Securitisation

A bank sitting on thousands of car loans or home loans has an asset — the right to receive those repayments — but it is a slow, illiquid one. It cannot sell "a loan portfolio" the way it can sell a bond.

Securitisation turns that illiquid asset into something that can trade. The workbook's own words: "Securitization is the process of monetizing illiquid loan assets of a lender such as a bank, into a liquid pool of tradable assets. Securitization is achieved by creation of a Special Purpose Vehicle (SPV) and structuring the pool of loans into tradable bonds."

Two moving parts make the structure work:

1. The Special Purpose Vehicle (SPV). The originating lender does not issue the new bonds itself — a separate SPV is created for the purpose.
2. Transfer of ownership. Securitised (or asset-backed) securities transfer ownership of the assets — the loans and receivables — to the SPV. The loans move off the originating lender's own books and into a legally separate vehicle.

The SPV then funds its purchase of the loan pool by issuing tradable bonds to investors, backed by the cash flows (interest and principal) the underlying loans generate. Investors in those bonds are, in substance, being repaid from the pool of borrowers' repayments rather than from the originating bank's general balance sheet.

Where securitised debt shows up elsewhere in the workbook. Securitised debt instruments are named among the instruments issuers may place through the Electronic Book Provider (EBP) platform for private placement, alongside CPs and CDs. Separately, credit rating agencies are described as rating a range of instruments including mortgage-backed securities and collateralised debt obligations — both are forms of securitised paper, valued and traded the same way any other rated debt instrument is, on the strength of a credit rating.

Vikram Housing Finance Ltd has disbursed Rs 2,000 crore of home loans over several years. The loans are performing well, but the capital is locked up for 15–20 years each — the company cannot easily raise fresh funds against it.

Step 1 — pool and transfer. Vikram selects a pool of Rs 500 crore of home loans with similar characteristics and transfers ownership of that pool to a newly created Special Purpose Vehicle, "Vikram Housing Trust I".

Step 2 — issue tradable bonds. The SPV, in turn, issues Rs 500 crore of securitised (asset-backed) bonds to investors — mutual funds, insurance companies and other institutional buyers — backed by the cash flows from the underlying home loans.

Step 3 — the cash flow chain. As homeowners pay their EMIs each month, that money flows through the SPV to the bondholders as interest and principal on the securitised bonds — not through Vikram Housing Finance's own balance sheet.

What Vikram gains. It has converted Rs 500 crore of illiquid, 15–20-year loan assets into Rs 500 crore of immediate cash, which it can now redeploy into fresh lending — without waiting for the original borrowers to finish repaying over two decades.

Chapter 1 (Introduction to Interest Rate, Interest Rate Instruments and Fixed Income Markets), section 1.3.1.4 (Securitized Debt), introduces securitisation immediately after corporate bonds, as one of the fixed income instrument types. Expect a definitional question on what securitisation achieves (turning illiquid loans into tradable bonds) and the mechanism (an SPV, ownership transfer of the underlying assets).

• The originating lender does not issue the new bonds directly — the SPV does. The whole point of the structure is that ownership of the loans moves to a separate vehicle.
• "Monetizing illiquid loan assets" is the objective; the SPV and the structuring into tradable bonds are the mechanism — a question may ask for either half.
• Securitised/asset-backed securities transfer ownership of the underlying assets to the SPV — the loans do not simply serve as collateral while staying on the originator's books; they are transferred.
• Do not confuse this with a Corporate Bond, which is a direct, unsecured-or-secured obligation of the issuing corporate itself — a securitised bond's repayment stream comes from a specific transferred pool of loans, not from the originator's general revenues.
• Securitised debt instruments can be placed through the EBP platform, the same private-placement mechanism used for other debt securities, CPs and CDs — it is not a wholly separate issuance channel.