Group-3 Neeraj Bhardwaj – 114 Rohit Jain – 125 Shraddha Kamat – 128 Aditya S Prakash – 143 Devang Shah – 147 Rohit K Singh - 151

Securitization: Concept, Process, Participants & ClassificationCredit Enhancement and RisksRating MethodologySecuritization in IndiaAnalysis of RBI Guidelines & Basel II impactBenefits of SecuritizationIndian Perspective

 Identified pool of assets  Marketable Securities  Credit Arbitrage Transaction  Homogeneous  Sold directly or through SPV  Underlying assets are mainly secured loans like housing loans, auto loans, commercial vehicle loans etc

SecuritizationABSABS(Narrow)CDOMBS

CDOABS/MBS Underlying Assets High yield bonds, emerging market corporate debt, sovereign debt, conventional ABS/MBS Credit Card Account Receivable, Car loans etc Amount of Obligors 100 or 200, or even less than 100 Thousand obligors atleast Tranche Credit TrancheTime Tranche Asset Correlation HeterogeneousHomogeneous

Overcollateralization Direct Equity Issue Cash Collateral Account (CCA) Excess Spread Internal Credit Enhancement Insurance Letter of Credit Credit Default Swap Put Option on assets External Credit Enhancement

Risk of nonpayment by underlying assets Credit Risk Interest Rate Risk Prepayment Risk Market Risk Servicer Risk Commingling Risk Counterparty Risk

Proportion of Used / Refinanced asset Asset Type Depends on Asset Manufacture / Model / Class Asset Classification Creditworthiness of borrower Borrower Profile Geographical Location also poses additional risk Geographical Distribution Indicates the willingness of borrower to repay Loan to Value Ratio

Indicates the Obligor’s willingness to pay Installment to Income Ratio Shows the tenure of the Loan Original Tenure It shows the overdue composition of Loans Payment Status Shows the distribution of risks Number of Borrowers

Securitized Exposure Standardized Approach Rated Exposure Risk Weights Unrated Capital Deduction Internal Rating Based Approach Rated Exposure Rating Unrated Exposure

 Beginning of securitization in India  SARFESI Act  Main players in this segment  NHB

 Criteria for ‘True Sale’  Criteria to be met by SPV  Re-purchase of Assets from SPV  Disclosure to be made by SPV

 Funding Alternative  Replace receivables with cash and improves liquidity  Balance Sheet Management  Re-allocation of Risks  Operating Process Efficiency  Improves Operating Leverage  Improves transparency Benefits to Originator

 Low Event Risk  Higher Yield for Similar Risks  Portfolio diversification  Liquidity  Less Volatile and had low default rate historically  Aligned as per Investor’s needs  Benefits to economy  Enhance the variety of debt  Connects capital markets and financial markets  Enhance sources of capital Benefits to Investors

 Lack of Appropriate Legislation True Sale Stamp Duties Taxation & Accounting  Debt Market  Registration  Foreclosure Laws  Lack of Investor Appetite- quality of assets Obstacles in INDIA

 Inadequate understanding and pricing of risks inherent in the process of transformation of risks  Growing complexity and lengthening of the chain gave rise to several principal/agent problems.  Fundamental modelling issues

 MBS market has been relatively slow  the long maturity periods,  lack of secondary market liquidity and  the risk arising from prepayment/re- pricing of the underlying loan.  Direct assignment of single loan or retail loan pools has been gaining importance  Similar to ABS but do not issue any instrument like PTC  Customized deal

 Costly source  Uneconomical for lower requirements  Passes on database to investors  Leaves the entity with junk assets

 Securitization may lead to some diminution in the importance of banks  Increase in the volatility of asset values  Competition from Non-Bank Financial Institutions  Increase financial fragility

 Securitization leads to better disintermediation for its advantage  Redefines the intermediary's role  Eliminates funds-based financial intermediaries by fee-based distributors  Banks are facing the threat of disintermediation