(a) What is debt securitisation? Explain the basics of debt securitisation process.

4. (a) Debt Securitisation: It is a method of recycling of funds. It is especially beneficial to financial intermediaries to support the lending volumes. Assets generating steady cash flows are packaged together and against this asset pool, market securities can be issued, e.g. housing finance, auto loans, and credit card receivables. Process of Debt Securitisation (i) The origination function – A borrower seeks a loan from a finance company or bank. The credit worthiness of borrower is evaluated and a contract is entered into with repayment schedule structure over the life of the loan. (ii) The pooling function – Similar loans on receivables are clubbed together to create an underlying pool of assets. The pool is transferred in favour of Special Purpose Vehicle (SPV), which acts as a trustee for investors. (iii) The securitisation function - The SPV structure and issue securities on the basis of these assets pool. The securities carry a coupon and expected maturity which can be asset-based/mortgage based. These are generally sold to investors through merchant bankers. Investors may be a pension funds, mutual funds, insurance funds. The process of securitization is generally without recourse i.e. investors bear the credit risk and issuer is under an obligation to pay to investors only if the cash flows are received by him from the collateral. The benefits to the originator are that assets are shifted off the balance sheet, thus giving the originator recourse to off-balance sheet funding.