Benefits of securitization, Financial Management

Assignment Help:

Securitization has attracted a widespread application of the technique to residential mortgage loan, the easiest class of a financial asset to securitize, and to a growing volume of structured offerings of consumer receivables such as automobile loans, lease rentals, and credit card receivables. While the benefits of securitization would depend on individual situations - the state of the assets, the state of the borrower and capital market conditions, certain key factors stand out:

  1. The loan originators can raise money as soon as they create loans. They need not hold their asset portfolios till their maturity. This will help in multiple asset creation, thereby helping to route funds into business, thereby increasing the profitability.

  2. The investor is benefited since the security he buys is of a good quality debt (usually rated AAA as it is credit enhanced) at higher yields and good liquidity. In most of the cases, the deal is underwritten by a merchant banker. Also, the deal will have a trustee to oversee the operation of transfer of receivables to the investors in due course.

  3. Normally, securitized debt can be cheaper than other forms of funding as the securities enjoy a wider investor base and certain liquidity. It also improves returns on equity and assets besides eliminating the problem of mismatching by transforming the credit assets of the lending institutions into more liquid and marketable instruments and selling these to investors.

  4. Securitization deals in helping the originator beat the rating given to the company. Rating given to the company is based on all the items present in the balance sheet with a reasonable judgment on the quality of these assets. With the securitization deal taking place on a particular class of assets present in the balance sheet, there is a possibility of the originator getting funds at a rate cheaper than would have been possible on its own.

  5. Not only does securitization help in getting funds at low cost, it also enables the originator to take advantage of more profitable investment opportunities with the revenue generated through securitization.

  6. Securitized assets give originators the ability to pass on or eliminate credit, interest rate and lending risks associated with balance sheet funding. This improves asset management and is an effective means of diversifying credit risk.

  7. By transforming an illiquid asset on the balance sheet into cash, the originator minimizes the accounting leverage as measured by the debt ratio and thus enables raising more funds without impairing its borrowing ability.

  8. The advantage the originator derives through securitization in increasing the capital adequacy is tremendous. Capital adequacy norms are very rigorous especially for NBFCs which have to achieve a capital adequacy ratio of 12% by the end of this century. Capital Adequacy Ratio is the ratio of the sum of Tier-I and Tier-II capital to the risk weighted assets. An NBFC may increase its capital adequacy ratio by securitizing some of its homogenous assets which decreases the risk weightage of the assets. This will help the NBFC continue with its business, and at the same time fulfill the regulatory guidelines of the land.

This advantage is not available in case of Asset Securitization deals in some states in India due to higher stamp duties. Stamp duties are required to be paid on every transfer of assets as per the Transfer of Property Act, 1872 and Securitization involving transfer of assets from the Originator to the SPVs, a huge stamp duty has to be paid increasing the cost of the deal. However, some states like Maharashtra, Tamil Nadu and Karnataka have reduced stamp duty on these deals as determination of stamp duty is a state prerogative.

Not necessarily of least quality of the assets present in the balance sheet that has influenced lesser rating of the company.


Related Discussions:- Benefits of securitization

Explain the term - yield to call, Illustrate the process of calculating cal...

Illustrate the process of calculating call/ put options yields Issuing corporation will use provision if interest rates fall substantially below coupon rates offered on the se

Equity claims and debt instruments in financial securities, What is the dif...

What is the different between equity claims and debt instruments in financial securities? By getting conclusion about equity claims and debt instruments, that equity claims are

What are the time dimensions of the income statement, What are the time dim...

What are the time dimensions of the income statement, the balance sheet, and the statement of cash flows?  Hint: Are they videos or still pictures?  Explain. The income stateme

Define criteria for a good international monetary system, Discuss the crite...

Discuss the criteria for a ‘good’ international monetary system. Answer: A good international monetary system must offer (i) sufficient liquidity to the world economy, (ii)

State the rate of return of a bond - debt securities, Rate of return of a B...

Rate of return of a Bond In case of bonds, rather than dividends, investor is entitled to payments of interest yearly or semi-annually. Investor also benefits if there is an ap

Strong form level of efficiency, Strong form level of Efficiency This l...

Strong form level of Efficiency This level states that price reflects all the available public and private information (past, present and future information). If the hypothesis

Working capital as a percentage of total assets, Q. Working Capital as a Pe...

Q. Working Capital as a Percentage of Total Assets? This approach of estimation of working capital requirement is based on the fact that the total assets of the firm arc consis

Working capital cycle, Q. Working capital cycle? In a manufacturing con...

Q. Working capital cycle? In a manufacturing concern the working capital cycle is start with the purchase of the raw material and ends with the realization of the cash from the

Sources of risk, Define Sources of risk with types???? how can we analys...

Define Sources of risk with types???? how can we analysis the risk in bussiness?? plese help!!!!!

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd