Securitisation
Securitisation is the process by which a bank or financial institution pools illiquid assets such as loans and mortgages and converts them into tradeable securities called pass-through certificates or asset-backed securities, thereby transferring credit risk and unlocking fresh capital.
In a typical securitisation transaction, an originator (usually a bank or NBFC) identifies a pool of similar loans—home loans, auto loans, microfinance receivables—and transfers them to a Special Purpose Vehicle (SPV). The SPV then issues debt instruments backed by the cash flows from this loan pool to investors. The originator receives immediate liquidity, and the risk of default on those underlying loans shifts to the investors who hold the securities.
India's securitisation market is regulated by the RBI through its Master Direction on Securitisation of Standard Assets (2021). The rules require the originator to retain a minimum risk retention—known as Minimum Retention Requirement (MRR)—so that the originator has skin in the game and does not originate reckless loans simply to pass on the risk. There is also a Minimum Holding Period (MHP) requirement, ensuring the originator cannot securitise loans that have just been disbursed.
There are two common structures in India. The first is Direct Assignment (DA), where a bilateral loan pool transfer takes place between the originator and a single investor (often another bank meeting Priority Sector Lending targets). The second is the Pass-Through Certificate (PTC) structure, where multiple investors participate via a rated security issued by the SPV.
Housing Finance Companies (HFCs) and NBFCs have historically been large participants in the securitisation market, using it to manage their Asset-Liability Mismatch (ALM). During the NBFC liquidity crisis of 2018–2019 triggered by the IL&FS default, securitisation activity surged as NBFCs scrambled for liquidity by selling loan pools to banks.
For investors, securitised instruments can offer better yields than comparable rated corporate bonds because of the structural complexity premium. However, the risk lies in the quality of the underlying pool, prepayment behaviour of borrowers, and the robustness of the credit enhancement mechanisms such as cash collateral or subordination.