What is Securitization and Its Examples

Securitization is the process of converting illiquid assets into liquid assets by converting longer duration cash flows into shorter duration cash flows. It is a structured finance which was originated in USA in 1970 out of the necessity faced by the saving and loan associations of the United States to save themselves from the bankruptcy. When inflation began to rise and the market interest rates rose these institutions found that they had to pay high market rates for attracting short term deposits which were higher than the rates they were earning on the long term mortgage loans. For resolving these problem these institutions turned towards securitization of debt by selling long term debt in the form of securities of different maturities and denominations and sold it to various investors according to their risk- return profiles.

Hence therefore any resource with predictable cash flows can be securitized. For example tickets that is to be sold at a cinema hall, credit card receivables, loans that are to be paid to housing finance company, non performing assets of a financial company, etc…

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