Securitization involves pooling and repackaging of homogeneous financial assets into marketable securities that can be sold to investors. The main parties are the originator, special purpose vehicle (SPV), and investors. Assets are transferred from the originator to the SPV, which then issues securities to investors. Securities are structured and rated to match the maturity of the underlying assets. The process benefits originators through additional liquidity and investors through safer, higher returning investments. However, securitization remains unpopular in India due to factors such as heavy taxes, a lack of standardization and guidelines, and inadequate credit rating facilities. Hire purchase allows buyers to obtain goods through installment payments, with ownership transferring upon final payment. It provides
Securitization involves pooling and repackaging of homogeneous financial assets into marketable securities that can be sold to investors. The main parties are the originator, special purpose vehicle (SPV), and investors. Assets are transferred from the originator to the SPV, which then issues securities to investors. Securities are structured and rated to match the maturity of the underlying assets. The process benefits originators through additional liquidity and investors through safer, higher returning investments. However, securitization remains unpopular in India due to factors such as heavy taxes, a lack of standardization and guidelines, and inadequate credit rating facilities. Hire purchase allows buyers to obtain goods through installment payments, with ownership transferring upon final payment. It provides
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Securitization involves pooling and repackaging of homogeneous financial assets into marketable securities that can be sold to investors. The main parties are the originator, special purpose vehicle (SPV), and investors. Assets are transferred from the originator to the SPV, which then issues securities to investors. Securities are structured and rated to match the maturity of the underlying assets. The process benefits originators through additional liquidity and investors through safer, higher returning investments. However, securitization remains unpopular in India due to factors such as heavy taxes, a lack of standardization and guidelines, and inadequate credit rating facilities. Hire purchase allows buyers to obtain goods through installment payments, with ownership transferring upon final payment. It provides
Copyright:
Attribution Non-Commercial (BY-NC)
Available Formats
Download as PPT, PDF, TXT or read online from Scribd
SECURITIZATION Pooling and Repackaging of Homogeneous liquid Financial Assets into Marketable Securities that can be sold to Investors, is known as Securitization. Parties in Securitization Generally 3 parties, namely- 1. Originator: any financial institution or other entity, which has decided to adopt securitization and sell its assets. 2. Special Purpose Vehicle: usually a trust which converts receivables into securities. 3. The Investor: MF, pension fund, insurance company, PF, etc buying securities from SPV. Other Parties: 4.The Obligor: original borrower on whose integrity success of securitization depends. 5. Credit Rating Agency: rates originator and underlying assets of securities. 6. Administrator: receiving and paying agent who receives payments from obligor and gives to SPV. 7. Trustee: ensure that all parties meet their obligations 8. Structurer: works with originator to comply with all legal, taxation, procedural requirements and structuring whole deal. Process of Securitization Mainly includes transfer of assets, issue of securities, servicing of securities. 1. Transfer of Assets: to SPV thru any of the following methods- Assignment (statutory with legal & beneficial rights or equitable with beneficial rights) Sub-participation- (not a transfer of loan, payments received from borrower are transferred to buyer by the lender or originator) Documentation: rights and obligations of all parties are defined. 2. Issue of Securities: maturity of securities is matched with securitized loans, rated or guaranteed or underwritten by some agency. 3. Servicing of Securities: repayment of securitized loan passed on to SPV, which then pays to investors on maturity. Structure of Securities 1. Pass through certificates: issued to investors, against pooled assets and undivided interest and cash flows received from underlying assets are ‘passed through’ to investors. Tenure of PTCs is matched with life of securitized assets. Investors have no charge against underlying assets. 2. Pay through certificates: SPV issues secured debt instruments of different maturity in response to investors’ demand. Offered at a discount to face value. Like deep discount bonds. 3. Preferred stock certificates: issued by subsidiary company against trade debts/ consumer receivables of parent company. Subsidiary company issues S.T. securities against them with guarantee from merchant banker. 4.Stripped structures: structured as ‘interest only’ or principal only securities. Borrowers make early payment if market interest falls. Investors in ‘principle only’ gain by getting early payment, but ‘interest only’ investors lose interest. 5. Asset based commercial paper: SPV purchases portfolio of mortgages from lending institutions, combine into single group on the basis of interest rate, maturity and underlying collateral. Then transfers them to trust which, in turn, issues mortgaged backed papers (CPs) of S.T. duration. Investors participate in cash flows from underlying mortgages to the extent of investment in certificates. Benefits of Securitization 1. Additional source of fund/liquidity for originator. 2. Greater profitability due to high liquidity and fees when originator acts as receiving and paying agent. 3.Enhancement in capital adequacy ratio by removal of assets from balance sheet. 4.Spreading of credit risk by sharing responsibility with several parties. 5. Lower cost of funding due to higher credit rating of asset backed securities than the rating of company as a whole. 6. Provision of Multiple instruments for investors. 7. Safer investment and higher return to investors. 8. Capital formation by preventing idle capital. Causes of Unpopularity in India 1. New concept, benefits not much known 2. Heavy stamp duty and registration fees on assignment of illiquid& non performing assets to SPVs. 3. Cumbersome transfer procedure to SPVs. Difficulty in assignment of debt to third party. Transfer of Property Act needs amendment. 4. Lack of standardised loan document creates pooling difficult for SPVs. 5. Inadequate credit rating facilities. 6. Absence of proper accounting procedure for securitized assets. 7. Absence of proper guidelines for securitization. HIRE PURCHASE Hire purchase means a transaction where goods are purchased and sold on the terms that: (1) payment will be made in installments, (2) the possession of the goods is given to the buyer immediately, (3) the property in the goods remains with the vendor till the last installment is paid, (4) the seller can repossess the goods in case of default in payment of any installment, and (5) each installment is treated as hire charges till the last installment is paid. Characteristics of Hire Purchase Agreement 1. Payment is made by hirer (buyer) to the hiree, usually vendor, in installments over a specified period of time. 2. The possession of the goods is transferred to buyer immediately. 3. The property in goods remains with vendor (hiree) till last installment is paid. The ownership passes to buyer (hirer) when he pays all installments. 4. Hiree or vendor can repossess the goods in case of default and treat the amount received by way of installments as hire charged for that period. 5. The installments in hire purchase include interest as well as repayments of principal. 6. Usually, hiree charges interest on flat rate. Legal Position of Hire Purchase A. Possession of goods is delivered by owner there of to a person on a condition that such person pays the agreed amount in periodic payments, and B. The property in the goods is to pass to such person on the payment of the last of such installments, and C. Such person has a right to terminate the agreement at any time before the property so passes. ANY QUERY???