Securitisation: Structure and Importance

Securitisation implies every such process that converts a financial relation into a transaction, more specifically, into a capital market instrument or security. It is a process through which illiquid assets are packaged, converted into tradable securities and sold to third party investors. In securitisation process there are mainly two crafts: the original lender and a Special Purpose Vehicle (SPV). The SPV helps the original lender in liquefying the assets. The SPV converts these assets into marketable securities for investment and the cash flows to the original lender. This helps the original lender in meeting up the deficiency which arose out of the borrowers default. Apart from original lender and SPV, other parties involved in securitization process are merchant or investment banker, credit rating agency, servicing agency and the buyers of securities.