Securitisation

Imagine a landlord who owns a hundred separate rental properties, each generating its own modest monthly income, deciding to bundle the income rights from all hundred into a single tradeable certificate that an investor can buy, rather than trying to sell each individual property separately. Securitisation lets a lender do almost exactly this with a pool of individual loans.

In securitisation, a lender, typically an NBFC or bank, bundles together a large number of similar loans, vehicle loans, home loans or personal loans, for instance, and transfers the rights to the cash flows from that pool to a separate legal entity, which then issues securities, most commonly Pass Through Certificates, or PTCs, to investors. Investors who buy these certificates receive a share of the interest and principal repayments as underlying borrowers pay off their individual loans over time.

This gives the original lender an alternative source of funding beyond simply taking deposits or borrowing directly, it converts an illiquid pool of individual loans, each one small and hard to sell on its own, into a single, larger, tradeable financial instrument that institutional investors, mutual funds and insurance companies among them, can actually buy and hold.

For NBFCs specifically, whose funding cost is generally higher than a bank's deposit-funded model, securitisation is a genuinely important tool, letting them recycle capital, freeing up balance sheet capacity to originate new loans rather than holding every loan they make until maturity, while giving investors access to a diversified pool of consumer or business credit risk they could not efficiently assemble loan by loan themselves.

Whenever an NBFC's results mention income from assignment or securitisation transactions, that revenue reflects exactly this activity, loans the NBFC originated being sold off, in bundled form, to free up capital for further lending, rather than being held on its own balance sheet for their full original term.