Already have an account? Get multiple benefits of using own account!
Login in your account..!
Remember me
Don't have an account? Create your account in less than a minutes,
Forgot password? how can I recover my password now!
Enter right registered email to receive password!
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:
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.
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.
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.
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.
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.
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.
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.
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.
Let us consider a bond with callable or prepayable feature. Figure shows the price/yield relationship of option-free bond and callable bond. The price yield
Prevention of Risk - Method of risk management In case of this method, the business avoids risk by taking appropriate steps for prevention of business risk or avoiding loss, su
What are the Factors determining the cost of capital There are many factors which impact the cost of capital of any company. This would mean that cost of capital of any two co
Accept-Reject Rule: The decision rule is to accept the project if the computed payback period is less than the standard. If not, reject it. While ranking the projects, projec
Bankers' acceptance is a debt instrument created to smoothen the commercial trade transactions. It is named so because a banker in this case accepts the ultimate
Functions of a Stock Exchange The stock exchange is a market place where investors trade in securities. It is a competitive market involving large numbers of buyers and sellers
What is the difference between business risk and financial risk? Business risk considers to the uncertainty a company has regarding to its operating income (as well termed as ear
What are a bank's primary reserves ? When the Fed sets reserve requirements, what is its primary goal? Vault deposits and cash in the bank's account at the Fed are used to pe
which are the components of working capital management?
Question 1 Define 'Trust'. Explain in detail the various types of Trust Question 2 Discuss the concept of Tax Planning. Identify difference between Tax Planning and Tax Ev
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!
whatsapp: +91-977-207-8620
Phone: +91-977-207-8620
Email: [email protected]
All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd