Introduction and Meaning of securitisation
Technological advancements have changed the face of the world of finance. It is today more a world of transactions than a world of relations. Most relations have been transactionalised.
“Transactions” mean coming together of two entities with a common purpose, whereas “relations” mean keeping together of these two entities. For example, when a bank provides a loan of a sum of money to a user, the transaction leads to a relationship: that of a lender and a borrower. However, the relationship is terminated when the loan is converted into a debenture. The relationship of being a debenture holder in the company is now capable of acquisition and termination by transactions.
Meaning of Securitisation:
”Securitisation” broadly implies every such process, which converts a financial relation into a transaction. History of evolution of finance, and corporate law indicate where relations are converted into transactions. Contribution of corporate laws to the world of finance, for example an ordinary share, which implies piece of ownership of the company, is amazing to note. Ownership of a company is a “relation”, packaged as a “transaction” by the creation of the ordinary share. This earliest instance of securitisation was instrumental in the growth of the corporate form of business and separation of ownership and management of organizations is one of the greatest commercial inventions of this 19th century. Similar to the role of ordinary share, securitisation has strong role to play in economy.
Securitisation is defined as “ the process whereby loans, receivables and other financial assets are pooled together, with their cash flows or economic values redirected to support payments on related securities”. These securities, some of which are referred to as “asset-backed securities” are issued and sold to investors principally, institutions in the public and private markets by or on behalf of issuers. The issuers use securitisation to finance their business activities. The financial assets that support payments on asset-backed securities include residential and commercial mortgage loans, as well as a wide variety of non mortgage assets such as trade receivables, credit card balances, consumer loans, lease receivables, automobile loans, and other consumer and business receivables. Although these asset types are used in some of the more prevalent forms of asset based securities, the basic concept of securitisation may be applied to any asset that has a reasonably ascertainable value, or that generates a reasonably predictable future stream of revenue. Consequently, securitisation has been extended to a diverse array of less well known assets, such as insurance receivables, obligations of shippers to railways, commercial bank loans, health care receivables, obligations of purchasers to natural gas producers, and future rights to entertainment royalty payments, among many others. Other instances of securitisation of relationships are commercial paper, which securitises a trade debt.
Tags: Assets, Credit, credit card, debt, finance, financial assets, Loans, Meaning, mortgage, mortgage assets, mortgage loans, revenue, Securities, Securitisation, Security
By: Management Duniya
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