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Securitization refers to conversion of illiquid assets to liquid assets by converting longer duration cash flows into shorter duration ones. Securitization denotes the process of selling assets by the person holding it to an intermediary, who in turn will break such assets into marketable securities. The assets may virtually be anything ranging from future sales of cinema tickets and airline tickets to hire purchase deals and Non-Performing Assets (NPAs).
Securitization is a process through which illiquid assets are transformed into a more liquid form of assets and distributed to a broad range of investors through the capital market. Despite the obvious advantages this process confers on institutions and companies - especially those having large receivables - securitization in India has not taken off. So far confined to a few deals involving some non-banking companies and foreign banks, securitization waits for all round initiatives before it can emerge as an important capital market instrument. One significant obstacle might have been the fact that despite being talked about so much, very few people can understand it. A securitized transaction is best understood through by a typical example. A Non-Banking Finance Company (NBFC), which has lent money to truck operators for the purchase of vehicles, will have in its balance sheet these assets for a fairly long period (until the hire purchase transactions are paid-off). Funds used to finance the purchase of these vehicles, therefore, get blocked. Securitization will help in removing these relatively illiquid assets from the NBFC's balance sheet. By conveniently sending them out to other investors, who now basically buy negotiable instruments, it will be able to recycle its funds. The security for the new investors will be the expected cash flow from the securitized assets.
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