Securitisation

Securitisation refers to a financial process where banks or non-banking financial companies (NBFCs) combine various kinds of loans that are harder to sell. These range from residential mortgages, commercial loans, car loans, credit card debts, and lease payments. They turn them into one package and then sell it off to a special purpose vehicle (SPV) or a securitisation firm. The SPV releases the tradeable securities in the form of pass-through certificates (PTCs), asset-backed securities (ABS), and collateralised debt obligations (CDOs). These securities are then supported by the cash flow resulting from repayment of these loans, both the principal amount and the interest. This transforms debts that could originally not be repaid into liquid financial instruments that a range of investors (like mutual funds, insurance companies, and pension funds) use to trade in the market.

As a result of this process, originators and lenders gain cash in return for selling these assets. The funds gained can be used for fresh lending activities. The credit and default risk is transferred to the investors.  In India, the SARFAESI Act, 2002, plays a key role. Under the act, non-performing assets (NPAs) are mentioned. NPAs let securitisation companies take over troubled loans at a lower amount. These loans can be recovered through speedy legal action instead of relying on lengthy court proceedings.

Significance

Securitisation contributes to the risk diversification process by dividing the asset pool into senior (low-risk, lower-yield), mezzanine, and equity (high-risk, high-yield) parts, priming the default risks unevenly according to the tastes of different investors and generating market efficiency through price discovery and wider participation in the capital market. It also plays a vital role in the promotion of financial inclusion as it pours institutional savings into the poor credit segments, such as small-ticket consumer loans or microfinance portfolios. In contrast, the regulatory supervision from RBI in the form of minimum holding periods, credit enhancement caps, and clean-sale requirements, lessens the risks that might have been exposed.

Official definition of securitisation

As defined by legislation

‘Securitisation’ as defined in the SARFAESI Act

The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) defines “securitisation” under Section 2(1)(z).

“securitisation" means acquisition of financial assets by any securitisation company or reconstruction company from any originator, whether by raising of funds by such securitisation company or reconstruction company from qualified institutional buyers by issue of security receipts representing undivided right, title or interest in such financial assets or otherwise.”

Securitisation refers to the process of converting future revenue into tradeable assets. The main steps involve banks or companies selecting a large number of similar income-generating assets (e.g. loans or mortgages), grouping them together in a pool, and then transferring the pool to a new, different entity. This entity will then create and sell securities to investors that are based on the income generated by the pooled assets. The money for these securities will come from the original assets' income.

Essentially, large number of small loans that are not very easy to sell are put together and their value is turned into financial products that can be traded.

‘Securitisation’ as defined by SEBI

Under Regulation 2(1)(r) of the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (as amended):

“securitisation” means acquisition of debt or receivables by any special purpose distinct entity  from  any  originator  or  originators  for  the  purpose  of  issuance  of  securitised  debt instruments to investors based on such debt or receivables and such issuance.”

This definition highlights that the debt is being transferred to a bankruptcy-remote special purpose entity (SPE), which issues pass-through certificates (PTCs) or other forms of securitised debt instruments (SDIs) that are funded by the cash raised from those assets. It is in line with the RBI's framework. However, it also points out the limitations of the listed instruments. This requires the underlying assets to have similar risk/return profiles and minimum standards for public offers.

Legal provisions related to securitisation

SARFAESI

The SARFAESI Act grants the right to financial asset acquisition by securitisation and reconstruction companies (SCs and RCs) from the originators, like banks.

The procedure is mentioned in Section 5. Frst, RBI registration is required for SCs/RCs, then the assets can be bought only if they are NPAs more than 90 days overdue. This ensures that the assets under distress are the trigger for the process. Payment can be made in cash, bonds or through the issue of security receipts (SRs) which would represent similar interest in the assets (Section 7). Issuance of SRs to Qualified Institutional Buyers (QIBs) such as banks or mutual funds is obligatory under Section 7, and the redemption is linked with the asset cash flows. SCs/RCs hold the assets in a trust, so further securitisation is not permitted without the approval of RBI, which effectively encloses the risks in bankruptcy-remote structures.

The financial asset acquisition rights of SCs/RCs under Section 9 are powerful enough that they become equal to the lenders. They can demand the debt to be paid back, take control of the collateral (Section 13(4)), and sell it off or rent it out (Section 13(4A)) or even reorganise the debts. The borrowers are served a 60-day notice as per Section 13(2), and then they have a 30-day hearing remedy through the Chief Metropolitan Magistrate or District Magistrate under Section 14.

SEBI's Regulations for Listed Securities

According to the SEBI (Issue and Listing of Securitised Debt Instruments and Security Receipts) Regulations, 2008 (amended version), the public offers of securitised debt instruments (SDIs) or SRs demand a registration of the special purpose distinct entity (SPDE) with SEBI as per Regulation 4. Regulation 18 obliges the companies to provide credit enhancements and liquidity facilities for the protection of investors, while Regulation 25 imposes minimum holding periods and public offer standards (for example, ₹1 crore minimum issue size).

RBI Norms

The Reserve Bank of India (RBI) has set limits for investments by SC/RC through its Master Directions that restrict them to 10% of owned funds per originator and also set a minimum net owned fund of ₹2 crore. Off-balance sheet treatment for originators depends primarily on true sale conditions. Risks must pass completely, and there should be no recourse apart from warranties. Breaches lead to consequences under Section 12, which may include the revocation of the license. The said provisions are a perfect combination of creating liquidity and reducing risk. Therefore, banks can clean up their balance sheets while simultaneously investing in distressed assets.

As defined by official documents

‘Securitisation’ as defined by RBI

The Reserve Bank of India (RBI) with its Master Directions on Securitisation of Standard Assets (September 2021) characterises securitisation as a methodical approach whereby the original lenders based on 'clean-sale' allow their pools of assets to be transferred to an SPV (special purpose vehicle), credit enhancement being one of the conditions, issue pass-through certificates (PTCs) or other instruments in the form of future cash flows from the assets, subject to minimum holding periods and limits of credit enhancement.

The RBI's Draft Directions on Securitisation of Stressed Assets (April 2025) envisaged it as a process to share the risk of recovery in stressed loan portfolios (NPAs and special mention accounts) with the aid of SPE notes issued to investors, complemented by market-based approaches involving resolution managers and external valuations.

These regulations exclude from eligible pools re-securitisation, fraud accounts, and specific types of exposures (like farm credit). They require pooling of assets to be homogeneous and 20% risk retention.

As defined by international instruments

‘Securitisation’ as defined by Basel Committee

The Basel Committee on Banking Supervision (BCBS) is the sole authority that gives the official definition of securitisation according to the Basel III guidelines, and this definition is accepted as a standard across all regulatory banking jurisdictions around the globe.

In simple terms, securitisation exposures are those that come from transactions where at least two different risk tranches are involved, and the performance or risk is correlated with the underlying assets. These transactions must include and transfer a considerable amount of credit risk to outside entities, which gives the bank that created the pool the power to remove it from the calculation of its risk-weighted assets. Traditional securitisation, where assets are sold to a special purpose vehicle (SPV) and synthetic securitisation, where credit derivatives or guarantees are used for risk transfer, are considered as the eligible structures.

‘Securitisation’ as defined by European Parliament

The European Parliament describes securitisation as “a financing technique by which homogeneous income-generating assets − which on their own may be difficult to trade − are pooled and sold to a specially created third party, which uses them as collateral to issue securities and sell them in financial markets.”

Securitisation is basically the conversion of future income to financial products that can be traded. A bank or a company takes a number of income-producing assets (like loans or mortgages, for instance) that are very similar in nature and, therefore, hard to sell individually, and transfers those to another entity. The new entity then creates securities that are backed by the income from those assets and sells them to the investors. Investors receive their payments from the income generated by those assets.

‘Securitisation’ as defined by International Monetary Fund

The International Monetary Fund (IMF) defines it as involving the gathering of assets with consistent cash flows (like mortgages) into a special-purpose vehicle (SPV), which then issues tradable securities to investors, thus transferring credit risk off the balance sheet in a manner that does not inflate liabilities.

The whole issue can be explained as packaging up loans with regular payments and converting them into investments. A bank collects assets such as mortgages and shifts them into a separate entity (called a special purpose vehicle or SPV). The SPV sells securities to investors who, in turn, get payments from those mortgaged loans. The bank, by doing so, offloads the risk of those loans to investors without having to record additional debt on its balance sheet.

Types of securitisation

Different types of securitisation have been developed for various asset classes, investor preferences, and risk profiles. Generally, the distributed cash flow and risk allocation among investors are two main criteria to classify the securitised products. The most widespread types of securitisation are pass-through securitisation, pay-through securitisation, and collateralised debt obligations (CDOs).

Tranches are the first feature of many securitised instruments. Separate classes of securities known as tranches are created from the same pool of underlying assets, thereby redistributing risk among investors. Each tranche is assigned a different level of risk (and return) based on its payment priority. The senior tranches are the first to receive the payments. Thus, they are considered less risky but yield lower returns, whereas the junior or equity tranches are the ones that absorb the losses first and, as a result, earn more on their investment.

Pass-through securitisation

Pass-through securitisation is the least complicated and the most transparent method of securitisation. The cash flows from the pool of underlying assets and is handed over to the investors directly. A Special Purpose Vehicle (SPV) issues pass-through certificates to the investors that show an undivided ownership interest in the pooled assets. Tranching is not done in a pure pass-through structure, and all the investors get their payments on a pro rata basis as the borrowers repay their loans.

Pay-through securitisation

Pay-through securitisation is a more complicated process and includes the issuance of debt instruments by the SPV. Here in this structure, the investors do not hold direct ownership in the underlying assets. However, the cash flows from the asset pool go to pay the interest and principal on the securities issued. Typical examples of this structure include collateralised mortgage obligations (CMOs) and real estate mortgage investment conduits (REMICs). These securities are then divided into tranches based on the different maturities, risk levels, and payment priorities, followed by a pre-determined distribution cascade where senior tranches get paid before the junior tranches.

Asset-backed securities (ABS)

Asset-backed securities (ABS) are a group of financial instruments created from loans other than mortgages, like auto loans, credit card payments, student loans, and equipment leases. These assets generate a cash flow, which is then used to pay principal and interest amounts to investors. Similar to other forms of securitisation, ABS is divided into tranches. This lets investors pick among various risk and return combinations. The risk of ABS is mainly determined by both the quality of underlying assets and how well the transaction is structured to protect investors.

Collateralised Debt Obligations (CDOs)

Among the different types of securitisation, collateralised debt obligations (CDOs) are one of the most intricate ones. The process starts with the assembling of diversified debt instruments like corporate bonds, corporate or leveraged loans, and even other securitised products like mortgage-backed securities (MBS), to name an example. Various tranches are created from these pooled assets, with each tranche having a different risk-return ratio. Senior tranches are relatively safe from initial losses, while junior tranches take the brunt of the higher possibility of defaults.

One step further is the use of CDO-squared and the CDO-cubed instruments. Through these other methods, tranches are bundled into layered and complex structures. This makes them hugely opaque and difficult to understand. The 2007-2008 global financial crisis highlighted how many of these instruments were backed by subprime mortgages. They suffered heavy losses due to the housing market's decline. Since these instruments are not intricate and confusing, the investors struggled to accurately determine risk. Eventually, this caused a loss of confidence in the securities market.

Research that engages with securitisation

Research in the area of securitisation in India has been mainly conducted by academic institutions, development finance organisations and legal research firms focused on the market. While such studies do bring out the transactional and economic aspects of securitisation more deeply, they often seem to overlap by giving similar importance to market efficiency and regulatory design, thus leaving the areas of judicial outcomes, empirical court-level analysis comparatively less explored.

Research from “Securitisation in India: A Strategic Tool for Competitiveness”  by Suman Chakaborty (Indian Journal of Applied Research)

The academic paper treats securitisation as a financial instrument that is primarily a strategic one and that increases the competitiveness of Indian financial institutions through liquidity, balance sheet management, and capital efficiency improvements. The study places securitisation in India's changing financial architecture, where regulatory reform and market practices are seen as a cycle that has an impact on the behaviour of institutions. The paper connects securitisation to macro-level outcomes like capital cost and international competitiveness, which are not highlighted in RBI or statutory texts, thus going beyond the official documentation. Nevertheless, its focus coincides with the literature on policy and markets in view of the preference for institutional efficiency, and it does not discuss how securitisation disputes are settled in courts and tribunals or how the enforcement powers under SARFAESI affect justice outcomes.

Research from “Securitisation in India: Managing Capital Constraints in Infrastructure” by Jennifer Romero-Torres, Sameer Bhatia, and Sudip Sural (Asian Development Bank)

This ADB publication focuses on the securitisation of development finance and infrastructure, considered as a way of releasing long-term capital for infrastructure amid the constraints of the banking sector. Furthermore, it uses the Indian securitisation case to explore the international development framework by comparing and drawing from global infrastructure finance models, and then proposing a scenario for India. The report aligns with the academic and regulatory debates in its focus on standardisation, risk reduction and confidence-building measures for investors; however, it does not cover the legal disputes and judicial oversight that arise once receivables linked to infrastructure are securitised and enforced.

Research from “Investing in the Indian Securitisation Market: A Legal Primer for Foreign Investors” by Hrishikesh Anand (Resolut Partners)

This research explains securitisation from the point of view of foreign investors learning to navigate Indian laws. It explains Indian laws like RBI and SEBI regulations, what type of transaction is a true sale, protection from possible bankruptcy and insolvency, and enforcement of loans under SARFAESI. Securities are treated as an international instrument whose basis is contracts, regulations, and court decisions. Particularly, it examines legal enforcement mechanisms and the risk of disputes arising.

There is a gap in research on how securitisation affects tribunals, courts, and borrowers. In India, the legal system is seen as more of an enforcer of contracts, not a place where disputes shape how securitisation functions in practice. Research has explored economic sides of securitisation, with an overwhelming focus on investors, but there is a lag in judicial analysis of the same.

International experiences

On the whole, other regions that have thoroughly dealt with securitisation think of it as a whole financial life cycle process. The process starts with the origination and pooling of assets, then comes risk transfer and issuance, followed by servicing, enforcement, and resolution. However, in the Indian context, securitisation is mostly viewed as the enforcement and recovery process under the SARFAESI Act. The difference in the conceptual frame is directly linked to how the transaction is defined in the law, implemented by the agencies, and seen in the official data systems.

European Union

The EU Securitisation Regulation defines securitisation uniformly and exhaustively in the European Union. The regulation embeds the notion into a regulatory taxonomy that distinguishes between the two types of securitisation, traditional and synthetic, and mandates risk retention as well as prescribing detailed disclosure obligations. From an operational perspective, securitisation transactions are subject to standardised reporting templates that include asset-level data, cash-flow structures, credit enhancement mechanisms, and performance indicators. The data is aggregated and managed through the use of authorised repositories, which allows regulators and, to a limited extent, market participants to treat securitisation activity as an integrated market phenomenon. This set-up regulates securitisation as an object of data.

The United States

The approach adopted in the United States is based on the concept of securities law. Securitisation is the issuance of securities backed by pools of assets. This positioning has brought securities under the federal disclosure regime. The process is implemented through compulsory filings where companies that issue securities are required to provide detailed information about the nature of the assets, the standards for underwriting, the arrangements for servicing, and the obligations for repurchase. Courts often engage with securitisation through litigation concerning mortgage-backed securities and can trace their decision back to the disclosure documents. This tilts the balance in favour of courts, regulators, and researchers who can connect the transactional data with the dispute outcomes. Securitisation is a financial instrument that carries the burden of public-law transparency. It is not just a private debt restructuring process.

Comparative Analysis

India’s conceptualisation, on the other hand, is different. The SARFAESI Act explores the topic of securitisation mainly as a method of creditor enforcement without any court involvement, although the term is legally defined to some extent under the Act.

Data collection is done according to this enforcement-centric logic. Courts and tribunals consider securitisation only in terms of SARFAESI challenges, where banks claim their rights over specific assets. There is no common conceptual or data framework that considers securitisation as a continuous transaction containing origination, transfer, market participation, and eventual resolution. As a result, securitisation in India seems to be scattered and procedural rather than structural and lifecycle-oriented.

To some extent, other jurisdictions show the integration of regulatory and judicial data in a functional manner. Transaction identifiers, issuer names, or filing references in the EU and the US often go across regulatory filings, market disclosures, and litigation records. Thus, such a situation greatly enables cross-institutional analysis. India, on the other hand, has taken a contrary approach to this, where securitisation-related data is still treated as separate entities. RBI databases do not communicate with court or tribunal systems, and judicial databases do not have any identifying factors that can locate the underlying securitisation transaction or assignment history. The difference is conceptual, as it indicates the different positions of the respective legal systems and governance on securitisation.

These comparisons provide several lessons and practices applicable to India, among which is the need for uniformity. Such a uniformity would include the issuance of a clear and comprehensive definition of securitisation that will apply to all regulatory and judicial areas, as well as the area of insolvency. This would cut back on fragmentation while not necessitating any major changes to the statutory framework in place. Another learning point would be the use of limited standardised reporting templates, even if only regulators can access them or in anonymised form, which would make it possible to monitor the securitisation process beyond disputes over enforcement. Recognition of securitisation as a market activity with public-interest implications would justify increased transparency and allow for more influential policymaking through the use of evidence. Lastly, comparative frameworks reveal that increased data availability does not have to come at the cost of creditor efficiency. It can increase accountability and stability of the system.

Data challenges

Securitisation is a central part of the financial market in contemporary times, yet despite this, it is difficult for the general public and investors to understand how securities work in practice. They are complex in structure and highly fragmented.  Data issues are present across academic and regulatory research.

Transparency in securities markets is among the biggest problems. Often, information about the asset pools, borrowers’ credit quality, cash-flow structures, and risk allocation among tranches is limited or presented in technical formats. Much of the detailed data is still with the originators, arrangers, or special purpose vehicles, and researchers or the public cannot have easy access to it. This lack of transparency makes it hard to evaluate the securitised products’ real risk and also prevents comparing such products and transactions across borders.

The issue of data transparency is very closely related to that of accessibility and reliability. Even when information is made available, it is scattered across several documents, reports, and filings. Transparent data is usually behind a paywall or available only to institutional investors. It cannot be widely scrutinised. Reporting practices are also not uniform, which creates confusion about how reliable official reporting figures are, whether it is rates of default, prepayment behaviour, or loss distribution. These may differ based on which deal it is.

There is an overall lack of standardisation of data relating to securitisation. Due to such high levels of variation, tracking trends over time or comparing different deals is tedious. The issue is pronounced in the case of structured instruments such as CDOs and CLOs, where the investor exposure is hidden under a maze of layers which disconnect it from the underlying assets.

The process of securitisation brings about its own challenges as well, beyond difficulty with data. The regulatory frameworks that govern disclosure, risk retention, and reporting are not applied uniformly, and the degree of compliance varies from one market to another. In certain areas, the securities markets are still in their infancy. Thus, the data trails are incomplete, and the reporting mechanisms are not fully developed. Moreover, operational obstacles like poor technological infrastructure and insufficient regulatory capacity continue to hinder the progress of systematic data collection and analysis.

All these factors are interlinked. The lack of transparency, the limited access to data, the non-uniformity in standards, and the difficulties in implementing processes are all contributing to making the analysis of securitisation very challenging. Unreliable and incomparable data make it hard to assess the performance of the market, pinpoint systemic risks, or measure the economic impact of securitisation. Thus, the resolution of the above-mentioned issues is a prerequisite for the enhancement of academic insight and the regulatory control of the securitised financial markets.

Way ahead

Securitisation can hardly be seen as a transparent process. It is heavily fragmented. Consequently, senior judges, regulators, academics and policy research organisations have all, though from different institutional perspectives, recycled the same message of standardisation, improved data architecture and analytical interoperability.

The RBI’s Committee on Development of the Housing Finance Securitisation Market (2019), led by Dr Harsh Vardhan, recommended the creation of uniform standards across the entire securitisation chain so that different transactions can be compared easily and aggregated. The Committee stressed the need for ‘one-size-fits-all’ loan origination practices, servicing procedures, documentation formats and data-reporting methods, particularly for mortgage-backed securitisation. The Committee also recommended that loans entering securitisation pools would have to meet certain “common eligibility criteria” such as providing “uniform definitions” of LTV (loan-to-value) ratios, debt-service coverage ratios and delinquency thresholds, so that differences between DA (direct assignments) and PTCs (pass-through certificates) will be narrowed and risk assessment become more homogeneous from the investors’ viewpoint.

Meanwhile, the RBI's Master Directions on Securitisation of Standard Assets (SSA Directions, 2021, updated in 2022) demand comprehensive and consistent disclosures to be made at the asset-pool level. The disclosures are expected to reveal information relating to loan maturities, average LTV and debt-to-income ratios, the geographical distribution of loans, and the extent of delinquency, among others. The originators will have to send investor reports at least four times a year based on a common reporting template and provide loan-level or grouped (stratified) data that is synced with the reporting cycles. Performance indicators like prepayment rates and credit enhancement details must also be revealed, thereby maintaining transparency, but at the same time, the originator can't give any implicit support as a result.

Additionally, SEBI’s 2025 modifications to the Securitised Debt Instruments (SDI) Regulations are in line with RBI stipulations as they bring in the minimum risk retention (5–10%) rule, uniform calculations of risk-weight for simple, transparent and comparable (STC) securitisation, and mandatory dematerialisation of PTCs, which are the major features of the new regulations. Even the amendments have mandated that similar disclosures be made on the tranche size and maturity mismatches.

The academicians and the market analysts have backed this move by saying that there should be a clear-cut between direct assignments (which are bilateral and de facto non-securitised) and PTCs, and that there should be a Basel-based level of tranches (senior, mezzanine and junior) for PTCs. They believe that it will be the analytical standardisation that will result in less specific reporting and will open the door for more participation by institutional investors like mutual funds and insurers, thanks to the shared data formats, which are consistent and easy to compare.

Judges, regulators, and scholars hope to recontextualise securitisation as a legal process generating data that crosses regulation, adjudication, and insolvency. India should use standardisation of terms, transaction-linked identifiers, and interoperable databases as strengths that would help it to make securitisation efficient.

Also known as

• Asset-backed financing
• Asset reconstruction
• Structured finance
• Sale of receivables
• Debt securitisation
• Financial asset transformation

References

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Page created 2026-08-21  ·  Last updated 2026-08-22