Explain The Concept Of Debt Securitization?
Debt securitization is a method of recycling of funds. It is especially beneficial to financial intermediaries to support the lending volumes. Assets generating steady cash flows are packaged together and against this assets pool, market securities can be issued. The debt securitization process can be classified in the following three functions. The origination function: The credit worthiness of a borrower seeking loan from a finance company, bank, housing company or a leasing company is evaluated and a contract is entered into and repayment schedule is structured over the life of the loan. The pooling function: Similar loans or receivables are clubbed together to create an underlying pool of assets. This pool is transferred in favors of a special purpose vehicle (SPV). The securitization function: After structuring, issue the securities on the basis of asset pool. The securities carry a coupon and an expected maturity, which can be asset based or mortgaged based. These are generally sold to investors through merchant bankers. The process of securitization is generally without recourse i.e. the investor bears credit risk or risk of default and the user is under an obligation to pay to investor only if the cash flows are received by him from the collateral.
