What do you mean by Securitisation and Reconstruction of Securities? What are the functions of Securitisation and Reconstruction of Securities?

 What do you mean by Securitisation and Reconstruction of Securities? What are the functions of Securitisation and Reconstruction of Securities?

Securitisation and Reconstruction of Securities

Securitisation:
Securitisation is a financial process where illiquid assets, such as loans or mortgages, are pooled together and converted into marketable securities. These securities are then sold to investors, allowing the original lender to recover funds and transfer the risk to the investors. This process increases liquidity in the financial system and enables lenders to extend new credit.

Reconstruction of Securities:
Reconstruction of securities involves restructuring or reorganizing non-performing assets (NPAs) or distressed securities. It is carried out by specialized institutions like Asset Reconstruction Companies (ARCs) under regulatory frameworks. Reconstruction may include rescheduling payments, converting loans into equity, or other strategies to revive the value of the asset.

Functions of Securitisation and Reconstruction of Securities

  1. Liquidity Creation:

    • Converts illiquid assets into tradable securities, enabling lenders to free up capital for further lending.

  2. Risk Diversification:

    • Transfers credit risk from financial institutions to a broad base of investors.

  3. Reduction of Non-Performing Assets (NPAs):

    • Helps banks offload their NPAs to Asset Reconstruction Companies (ARCs), improving their balance sheets.

  4. Credit Enhancement:

    • Through securitisation, structured finance techniques enhance the credit rating of securities, making them more attractive to investors.

  5. Resource Mobilization:

    • Facilitates long-term resource mobilization by turning future cash flows into immediate capital.

  6. Economic Growth:

    • Promotes capital recycling, leading to increased credit availability, which supports economic activities.

  7. Debt Restructuring:

    • Under reconstruction, terms of the debt are restructured, providing relief to borrowers and ensuring recovery for lenders.

  8. Investor Returns:

    • Offers investors opportunities for stable returns from investments in securitised assets.

  9. Development of Financial Markets:

    • Encourages the growth of secondary markets for securitised instruments, improving financial system efficiency.

  10. Regulatory Compliance:

    • Aligns with regulatory frameworks like the SARFAESI Act, enabling systematic resolution of distressed assets.

Conclusion:
Securitisation and reconstruction of securities are vital for improving financial stability, enhancing liquidity, and managing distressed assets. They serve as essential tools for financial institutions to optimize asset utilization, mitigate risks, and support economic development.

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