The importance of structured finance and securitization in the global economy cannot be overstated. Corporations, governments, and financial intermediaries use them to manage risk, construct capital markets, expand the business scope, and create new financing instruments.
Not all lenders and financial institutions, however, provide structured finance. This is why so many businesses seek alternative funding sources.
Securitization pools and sells diverse forms of contractual debt, such as mortgages, auto loans, equipment leases, credit card receivables, student loans, and trade receivables. The repackaged assets are then sold to investors as tradable debt securities such as CDOs and asset-backed securities.
Commercial banks, non-banking financial companies (NBFCs), and housing finance companies are typically the originators of structured finance and securitization. (HFCs). They create asset pools by monetizing receivables not backed by physical assets.
Structured finance and securitization can be utilized to fund a variety of projects. For instance, it can fund a business's expansion, development, or acquisitions. Additionally, it can finance smaller businesses that lack substantial assets to pledge as collateral.
Structured finance and securitization involve using SPVs that issue debt instruments to investors—usually domiciled in a particular jurisdiction for tax, regulatory, and accounting purposes. This type of financing is a popular option for businesses with complex financial needs. However, traditional lenders typically do not offer such loans.
In recent years, the structured finance market in India has experienced significant expansion. According to ICRA, the volume of structured financing increased by approximately 70% in the first half of fiscal year 22-23 compared to the same period in the previous fiscal year.
Structured finance and securitization involve several investors. Financial institutions, asset reconstruction firms, banks, and foreign portfolio investors are included.
There are borrowers in India with unique needs who require specialized financing instruments to achieve their business objectives. These borrowers are difficult to reach via conventional debt instruments such as loans.
Structured finance and securitization are novel approaches to meeting these requirements. It is a collection of financial assets, such as loans and bonds, entailing complex transactions to meet substantial financial needs.
The Securities and Exchange Board of India administers structured finance and securitization. (SEBI). In India, structured finance and securitization are governed by laws that impose requirements on originators, issuers, and investors.
The purpose of these regulations is to ensure that businesses and corporations that participate in structured finance transactions maximize their investments. In addition, they ensure that all parties involved in the transaction comprehend the risks and benefits of structured finance.
Structured finance and securitization are frequently utilized by businesses that require a specific type of financing that is not readily available. These loans can help businesses restructure debt, reduce repayment costs, and free up working capital to maximize cash flow.
Governments, corporations, and financial intermediaries are utilizing structured finance and securitization programs to assist with risk management, business expansion, developing one or more financial markets, and creating new financing instruments.
Structured finance and securitization allow cash flows from a portfolio of assets to be converted into lump sum payments, often at a lower cost than traditional financing sources. The underlying assets may include commercial or residential mortgages, credit card receivables, equipment leases and loans, auto and student loans, trade receivables, film rights, royalty payments, and life settlements.
The growth of the structured finance and securitization market in India can be attributed to the rise in credit demand among non-banking financial companies (NBFCs) and mortgage finance companies. (HFCs). According to Abhishek Dafria, vice president and group head of Structured Finance Ratings at ICRA, disbursements for NBFCs and HFCs increased in Q4FY22 and remained strong in Q1FY23.