## Debt Securitisation

### Meaning

Securitisation is the process of converting illiquid assets (like individual loans on a company's books) into tradeable marketable securities that can be sold to investors.

> Simple analogy: A finance company holds 10,000 individual car loans. Securitisation bundles them into a single investable product and sells it to investors — converting an illiquid asset pile into liquid capital.

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### Process of Securitisation — Step by Step

Step	Actor	Action
1. Originator	Finance company	Gives many individual loans (car, housing, personal loans)
2. Pooling	Originator	Groups these loans into a single asset pool
3. SPV Transfer	Originator → SPV	Sells the pool to a Special Purpose Vehicle — a legally separate entity
4. Security Issue	SPV	Issues marketable securities backed by the loan pool to investors
5. Cash Flow	Borrowers → SPV → Investors	Loan repayments flow from borrowers through SPV to investors

> SPV (Special Purpose Vehicle): A legally separate entity created solely for this transaction. Protects investors from the originator's insolvency risk.

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### Benefits of Securitisation

To Finance Company (Originator)	To Investors
Raises funds quickly from existing loan books	Access to a liquid, tradeable investment
Removes loans from Balance Sheet (off-balance sheet treatment)	Exposure to a diversified asset pool (lower single-loan risk)
Frees up capacity to originate more loans	Often offers better returns than traditional bank deposits

Worked example

### Example 1

HDFC Ltd. has ₹500 crore of housing loans on its books (illiquid). It creates a pool of 5,000 home loans and transfers them to an SPV. The SPV issues Pass-Through Certificates worth ₹500 crore to investors. Monthly home loan EMIs from borrowers pass through the SPV to investors. HDFC gets ₹500 crore upfront to lend again — illustrating the full securitisation cycle.

### Example 2

Before securitisation: HDFC's balance sheet shows ₹500 crore of loans and corresponding borrowings — high leverage. After securitisation: the ₹500 crore loans move off the balance sheet to the SPV, improving HDFC's capital adequacy ratios and enabling fresh lending without raising additional capital.

### Example 3

An investor wants exposure to the home loan market without becoming a lender. Through securitised Pass-Through Certificates, they invest ₹10 lakh and receive proportional monthly repayments from 50 different home loans — demonstrating diversification benefit to investors.

⚠️ Common exam mistakes

Confusing securitisation with a regular bond issue — in securitisation, the securities are backed by specific pooled assets (not the general creditworthiness of the issuer); the SPV is a separate legal entity.
Thinking the originator retains risk after securitisation — once transferred to the SPV, the originator has sold the assets; investors bear the underlying borrower default risk.
Confusing SPV with a subsidiary — an SPV is created for a specific transaction and is legally bankruptcy-remote from the originator; it is not a business subsidiary.
Stating securitisation only benefits the originator — it benefits both parties: originator gets liquidity and balance sheet relief; investors get diversified, potentially higher-yielding securities.

Reference:

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Debt Securitisation — Meaning, Process, and Benefits

Worked example

⚠️ Common exam mistakes