Securitisation vs factoring

S. MURLIDHARAN | Updated on January 24, 2011

How is securitisation different from factoring?

Vineet Jain, New Delhi

Securitisation is unlocking of illiquid assets with a classic example being receivables of a mortgage finance company whose funds are typically locked for long durations depending on the period over which EMIs are payable by borrowers. These receivables are sold to an SPV (special purpose vehicle) at a discount which in turn issues bonds on the security of the receivables. The buck therefore stops with the bond holders who are enticed by the high rate of interests carried by such bonds on the back of mortgage loans.

Factoring, on the other hand, is outsourcing of receivables to the factoring company.

Factoring may be with or without recourse and when it is without recourse, that is, the risk of bad debts is borne by the factoring agency, it resembles securitisation. But there is a vital difference. Unlike in securitisation where the SPV pays off the mortgage finance company with the proceeds of the bonds issue, a factoring agency does not resort to issue of bonds back to back but instead pay a portion of the receivables upfront with the remaining being paid at regular intervals as and when debts are collected.

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Published on January 24, 2011

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