Definition
Pass-Through Certificate (PTC)
A Pass-Through Certificate is a security issued in a securitisation that passes the principal and interest from an underlying loan pool to investors.
When loans are securitised, the special-purpose vehicle issues PTCs whose holders receive the borrowers' repayments, net of fees, as they come in. PTCs are usually rated and may have senior and junior tranches, with junior holders absorbing losses first.
PTCs let banks, mutual funds and other investors gain exposure to a diversified pool of retail loans without originating them. In India, PTCs are also a way for banks to acquire priority sector assets and for NBFCs to obtain term funding.
Related terms
- Direct AssignmentDirect assignment is the sale of a pool of loans by an NBFC or bank directly to another lender, transferring the cash flows and a share of the risk.
- Securitisation (Loans)Securitisation is the pooling of loans and issuing of tradable securities backed by their cash flows, letting originators raise funds and transfer risk.
- Minimum Retention Requirement (MRR)The Minimum Retention Requirement is the share of a securitised loan pool that the originator must keep, ensuring it retains skin in the game.
- Credit EnhancementCredit enhancement is a structural feature that improves the credit quality of a securitisation, such as over-collateralisation, cash reserves or subordinated tranches.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.