Regulation of Bank Finance^403
These securities could be in the form of commercial paper, participation certificates.
Notes or any other form of security permissible under the legal frame work of the
country. In a securitisation process, the underlying assets are used both as a collateral
and also to generate the income to pay the principal and interest to the investors of the
asset backed securities.
Securitisation process
l Firstly, assets have to be originated through trade receivables, lease rentals,
housing loans, automobile loans, etc., according to their maturity pattern and
interest rate risk and formed into a pool.
l Secondly, a trust has to be established solely to purchase receivable from the
originator, create instruments according to the maturity period and risk of the
asset, sell instruments and transfer the funds to the originator. The trust may
also act as a receiving and paying agent.
l For this purpose, the trust has to obtain credit rating to make the transactions
more attractive to the investor (although the rating is not mandatory).
l The trust would have to obtain some form of liquidity support from a third party
lender to cover the possibility that the loan portfolio would generate insufficient
payment when due. The trust may also have to obtain insurance cover, often
provided by a pool insurance policy.
l It has to appoint a merchant banker or syndicate of merchant bankers for
underwriting the whole issue.
l The securities have to be sold to the investors either by a public issue or by
private placement.
Obviously, the good quality loans will be eligible for securitisation. The
repayment pattern of assets in particular will be the deciding factor to structure the
instruments.