Meaning of securitisation:
"Securitisation" broadly implies every such process, which converts a financial
relation into a transaction. History of evolution of finance, and corporate law indicate
where relations are converted into transactions. Contribution of corporate laws to the
world of finance, for example an ordinary share, which implies piece of ownership of the
company, is amazing to note. Ownership of a company is a “relation”, packaged as a
“transaction” by the creation of the ordinary share. This earliest instance of
securitisation was instrumental in the growth of the corporate form of business and
separation of ownership and management of organizations is one of the greatest
commercial inventions of this 19th century. Similar to the role of ordinary share,
securitisation has strong role to play in economy.
Securitisation is defined as “ the process whereby loans, receivables and other
financial assets are pooled together, with their cash flows or economic values redirected
to support payments on related securities”. These securities, some of which are referred to
as “asset-backed securities” are issued and sold to investors principally, institutions in the
public and private markets by or on behalf of issuers. The issuers use securitisation to
finance their business activities. The financial assets that support payments on asset-
backed securities include residential and commercial mortgage loans, as well as a wide
variety of non mortgage assets such as trade receivables, credit card balances, consumer
loans, lease receivables, automobile loans, and other consumer and business receivables.
Although these asset types are used in some of the more prevalent forms of asset based
3
securities, the basic concept of securitisation may be applied to any asset that has a
reasonably ascertainable value, or that generates a reasonably predictable future stream
of revenue. Consequently, securitisation has been extended to a diverse array of less well
known assets, such as insurance receivables, obligations of shippers to railways,
commercial bank loans, health care receivables, obligations of purchasers to natural gas
producers, and future rights to entertainment royalty payments, among many others.
Other instances of securitisation of relationships are commercial paper, which securitises
a trade debt.