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Steps involved in the Process of Securitization
The following are the major steps involved:
The lender (also called the originator) - in this example, the NBFC - segregates its loans portfolio into homogeneous pools, which are then transferred to a Special Purpose Vehicle (SPV).
On its part, the SPV issues asset-backed debt instruments. These can be with or without recourse.
Interest and principal on the underlying pool of assets are collected and transmitted to the investors by a designated party which can also be the original lender.
Credit enhancement in the form of a guarantee from the original lender will boost investor confidence. Advantages and disadvantages of securitization obviously help in improving the seller's (the originator or the lending company) liquidity. Its capital is freed for other uses. Group or sectoral exposures can be altered through this route. Interest rate mismatches can be corrected.
Modified duration is used to determine the percentage change in the bond's prices for a 100 basis point (1%) change in the yield. The underlying assumption is tha
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