Securitization is the process of connecting the capital markets and npa financial services markets by converting the financial assets into capital market commodities.
It reduces the intermediation and agency costs.
What is the benefit of securitization? Since it integrates two strong forces of the economy, the capital, and financial markets, the benefits are incredible.
It creates financial assets like mortgage financing companies or banks in the financial markets. These assets are conventionally refinanced on an on-balance sheet.
How does securitization benefit the economy?
As mentioned earlier, its benefits are many. It converts loan relationships into capital market commodities. Hence, it increases the power of the capital market manifold.
Though some criticism has been there regarding stretched credit creation by securitization, It happens because of the shift to marketable assets from nonmarketable assets.
Some legal aid services feel that it results in borrowers sustaining longer in economic expansion. They are exposed to contractions more.
However, these impacts can be minimized by making necessary corrections and taking precautions.
How do investors get benefited by it?
Three reasons make securitization great for investors.
- Securitization is aligned more to the needs of an investor because it is a structured finance instrument. People can invest in something that suits them best to their investment policy.
- It has shown quite a high rating resilience. All leading financial gurus worldwide prove this point.
- There are hardly any defaults over the past two decades. Therefore, securitization tranches are quite safe.
- Not only the default rate but the recovery rate has also been impressively higher than other comparable things such as corporate bonds.
The impact of securitization on the cost of funding also.br>
The proposition is quite clear. To reduce the risk, the security rights of a creditor have to be strong. When securitization lowers the credit risks, it leads to lowering down the funding costs eventually. br>
It affects the npa funding in india positively.br>
Therefore, securitization plays a key role in channelizing money in the economy. It is more important to understand its importance and making the best use of it.