The first securitisation transaction in India was done by Citibank in 1991, followed by the Housing Development Finance Corporation (HDFC) in 1992, both involving mortgage-backed securities (MBS). However, in the late 1990s and early 2000s, the market saw securitisation of various asset classes, including auto, commercial, and personal loans. Indian securitisation market has witnessed a remarkable evolution in recent years, transforming from a nascent niche to a dynamic and growing segment of the financial landscape. From its early days dominated by Mortgage-Backed Securities (MBS) to the current rise of Asset-Backed Securities (ABS) and the potential for infrastructure financing, the journey has been one of adaptation and innovation.

What is securitisation?

Securitisation is the process of pooling and selling loans or other income-producing assets to investors as securities. Securitisation can increase liquidity and access to credit in the market, but it can also create complex and opaque products that may pose risks to financial stability. It is commonly used for mortgages, personal, credit card, and student loans. India’s securitisation market is regulated by RBI, SEBI and NHB.

Types:

Direct assignments (DAs) and pass-through certificates (PTCs) are two types of transactions that involve the sale of loan portfolios to investors. The main difference between them is the involvement of a special purpose vehicle (SPV) and the issuance of securities. In a DA, the originator (such as a bank or a housing finance company) directly sells the loan portfolio to another entity (such as another bank) without setting up an SPV. The originator receives an immediate cash payment and transfers the loans' credit risk and servicing rights to the buyer. The buyer does not issue any securities to the originator or other investors. In a PTC, the originator sets up an SPV, which is a separate legal entity, and sells the loan portfolio to the SPV. The SPV issues securities, called PTCs, to the originator and other investors. The PTCs represent the claims on the cash flows from the loan portfolio. The originator may retain some PTCs or sell them to other investors. The SPV pays the interest and principal to the PTC holders from the collections of the loan portfolio. The following table summarises the key differences between DAs and PTCs:

mortgage-backed securities

Why India needs a robust securitisation ecosystem