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

Valuing mortgage-backed and asset-backed securities, A cash-flow yield is t...

A cash-flow yield is the discount rate that makes the price of a mortgage-backed or asset-backed security equal to the present value of its cash flows. It is built

Which ratios would a banker be most interested, Which ratios would a banker...

Which ratios would a banker be most interested in when considering whether to approve an application for a short-term business loan? Explain. Bankers and other lenders use liq

What is the irr of the project, QUESTION Part A: 1. Nev Plc is consi...

QUESTION Part A: 1. Nev Plc is considering to invest in a machine to manufacture a new line of umbrellas. The following data has been assembled in respect of the investment:

Explain the significance of financial analysis, Question 1 What are the li...

Question 1 What are the limitations of management accounting? Question 2 Explain the significance of financial analysis Question 3 What are the advantages of the value a

Enhance or maintain its image and reputation, a) Marketing might be vital t...

a) Marketing might be vital to an organisation such as WHSG for several reasons, including: • The need to be a focus for the right kind of students to the school (there are riva

Explain due date and due diligence, Q. Explain Due Date and Due Diligence? ...

Q. Explain Due Date and Due Diligence? Due Date -Every governing agency and its forms scheduled reporting and most significantly payments have a required due date. It's this

Extendible reset bonds, Extendible reset bonds are floaters in which ...

Extendible reset bonds are floaters in which the issuer is required to reset the coupon rate so that the issue will trade at a predetermined price (usually above

Functional classification of mutual funds, Functional Classification of Mut...

Functional Classification of Mutual Funds Functional classification of Mutual Funds is based on the basic characteristics of the mutual fund schemes for subscription. Mutual Fu

Financial information, A)  What are the statements of financial information...

A)  What are the statements of financial information? Talk about two items from each. B)   Describe statement of changes in financial positions, with an example.

What is bridge financing, Bridge Financing A type of short-term financ...

Bridge Financing A type of short-term financing used to cover an organization short-term want; a loan that is expected to be repaid relatively fast.

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