Securitization means the conversion of a pool of assets into marketable debt securities. The deal starts with an originator selling a part of his assets portfolio to a body (or a trust) called the Special Purpose Vehicle (SPV) and in effect converting the assets into cash. The special purpose vehicle in turn raises money by floating a debt instrument on the strength of cash flows and the underlying assets, and using the proceeds to pay off the originator. To this extent, the SPV is
only a pass through vehicle
and a manager of the asset and
cash
flow pool. The proceeds
collected by the originator on account of
the outstanding loans made by him is then passed
on
the SPV who in turn pays off the principal
and interest to
the
final investor,
typically the wholesale investor,
like
the mutual funds, insurance companies and pension funds.
Benefits of
Securitization:
1. For the issuer, securitization provides an additional
source
of funds, reduces funding costs,
besides resulting in economy in the use of
capital,
greater
recycling of
funds which
lends to
higher turnover
and profitability.
2. It also improves the capital adequacy norm by removing loan assets from the balance sheet,
or by substituting them with
less risk weighted assets.
Moreover, funds can be managed without impairing its borrowing ability.
3. Securitized
assets gives the issuer, the
ability to pass on or
eliminate credit, interest rate and
lending risks associated with balance
sheet
funding and hence
is
an effective means of
diversifying credit risk.
4. For the investor, it improves the
diversity of investment avenues.
It also makes it possible for
investing in high
yielding assets like housing and consumer finance which
are untouchable by
banks. Moreover,
the investor benefits from the purchase of
securitized
debt with higher quality
debt with higher yields and good liquidity. Impediments to Assets Securitization in Bangladesh:
1. Lack of Awareness
2. Non Uniformity in Stamp Duty
3. Absence
of Effective
Foreclosure
norms
4. Less demand for long term Debt Papers
5. Investments Restrictions