holds great promise for a Developing Country like India. Securitisation has worked well over the other tools of financing as it does not increase the liability of the Originator but at the same time provides him financing. It infact converts the NPA of the company into cash flows. The above features help infrastructure companies to get finance easily and also helps the banks by reducing the burden on them and helping them to concentrate on their core business activities. But the tool has not been utilised to its fullest in our country as cuase of the legal complications. However a welcome step was seen in the form that securitised papers can now be traded as assets in the market and also the reduction in the stamp duty of the securitisation transaction. The development till off late was slow but the future for securitisation is said to be very bright in Asias 2nd largest economy where financing is of prime importance and the growth potential are very high.
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BIBLIOGRAPHY
BOOKS
SECURTISATION VINOD KOTHARI
WEB SITES
WWW.VINODKOTHARI.COM WWW.BSEINDIA.COM WWW.FITCHINDIA.COM WWW.NHB.ORG.IN WWW.REDIFF.COM WWW.ECONOMICTIMES.COM WWW.WICKIPEDIA.COM WWW.SOOPLE.COM
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FINANCING.

SECURITISATION A TOOL TO MODERN

THE INDIAN EXPERIENCE

2. NEED FOR SECURITISATION IN INDIA

BANKING & SECURITISATION

SECURITISATION A TOOL TO MODERN

INFRASTRUCTURE DEVELOPMENT AND FINANCING

5. FISCAL INCENTIVES FOR INVESTING IN INFRASTRUCTURE PROJECTS FINANCING

INFRASTRUCTURE 8. RELEVANCE OF SECURITISATION TO DIFFERENT SECTORS OF INFRASTRUCTURE

9. CRITERIA FOR STRUCTURING A SECURITISATION TRANSACTION

SECURITISATION A TOOL TO MODERN

Securitisation A Tool to Modern Financing

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

OriginatorAssets to Securitize. SPV Formation.

Servicer collects receivables (escrow account) & gives to SPV.

SECURITISATION A TOOL TO MODERN

cash flow to the SPV is done in this manner.

SECURITISATION A TOOL TO MODERN

Reinvestment of Cash Flows:

FORMS OF SECURITISATION STRUCTURES

SECURITISATION A TOOL TO MODERN

Pass Through Structure

Figure 1. Pass Through Structure

SECURITISATION A TOOL TO MODERN

Pay Through Structure

Figure 2. Pay Through Structure

SECURITISATION A TOOL TO MODERN

METHODS OF TRANSFER OF ASSETS

1. Novation is the clearest way of selling a loan and effectively transferring

SECURITISATION A TOOL TO MODERN

3. Sub-participation does not transfer any of the seller's rights, remedies or

SECURITISATION A TOOL TO MODERN

MOTIVATION AND BENEFITS

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

5. The Rating agency

6. Receiving and Paying Agent

7. Agent and Trustee

SECURITISATION A TOOL TO MODERN

SECURITISATION A TOOL TO MODERN

TYPES OF ASSETS THAT CAN BE SECURITISED

SECURITISATION A TOOL TO MODERN