The ‘Securitisation’ is a two-stage process in which pool of assets are structured or packaged and sold by an originator(Banks and financial institutions) to a bankruptcy remote* special purpose vehicle (SPV). In the first stage there is sale of single asset or pooling and sale of pool of assets to a SPV in return for an immediate cash payment on without recourse basis. In the second stage these security interests are restructured by SPV and selling them to third party investors by issuance of tradable debt securities. The investors subscribe to the Pass through Certificates (PTCs) issued by the SPV. The investors holding these certificates to acquire beneficial interest only in the cash flows realized from the underlying assets. The underlying assets are mainly secured (asset backed ) like housing loans, vehicle loans (four wheeler and two wheelers), commercial vehicle loans, tractor loans, three-wheeler loans and unsecured loans like personal loans, consumer durable loans. Characteristically in India, the originators or sellers are banks, financial institutions and non-banking financial companies.
For enabling the transferred assets to be removed from the balance sheet of the originator in a securitisation structure, the isolation of assets or ‘true sale’ from the originator to the SPV is an essential requirement. In case the assets are transferred to the SPV by the originator in full compliance with all the conditions of true sale given below, the transfer would be treated as a ‘true sale’ and originator will not be required to maintain any capital against the value of assets so transferred from the date of such transfer. The effective date of such transfer should be expressly indicated in the subsisting agreement. In the event of the transferred assets not meeting the “true-sale” norms the assets would be deemed to be on the balance sheet of the originator and accordingly the originator would be required to maintain capital for those assets.
The SPV set up during the process of securitisation may be a partnership firm, a trust or a company. The SPV should be entirely independent of the originator. The originator should not have any ownership, proprietary or beneficial interest in the SPV. The Servicer (typically, Originator in India) is appointed by the SPV trust to service the loans. Servicer passes on the periodic collections from the underlying borrowers to the trust which is further passed on to the investors as per scheduled payouts. Credit Enhancement is provided to an SPV to cover the losses associated with the pool of assets. In securitization, credit enhancement refers to a risk-reduction technique that increases the credit profile of structured financial products or transactions.
[*’Bankruptcy remote’ SPV means the unlikelihood of an entity being subjected to voluntary or involuntary bankruptcy proceedings, including by the originator or its creditors].