INSTITUTE-UNIVERSITY SCHOOL OF

BUSINESS
DEPARTMENT-MBA
Banking and Financial Services Management
21BAT-635
Chapter 3.2

FACULTY NAME: Manpriya Singh

(Assistant Professor)

Topic-Factoring and
Securitization DISCOVER . LEARN . EMPOWER
 Factoring and
Securitization

Course Outcome
Blooms
Course
Description Taxonomy
Outcome Level www.fundstiger.com
1 To demonstrate a comprehensive knowledge of the disciplines Understand/
of banking and financial services Remember

2 Employing the knowledge of financial services to choose Apply Will be covered in this
between lease, buy or hire-purchase lecture
3 To analyse the performance of the various financial Analyze
instruments

4 Evaluating the different investment vehicles on the basis of Evaluate

credit ratings

5 Design/Create
To structure and appraise the debt securitization deals for the
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business
Differences between Factoring and
Securitization
While both factoring and securitization involves capitalizing the receivables of the
company, however there are many differences between factoring and
securitization.

1.While factoring is arrangement between the banks and a company in which

financial institution purchases the book debts of a company and
•pays the money to the company against receivables
•whereas Securitization is the process of converting illiquid assets into liquid
assets by converting longer duration cash flows into shorter duration cash flows.

2. Under factoring there are two parties that is the bank and the company
•while under securitization there are many investors involved who invest in the
securitized asset.
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3. While factoring is done for short term account receivables ranging from 1
month to 6 months whereas securitization is done for long term receivables of
the company.

4. While factoring is of many types and can be with or without recourse while
securitization is done without recourse.

5. Since factoring involves only bank and the company there is no need for any
credit rating while securitization involves many investors and therefore it is
necessary to take credit rating before going for securitization of receivables.

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Types of Securitisation
• Assets backed securities :Those securities whose income is derived
from pool of underlying assets.
Example: payments from car loan, credit card.
• Mortgage backed securities: Mortgage loans are purchased from
banks and assembled into pools which become securities.

• Credit debt obligation:

• CBO: Those backed b corporate bonds.
• CLO: Those backed by leveraged home loans.
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• Asset-backed security (ABS)
• Mortgage-backed security (MBS)
• Credit derivative.
• Credit default swap (CDS)
• Collateralized debt obligation (CDO)
• Collateralized mortgage obligation (CMO)
• Collateralized bond obligation (CBO)
• Collateralized loan obligation (CLO

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SECURITISABLE ASSETS
• Term Loans
• Commercial Loans
• Receivables From Government
• Vehicle Loans
• Lease Finance
• Mortgage Loans
• Credit Cards Receivables

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 SECURITISATION AND
BANKS
There is a vast scope for commercial banks to go in for
securitisation due to the following factors:
(i) Innovative and low cost source of fund
securitisation offers an excellent source of funds at cheaper rates.

(ii) Better capital adequacy norms

commercial firms utilize the cash flow from securitisation for
repayment of their borrowings, and thus, they can achieve a good
debt-equity ratio.
Also, high risk weighted assets can be easily converted into lower
risk weighted assets. Thus, it helps banks to achieve better capital
adequacy norms.
(iii) Creation of more credit
The cash flow from securitisation could be very well used for further
expansion of credit without any statutory restrictions.
(iv) Increased Profitability
It provides for more liquidity, quicker recycling of funds and greater
economy in the use of capital. Besides, they can also earn income in the
form of service fee by acting as receiving and paying agent.
(v) Tool for Asset-liability Management and Risk
It would reduce the over dependence of banks on the market for money
at call and short notice as well as the refinancing agencies for recycling of
funds.
eliminates the interest risk and thus it provides a hedge to banks against
interest risk
 SECURITISATION
ABROAD
• America where the first structured asset securitised financing
• In 1970, the newly created Government National Mortgage
Association began its operations by publicly trading in securities,
backed by a pool of mortgage loans.
• It was followed by Federal National Mortgage Association and similar
organizations.
• These organizations bought residential mortgage loans, made pools
out of them and issued mortgage-backed securities against them.
• The payment of principal and interest of these instruments was also
guaranteed.
• The securities issued by it were called “Mortgage pass through
securities”.
SECURITISATION ABROAD

• A pool of mortgage was created by putting together assets that

had similar characteristics in terms of duration, interest rate and
quality.
• The pool was then placed with a trust which actually sold the
certificates drawn against such mortgages to the investors either
directly or through private placement.
• Thus, the concept of securitisation was confined to mortgages
only.
 SECURITISATION ABROAD
• However, in March 1985, non-mortgage collaterals started getting securitised in
the U.S.A.

• For instance, the first offering of 192 million of lease backed certificates for
Sperry lease Finance Corporation was underwritten by The First Boston.

• Now it has become a popular mode of financing in America.

• It is slowly becoming a global phenomenon covering transactions relating to
various modes of finance.
SECURITISATION
ABROAD
• Securitisation is gaining popularity in the U.K. also in recent
years only. Like America, this concept started with mortgage
securitisation.

• The Bank America Finance Ltd., U.K. issued mortgage securities

in January, 1985 against the residential property mortgages as
underlying assets.

• The first mortgage securitisation issue for the international

market arranged was MINI in London in 1985.
 SECURITISATION
ABROAD
• Now, clearing banks and buildings societies have entered into this market
under the supervision of the Bank of England.
• Securitisation of debt and the consequent debt instruments are now popular in
countries like Italy, Australia, Canada, France, Spain, and Japan.
• In many of these countries, the process of securitisation has been encouraged
by passing suitable legislations.
 SECURITISATION IN INDIA
• The securitization of the ICICI’s receivables by the Citibank in February 1991 is
the first attempt in this direction. A sum of Rs.15 crores was raised by means
of securitization of assets.
• Following this, the hire purchase portfolio of TELCO was securitized by the
Citibank.
• Again, the Retail Residential Receivables of DLF International were also
securitized by the Citibank in June 1992.
• The Citibank’s own portfolio of “Citimobile Scheme” was subject to
securitisation.
• Infact the Citibank has pioneered this trend in India.
• Now, the HDFC has taken up this route along with the Citibank. The HDFC is on
the way to securities its housing loan portfolio around Rs.50 crores.
• Infrastructure Leasing and Financial Services has entered into this field by
setting up a SPV.
• If securitization has to become popular in India, the commercial banks should
enter into this field in a big way. Infact, the commercial banks can remove the
non-performing assets from their balance sheet by resorting to this technique.
CAUSES FOR THE
UNPOPULARITY OF
SECURITISATION IN INDIA
(i) New Concept
much unawareness not only among the investors and financial intermediaries.
(ii) Heavy Stamp duty and Registration Fees
Basically, securitisation requires the transfer of various illiquid and non-
performing assets to a central agency called Special Purpose Vehicle. This
transfer involves heavy stamp duty and registration fee.
(iii) Cumbersome Transfer Procedures
Again, the transfer of assets involves very complicated and cumbersome legal
procedures which stand as a real impediment in the way of securitisation.
(iv) Difficulty in Assignment of Debts
The right to assign debts to third parties has been permitted only under certain
circumstances under the Transfer of Property Act and infact, should be suitably
amended.
(v) Absence of Standardized Loan Documentation
As it is, there is no standardized loan documentation procedure in India. There
is no uniformity between different financial institutions regarding the loan
documentation even for the same type of loans.
(vi) Inadequate Credit Rating Facilities
for all debt instruments issued by non-banking companies.
The credit rating agencies are not adequately available in India at present to
take up the stupendous task of credit rating instruments for securitisation
purposes.
(vii) Absence of Proper Accounting Procedures
Proper accounting procedure should be evolved for securitisation.
Creation of a Trust or Special Purpose Vehicle is a must for securitisation and as
such there is no accounting procedure for the recognition of this trust.
Again, securitization paves way for the removal of the securitised assets from
the Balance sheet of the originator. How should one account for it? It is a
challenge to the accounting professionals in the country to evolve suitable
accounting procedures for securitization.
(viii) Absence of Proper guidelines
One can find a lot of guidelines issued by the Regulatory authorities to deal with
mutual funds, non-banking companies etc.
But, they are conspicuously absent in the field of securitisation.
There are various processes involved in securitisation right from the identification
process to the redemption process.
Again, various types of structures are available. Hence, proper guidelines must be
issued covering all these aspects so that financial intermediaries can go for
securitisation without any hesitation and thus securitisation becomes a smooth
affair.
 There is a bright future for
securitisation in India due to the
following factors :

(i) With the liberalization of the financial markets, there is bound to be more
demand for capital.
(ii) There has been an explosive growth of capital market and a vast increase in
the investor base in recent times.
(iii) The entry of newer financial intermediaries like mutual funds, money market,
pension funds etc. has paved the way for floating debt instruments easily in the
market.
(iv) Debt instruments have become popular in recent times since corporate
customers are not willing to take recourse to the equity route as a major source of
financing their projects.
(v) There is a proposal to establish Asset Reconstruction Fund as per the
Narasimhan Committee recommendations for the purpose of securitisation of non-
performing assets.
(vi) Since the financial institutions and banks have to follow the capital adequacy
norms as recommended by the Narasimhan Committee, they have to necessarily
go for securitisation.
More than that, it is used as a tool to improve the balance sheets by bringing out
changes in the critical financial ratios like debt-equity ratio, return on assets ratio,
asset turnover ratio, capital adequacy ratio etc.
• There is much scope for securitisation in respects of loans under
(i) mortgage (ii) housing loans
(iii) other term loan and
(iv) credit and receivables.
• In the case of non-banking financial companies also, lease receivables and
vehicle loans could be readily securitised.
• With nearly Rs.70,000 crore outstanding corporate debts of financial institutions,
at least Rs.50,000 crore could be securitised and thereby the financial
institutions could raise their liquidity for greater profitability.
• While most of the innovations in the financial service industry directly benefit
the customers, these innovations like factoring and securitisation directly bring
benefits to the financial institutions themselves first and then to the public at
large. It is high time that the Government came forward with all positive help to
encourage securitisation in India.
• The immediate need of the hour is to amend the various relevant Act like the
Transfer of Property Act, 1882, the Registration Act 1908, Stamp Laws Act 1809
etc. to make asset securitisation a smooth affair. Proper accounting procedures
should be evolved besides appropriate guidelines by the regulatory authorities
• Since the stamp duties have been considerably reduced in any states and the
National Stock Exchange has decided to list securitised assets, securitisation is
expected to have a very bright future in India and the debt market is expected to
become very active in the days to come.
 References

• Bhole, L.M.,Financial Institutions & Markets.Tata McGraw Hill, New Delhi

• Khan, M.Y.Financial Services Tata McGraw Hill, New Delhi
• Meir,Kohn,Financial Institutions & Markets,Tta McGraw Hill,New Delhi
• Prasanna Chandra: Financial Management, Tata McGraw Hill.
• Kothari, C.R., Investment Banking & Customer Services Arihant Publishers, Jaipur
• Sharpe, William F. etc. Investment. New Delhi, PHI
• Pandey, I.M.,Financial Management,Vikas Publishing House ,New Delhi
• Khan, M.Y. ―Financial Servicies – Tata MeGraw Hill Publishing Company Limited .
• Ferrell , O.C. and Others, ―Marketing Strategy Vikas Publishing House.

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