The Hindu Business Line : Securitisation of assets: What it means?

In the normal course assets like loans and securities held by banks/financial institutions are expected to yield a quantifiable stream of future income. However, since this income is yet to be realised, it cannot be brought onto their books here and now.

`Securitisation' of such assets in effect encashes this future flow of as-yet-unrealised income. This is what the State Bank of India seeks to do by entering into negotiations with Goldman Sachs (India) to securitise 30 per cent of its `total assets' (about Rs 400,000 crore). The deal, as and when it materialises, will allow SBI to swap future cash flow from the securitised assets for tradable bond-like securities; giving it instant access to money for which it would otherwise have to wait for years. This would augment its supply of loanable funds.

Eliminating risk

By entering into the deal, SBI would of course be ridding itself of the risk that some of the expected revenue on its loan assets might not materialise and, indeed, the risk that some of the loans themselves might turn sour. Accordingly, it would have to pay Goldman Sachs a premium for taking over this risk. This would be over and above the discount implicit in the price settled on for the purchase of the stream of future income from the securitised assets, discounted back to its present value at a mutually agreed upon rate of interest.

It is presumably because risks of loan default are not easy to evaluate and the envisaged deal between State Bank and Goldman Sachs is proposed to be spread over a period of years, rather than treated as a one-shot transaction.

The interim period would give both parties a chance to use past experience to help discover the appropriate price for valuation of future deals.

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