Securitization Introduction

Yet another method of imparting liquidity into the system by way of securitization. There is, however, a remarkable difference in this strategy used in this approach when compared to the earlier models.

Distinguishing itself from the earlier methods, which resort to a sale of securities/borrowings as and when the need for funds arises, securitization can impart liquidity on a continuous basis and has little or no relation to be surplus deficit balances.

The loan profile of the bank will generally be long term in nature. Large volumes of funds get blocked in project financing and asset financing activities of the institution.

Securitization is an effective way to release these funds for further investments. In securitization the future cash flows from the advances made by the bank are repackaged into negotiable securities and issued to the investors.

This arrangement induces liquidity into the system by imparting liquidity to the highly illiquid asset. In the process of enhancing liquidity, securitization also reduces the interest rate exposure for the bank since risk associated to the risk fluctuations will also be eliminated.

Securitization can in fact be taken up on a continuous basis to supplement the other approaches.