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(^402) Financial Management
l Reliable credit reports should be obtained on the customers for whom the guarantee
is given. Such reports should be kept uptodate.
l The guarantees should as far as possible relate to the normal business of the
customers. The banks will insist the customer to deposit the margin, depending on
case to case, before the issue of bank guarantees. The banks will charge
commission on bank guarantees issued or extended.
Asset securitisation
The emerging financial scenario has created a fierce competition among the companies
to raise funds through innovative financial products from the capital and/or money
markets. Additional source of capital can be accessed through securitisation relieving
the normal receivable/deposit collection process for finance companies and banks, without
disturbing the liabilities side of the balance sheet. Companies can rise finance and
increase their lending activity thus enhancing the profitability.
Meaning - The term ëSecuritisationí refers to both switching away from bank
intermediation to direct financing via capital market and/or money market, and the
transformation of a previously illiquid asset like automobile loans, mortgage loans, trade
receivables, etc., into marketable instruments.
ëíSecuritisation is a process of transformation of illiquid asset into security which may
be traded later in the open market.î
ëSecuritisation is the process of transforming the assets of a lending institution into
negotiable instruments.î
For banks and financial institutions, securitisation, fundamentally, involves conversion
of long-term assets into a current asset. It is a structured transaction whereby the bank
transfers or sells loans of a particular portfolio to a specially created trust which breaks
the loan into convenient amounts and raises money from the investors by selling the
instru≠ments which represent the loan amounts.
In India, ICICI has paved the way by securitisation of bills of exchange in 1991, and
later HDFC and a few other finance companies have adopted this method. At present
a number of other companies are adopting this procedure.
The illiquid assets such as mortgage loans, into loan receivable, cash credit receivables,
etc., on the balance sheet of the originator (such as Finance Companies, Financial
Institutions, Banks, etc.) are packaged, underwritten and sold in the form of securities
to investors through a carefully structured process.