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

What are the requirements of ifrs 8, What are the requirements of IFRS 8 ...

What are the requirements of IFRS 8 IFRS 8 requires an organisation to adopt management approach to reporting on financial performance of its operating segments. General idea

Consumer advisory panel (cap) of asic, Consumer Advisory Panel (CAP) of ASI...

Consumer Advisory Panel (CAP) of ASIC It was established in 1998. Its role is to advise ASIC on current consumer protection issues and give feedback on ASIC policies and activi

Management of pension funds, Management of pension funds Employees Prov...

Management of pension funds Employees Provident Fund Organization (EPFO) is the major organization which deals with the pension system in India. The Employees' Provident Fund O

Operating cycle of company, calculate the operating cycle of company which ...

calculate the operating cycle of company which gives the following details relating to its operations. Particular raw material consumption per annum 842000. Annual cost of producti

Objective of the business, Q. Objective of the business? Working capita...

Q. Objective of the business? Working capital is needed for the following purposes For the purpose of the raw material, components and spares To pay the Wages and the sal

Treasury inflation-protected securities or tips, Treasury Inflation-P...

Treasury Inflation-Protected Securities (TIPS) are the inflation-indexed bonds, the US Treasury offers. The first offer was made in the year 1997. As the name sug

Relationship b/w bond''s market price and yield to maturity, What is the re...

What is the relationship between a bond's market price and its promised yield to maturity?  Explain. A bond's market price reckon on its yield to maturity (YTM).  When a bond h

Example of relationship between bond price and time, Illustration    ...

Illustration      Discount bond (5 yr. bond with 10% coupon) (expected rate yield at 12%) Premium bo

Define mutually exclusive projects, Provide three examples of mutually excl...

Provide three examples of mutually exclusive projects. Mutually exclusive projects are projects which participate against each other for our selection.  If a organization and fir

Create a data entry and balance sheet, The ledger of AISExperts Inc. showed...

The ledger of AISExperts Inc. showed the following balances after adjustment , but before closing, on December 31, 2012, the end of the current year: Accounts payab

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