Securitization is the substitution of securities for bank loans i.e., the process that converts bank loans like receivable on mortgage loans, auto loans, credit card dues etc for other non-tradable financial transaction into tradable securities. The entity that securitizes its assets first pools them together into a common hotchpotch; it is the process of integration. And then the pool is broken into securities of fixed denomination; it is the process of differentiation.

Nowadays, one of the biggest challenges banks are facing in pursuing the business growth, is managing their capital base requirement to support further expansion. According to RBI, minimum Capital Adequacy Ratio (CAR) required for a bank is 9% of the risk-weighted assets. So expanding the portfolio and maintaining CAR at regulatory requirement simultaneously is a difficult task. Under these challenging circumstances, there are significant benefits for banks if they securitize their receivables of loans portfolio. The major benefits that accrue from the securitization are reduced for regulatory capital, liquidity improvement with cash replacing the loan, realizing the future margins/profits on the portfolio, besides managing the risk by reducing large exposure or concentration in a particular sector of the economy.

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