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The term ‘securitisation’ gained attention with the Subprime Mortgage Crisis of 2007. But did you know that it existed for decades before the 2008 market crash?
It is simply a process that’s used to pool and convert certain types of assets into interest-bearing securities. The interest and principal payments from these assets get passed through to the purchasers of the securities.
This article covers what securitisation is in detail. We discuss the meaning of the term, how it works, common types, benefits and risks, and the Indian regulatory framework so that you know exactly how important this concept is in finance.
What is Securitisation?
Securitisation is the process by which individual loans, such as home or vehicle loans, are pooled and converted into a tradable security. It is a way to pool contractual debt obligations, such as mortgages, auto loans, and student debt, into securities that investors can buy and sell easily.
Through securitisation, lenders get to convert their illiquid assets into tradable securities and raise capital from the secondary market. Investors, in turn, receive scheduled interest and principal payments generated from the repayments made by the underlying borrowers. Securitisation is also used to create SDI (Special Debt Instruments).
Let’s take an example to understand the meaning of securitisation better. Let’s say a bank has 1,000 home loans. Each borrower pays their EMI monthly. Instead of waiting 10-15 years for repayments, the bank pools these loans and sells them to investors as a single investment product.
This helps:
- The bank get immediate money and use it to issue more loans.
- The investors to earn a regular income from loan repayment.
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How Does the Process of Securitisation Work?
Now that you know what is securitisation, let’s understand how it works:
- Loans are originated
A lender, let’s say a bank, gives out loans such as home, auto, and credit card loans.
- Loans are pooled
These issued loans are grouped together into a reference portfolio (collateral pool).
- Assets are transferred to an SPV
The pooled loans are sold to an SVP (Special Purpose Vehicle). Note that:
- The SPV is a separate legal entity
- The SPV isolates the assets from the originator’s balance sheet (in this case, the bank’s).
- The bank (originator) has no legal interest in the assets.
- SPV structures the securities
In the next step, the SVP packages the pooled loans into tradable securities for sale by:
- Dividing the loans into different tranches and classes (Senior, Junior, and Mezzanine)
- Having credit rating agencies rate them after analysing risks
- Selling the securities in the market
Next, these securities are sold to investors in the market. Investors can choose from different tranche options based on their investment objectives.
- Payments
As borrowers of the loans (or whatever formed the base of the securities) make payments, those are distributed to the security’s investors. Senior tranches get paid first, and then lower ones.
Types of Securitisation in India
Now, coming to the Indian context. In India, you can find the following types of securitisation:
- Standard Asset Securitisation: This includes common products such as home and vehicle loans, as well as pass-through certificates (PTCs).
- Stressed Asset Securitisation: Banks can bundle and sell bad loans or non-performing assets (NPAs).
- Market-Linked Securitisation: This category includes asset-backed securities (ABS) and mortgage-backed securities (MBS) that are regulated by SEBI. They are available to various types of investors, including retail investors.
- Green Securitisation: This involves packaging sustainable loans into SEBI-regulated debt instruments backed by ESG-compliant assets. The goal is to fund projects that support environmental and social development.
Benefits and Risks of Securitisation
What securitisation is must be clear now. But what are its key benefits and risks? The key benefit of securitisation for originators like banks is that it helps them convert illiquid assets into liquid ones.
It also helps spread the risk. Instead of one institution holding all the risk, securitisation spreads it among different investors. But what are the pros and cons for investors? Let’s understand these quickly:
| Pros | Cons |
|---|---|
| May help diversify investments beyond stocks and bonds. | Can be complex to understand and requires a certain level of financial expertise. |
| Allows investors to choose based on their risk appetites. | Some securities may carry a higher level of default risk, especially in lower tranches. |
| May be able to offer higher potential returns | There is a risk that borrowers may default on the underlying loans |
| Many securitised products are traded in the secondary market, making them easy to buy and sell. | Early repayment may reduce expected returns |
Securitisation in India: Key Regulations
What is securitisation in India is governed by a strict regulatory framework that aims to ensure transparency and investor protection. Let’s understand this:
- The RBI’s Securitisation of Standard Assets Directions regulate securitisation activities for NBFCs and banks in India.
- The SARFAESI Act of 2002 is important for asset reconstruction and stressed assets.
- SEBI oversees and regulates listed securitised instruments, especially PTCs.
So, Securitisation Just Repackages Assets
To conclude, securitisation simply helps banks repackage their illiquid assets so they can be marketed. The RBI allows banks to combine their weak loans into marketable debt securities. So, your bank may package distressed personal loans and offer them as junk bonds. With this, the bank gets to clean its balance sheet, and you get good yields.
But as mentioned earlier, investing in securitised debt instruments carries several risks. If you don’t want to shoulder such risks and still earn good returns, you can consider other fixed-income options, including bonds, on the GoldenPi platform.
Summary & Key Takeaways
- Definition: Securitisation is the process of converting illiquid assets (loans) into tradable financial instruments.
- The Process: A lender (Originator) pools loans and sells them to a Special Purpose Vehicle (SPV), which then issues securities (PTCs or SDI) to investors.
- The Players: Key participants include the Originator (Banks/NBFCs), the SPV, Credit Rating Agencies, and Investors.
- Benefits: For banks, it provides immediate liquidity; for investors, it offers higher yields compared to traditional FDs and asset diversification.
Regulatory Oversight: In India, the market is strictly monitored by the RBI’s Securitisation of Standard Assets Directions and SEBI.
Securitisation Related FAQs
1. What is the meaning of securitisation?
Securitisation is the process of pooling loans and other debt obligations into marketable securities that can be sold to investors. Investors, in turn, earn cash flows from the security as the loan repayments are made.
2. Who are the major players in securitisation?
The main players in the process of securitisation include:
- The originator (bank/NBFC)
- SPV or trustee
- Credit agencies
- Investors
- Regulators (RBI and SEBI)
3. Why do banks use securitisation in 2026?
Banks use securitisation convert their illiquid assets into tradable securities, raise fresh capital, improve liquidity, reduce risk exposure, and strengthen their balance sheets.
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.
