One major advantage of securitisation is its flexibility. A pool of receivables could be split into different `strips' and sold to different types of investors.

1. First, a special purpose vehicle (SPV) is created, essentially to delink the assets (cash flows) from the company that wants to securitise (called `originator'). The SPV is usually a trust and has no borrowings of its own.

2. The assets (such as auto loan or credit card receivables) are placed with the SPV.

3. The SPV then splits the assets into different categories according to revenue streams and creates marketable securities against each category. For example, if a finance company securitises its auto loan receivables, the monies receivable in the first month could be one category, which could be sold to investors who might be interested in short-term securities. Similarly, the amounts receivable in the second month could be another category, the third month yet another. Or, the receivables could be split quarter-wise.

   This process is called `stripping'. In other words, if months represents the rows of a table and the auto-loan borrowers represent the columns, then each row, or sets of rows could be different `strips'.

4. Then the SPV creates tradeable debt instruments called `pass through certificates' against each strip, and sells them to investors such as mutual funds, banks and financial institutions, and possibly even individuals. The SPV then pays the `originator'.

This form of funding (raising money by selling future revenue streams) has many advantages. First of all, from the perspective of the company that securitises its cash flows, the major benefits are in terms of getting immediate cash and passing the risk to the investors. Besides, for finance companies, securitisation would take the loan assets off the balance sheet, thereby relieving pressures of capital adequacy.

They can also `upfront' profits. Further, the company that wants to securitise can ask for a particular rating from a rating company and get it, by a mechanism called `credit enhancement'. This refers to shoring up investors confidence by offering cash collateral to the SPV.

One major advantage of securitisation is its flexibility. A pool of receivables could be split into different `strips' and sold to different types of investors. For example, a money market mutual fund might be interested in a short-term paper (pass through certificate), whereas a pension fund might want to invest in a long-term paper. The SPV can have something to offer to both.

Essentially, the originator gets to raise off-balance sheet cash and get rid of risks, (for a price, which is relatively lower), while the investor gets high yielding paper for a relatively better prices. "Typically, yields in asset-backed securities (car loans, lease rentals etc) are higher than that of other securities of the same rating," says Crisil in a `position paper' on securitisation.

Figures made available by Crisil show that securitisation of rated transactions increased from less than Rs 1,000 crore in the calendar year 1998, to over Rs 7,000 crore in 2001, and the trend is continuing in the current year too. (Deals in which Crisil is involved as the rating agency, are estimated to be around 75 per cent of the total rated securitisation deals made in the country).

The first securitisation deal happened way back in 1991 - when the Citibank raised Rs 16 crore from GIC Mutual Fund by securitising some of its auto loans. But over 50 per cent of the deals that have happened so far, have happened in the last about 18 months, which Crisil says, "indicates an upsurge in this activity".

However, notwithstanding this sharp rise in volumes, securitisation is yet to happen in the country on a scale consistent with the potential.

"Securitisation as a funding source is still in its nascency," says Mr. Krishnan Sitaraman of Crisil, who is also a member of Assocham's core group on securitisation. There is not much statistics available about securitisation done on bilateral basis, but structured deals with credit rating, SPVs and `pass through certificates' have just about begun to happen.

(Source: from Article titled "Will securitisation turn out to be a vibrant industry? by Mr. M. Ramesh published in Business Line online edition dated 19.03.2002)