Debt Securitization

Debt Securitization:

Debt secularization is a loan which is specified from financial institution to borrowers. However this debt of loan is provided in the form of security or marketable instrument. Assume, X gives loan to Y. Loan is a fixed asset for X and it is fixed liability of Y. Now, Y provides loan to Z. Although this loan is provided in the form of marketable instrument. Now, this is current asset of Y. We can observe lots of car loan account in any financial corporation. There are as well lots of amount in car loan receivables. You know financial corporation acquires cheap money from originator and sells debt in the form of the debt securitization.

More clear illustration:

Before apparent illustration, I want to tell three major parties in debt securitization.

Party 1: Originator

It is the main organization. It provides loan in the form of loan and not in the form of debt securitization. In this party, we can comprise RBI or SBI.

Party 2: Special Purpose Vehicle

Special purpose vehicle are the party who acquires loan or pool of loan from originator and transform it in marketable securities. After transforming it in marketable securities or papers or Demat, it will become the debt securitized. Now, SPV will vend it in the money or any another financial market. Such parties comprise private banks and another private financial institution that you can find their office in your local town.

Party 3: Qualified Institutional Buyers

Now SPV advertises for his/her debt securitization product. However they did not sell to all. SPV sells to such who clear its circumstance. All such parties are termed as QIN.

Now, we clarify our illustration:

Assume that, SBI finds 10 SPV and provide loan of Rs. 200 Crores. Now, 10 SPV transforms this Rs. 200 loan in the form of debt securitization and sells to various qualified buyers. Such buyers might be 1000 or 100000. One of the best merits of debt securitization is to decrease risk. When SBI provides Rs. 200 crores to one party. It might be risky. However to give 10 SPV is less risky. For SPV, market instruments are as well less risky to provide 100000 persons. The Graph is as shown:

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