Every month, millions of Indian retail borrowers pay their EMIs.
Individually, they may be regular transactions but collectively, they create one of India’s most resilient cash-flow engines. It’s securitisation that combines such retail loans into a diversified pool.
The result is a fixed-income product backed not by one borrower, but by the repayment behaviour of several borrowers across geographies, industries, and customer segments.
Securitisation of retail loans is a process where thousands of retail loans are pooled and repackaged as interest-bearing securities. A securitisation transaction involves three steps:
Banks & NBFCs originate retail loans and build a portfolio of loan assets with regular stream of cash flows.
These assets are sold through a true sale to a Special Purpose Vehicle (SPV), in accordance with RBI guidelines.
The SPV raises money from investors by issuing securities backed by the underlying loan pool. As borrowers continue paying their EMIs, those cash flows are passed on to investors.
Securitisation enables investors to take exposure to granular retail loan assets, which provides better risk diversification than exposure to a single large corporate receivable.
The SPV acts as an independent vehicle that holds the loan assets.
As the assets are legally separated from the originator (i.e., a bank or NBFC) through a true sale, they are insulated from any financial trouble or possible bankruptcy of the bank or NBFC in the future, should it ever happen. In other words, investors are investing solely in the cash flows generated by the underlying retail loans, not in the balance sheet of the lender.
The interest-bearing securities through which investors access cashflows of granular retail loan pools are called PTCs, and they resemble bonds in many ways, as they are:
But unlike conventional bonds, which derive value from a corporate balance sheet, a PTC derives its value from thousands of underlying retail loans. It transforms a consistent stream of cash flows into diversified, fixed-income opportunity. It brings institutional-quality retail credit exposure to investors in a simple, transparent, and scalable form.
As borrowers pay back their borrowed principal, the principal collections are simply “passed through” to investors. Hence the name Pass-Through Certificate.
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