Definition
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.
A lender pools homogeneous loans (such as vehicle or home loans) into a special-purpose vehicle, which issues pass-through certificates to investors. The borrowers' repayments flow through to the certificate holders, while the originator gets upfront liquidity and frees up capital.
The RBI's securitisation framework prescribes minimum holding periods, minimum retention requirements and a ban on credit enhancement that would defeat true risk transfer. Securitisation is an important funding and capital-management tool for Indian NBFCs and HFCs.
Related terms
- Non-Banking Financial Company (NBFC)An NBFC is an RBI-registered financial company that lends and invests but cannot accept demand deposits or offer cheque facilities like a bank.
- 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.
- 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.
- 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.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.