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Over the last few years, the securitisation market in India has experienced robust growth. In fact, securitisation rose 24% on-year to reach Rs. 2.35 Lakh Crore in fiscal year 2025 (CRISIL). 54% of this growth came from PTCs.
PTCs or pass-through certificates help investors earn returns from loans without actually lending them out. They provide original loan holders like banks and NBFCs with liquidity and investors with diversified exposure to a securitised debt asset that’s backed by loans.
What are Pass-Through Certificates (PTCs)?
Pass-through certificates are a form of securitised debt instrument. PTCs are produced when loans like home loans, auto loans, and education loans are bundled together and then sold as a security to investors. The cash flow from these underlying loans is ‘passed through’ to the PTC investor when borrowers repay the loans.
So, for instance, let’s say, a housing finance company has given out home loans worth Rs. 200 Crore to borrowers. Now, borrowers will pay this money back over a certain time period (EMIs), but the company needs to raise capital presently. It can still raise money by pooling the loans, packaging them as PTC securities, and selling them to investors. In this case, investors would benefit from the EMI repayments made by borrowers on these loans.
Key Characteristics of PTC
These key characteristics of PTC will help you understand them better:
- PTCs are issued against debt securities to help the issuer spread risk.
- PTCs can include different assets like home loans, auto loans, microfinance loans, or trade receivables.
- PTCs are issued through Special Purpose Vehicles (SPVs).
- PTCs are typically preferred by institutional investors and ultra-HNIs.
How Do Pass-Through Certificates Work?
PTCs work through the process of securitisation, which simply means converting illiquid assets into tradeable securities. Here’s a step-by-step guide on how PTCs are securitised and how they work:
- Originator Identifies Loans: The originator is the bank or NBFC that owns the underlying assets, like loans and mortgages and wants to securitise them.
- Selling to the SVP: Next, the originator sells these loans to the SPV. SPVs are separate legal entities created for the purpose of this securitisation. The SPV becomes the owner of these loans.
- Issuance of PTCs: The SPV issues pass-through certificates to investors, who then become legally entitled to receive the payments when borrowers repay the underlying loans.
- Payment Distribution: As borrowers repay these loans, the SPV distributes the repayments proportionately to the PTC holders.
Understanding the Role of PTCs for Securitisation in India
Now that you know the meaning of pass-through certificates and how they are issued and work, it’s time to focus on why they are important. PTCs play an important role in the Indian securitisation market, especially for NBFCs and banks.
They help these financial institutions to offload loan assets – like retail, auto, and microfinance loans – to free up capital for further lending. In fact, PTCs have been particularly important in offering liquidity support to NBFCs after volatile periods in the market.
Over the years, securitisation through PTCs has also grown in India due to the RBI’s strong regulatory frameworks like the SARFAESI Act. All this has been made a vital component of India’s credit expansion ecosystem.
Benefits and Risks of PTCs
Before considering PTCs, investors should be aware of their unique potential benefits and risks. Let’s have a look at both:
| Benefits | Risks |
| Potential to earn higher returns compared to traditional options like FDs and government bonds. | Returns may fall if borrowers repay their loans earlier than expected (prepayment risk) |
| Originators can sell off a portion of their loans to free up capital, which they can now use to issue more loans. | If the borrowers default on the loans, it can impact cash flow to investors, especially junior tranche investors. |
| PTC investors receive regular cash flows when repayments are made for the underlying loans. | Interest rate fluctuations can impact the market value of PTCs, because they are debt securities. |
| Investors have access to a diversified pool of loans, which can help lower risk exposure to any one type of loan or a single borrower. | Not easily tradable since PTCs are usually bought and sold outside exchanges (liquidity risk). |
| PTCs are backed by loans (collateralised) and have been vetted for credit enhancements to ensure good risk mitigation. | PTCs have a limited secondary market and have to generally be traded OTC (over-the-counter), which makes them less liquid than other investments like bonds and FDs. |
Things to Note About PTCs
Apart from all this, there are also a few other key aspects one should understand:
Tranche Issuance
PTCs are issued in tranches. This simply means that the single pool of securitised assets is divided into different risk and return layers. So each PTC can have:
- Senior tranches
- Mezzanine tranches
- Junior tranches
This structure also dictates the order of payment and potential credit risk. In other words, senior tranches are paid first and may have lower risk as compared to junior tranches.
Credit Rating
Before a PTC is sold, credit rating agencies like ICRA and CRISIL assess the risks associated with each tranche of the security. So, senior tranches, which may have the least risk, can receive a higher rating, while the junior ones may have lower ratings as riskier options.
Regulatory Framework
The RBI regulates PTCs in India under the SARFAESI Act. It also has certain regulatory norms in place to ensure investor protection. For instance, the RBI requires a Minimum Retention Requirement under the Master Direction on Securitisation of Standard Assets as follows:
- For loans with a maturity of 24 months or less: 5% of the book value of the securitised loans
- For loans with a maturity of more than 24 months: 10% of the book value of securitised loans.
- For residential mortgage-backed securities: 5% of the book value, regardless of tenure.
Role of Servicer
While the loan originator (bank/NBFC) may handle repayments to the investors, typically, an independent third-party (Servicer) is appointed. The servicer is responsible for collecting repayments from borrowers and ensuring the transfer of funds to the PTC holders.
Who Can Invest in PTCs?
While PTCs may potentially offer better returns, their structure can be complex and harder to understand compared to simple products like FDs. That’s why retail investors don’t generally invest in PTCs.
Typically, the following categories of investors prefer PTCs:
- Institutional investors
- HNIs
- Ultra-HNIs
These investors have enough capital to invest in PTCs and also generally look for alternative investment avenues that may offer higher potential yields.
PTCs Pass-On Loan Repayment Benefits
So, PTCs are securitised debt products that help banks and NBFCs clear their loan books, while allowing HNIs to gain potentially better returns than traditional assets like bonds and FDs. But they carry risks like the possibility of default on the underlying loan. That’s why, PTCs may be:
- Good as diversifiers, not core allocations
- Suit experienced investors who understand risks properly
- Can be an alternative investment
But if you’re looking to diversify your holdings into debt assets and don’t wish to take on the higher risks associated with PTCs, you can head to the GoldenPi platform. Here, you can check out various corporate bond baskets to invest your capital, diversify, manage risks, and earn good returns.
FAQs on Pass-Through Certificates
1. What is the meaning of a pass-through certificate?
A pass-through certificate is a type of securitised debt, where a bank or NBFC pools its loans, packages them as tradable assets, and sells them to investors. PTC investors earn returns when the underlying loans are repaid.
2. How are PTCs regulated in India?
PTCs are primarily regulated by the RBI in India through comprehensive guidelines and requirements, including the SARFAESI Act and the Master Direction – Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021.
3. How are PTCs different from other debt investments like bonds and debentures?
PTCs are different from bonds and debentures mainly in how returns are generated.
- Source of returns: Bonds pay fixed interest from one issuer, while PTCs pay from a pool of loan EMIs
- Cash flows: Bonds are more predictable, PTC payouts can vary based on repayments
- Risk: Bonds depend on one issuer, while PTCs spread risk across multiple borrowers
- Complexity: Bonds are simpler, PTCs are more structured and harder to understand
4. Can retail investors invest in PTCs in 2026?
While technically retail investors can invest in PTCs, they are better suited for institutional investors and HNIs. That’s because PTCs require a higher minimum investment and may be complex to understand for regular, retail investors.
Disclaimer:
This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the securities market are subject to market risks. Read all the offer-related documents carefully before investing.
Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.
