Comparing Covered Bonds and Securitization in India

Are you interested in the Indian financial market? Have you heard of covered bonds and securitization but aren’t quite sure what they are or how they differ? If so, look no further. In this blog post, we’ll be diving into the world of covered bonds and securitization in India, comparing and contrasting these two complex financing structures. From their history to their current usage by Indian banks, we’ll explore everything you need to know about these important tools for raising capital. Buckle up and let’s get started!

What are covered bonds and securitization?

Covered bonds and securitization are both methods of financing that have been used in India for some time. Covered bonds are typically issued by banks and are backed by a pool of assets, such as loans or mortgages. Securitization, on the other hand, is a process whereby assets are pooled and then sold to investors in the form of securities.

In India, covered bonds have been used primarily for infrastructure projects, while securitization has been used more extensively to finance housing loans. There are some similarities between the two mechanisms: both involve the pooling of assets and both result in the issuance of securities. However, there are also important differences.

Covered bonds tend to be more stable than securitized products because they are backed by a physical asset – typically loans or mortgages. This makes them less vulnerable to changes in market conditions. In contrast, securitized products are often backed by intangible assets such as credit card receivables or future income streams from loans. As such, they can be more volatile and sensitive to changes in market conditions.

Another key difference is that covered bonds tend to have longer maturities than securitized products. This makes them more suited to long-term infrastructure projects. Securitized products, on the other hand, often have shorter maturities and can be used for more short-term financing needs.

Lastly, it is worth mentioning that covered bonds generally offer higher coupon rates than securitized products. This is because the former are seen as a safer investment, so investors are willing to accept lower yields for the additional security they offer.

How are covered bonds and securitization structured?

Covered bonds and securitization are two different ways of raising capital that have been used in India for many years. Both covered bonds and securitization involve the pooling of assets and the issuance of debt securities, but there are important differences between the two structures.

Covered bonds are typically issued by banks or other financial institutions and are backed by a pool of assets, such as mortgages or loans. The asset pool is used to secure the bondholders’ investment and to make interest and principal payments on the bonds. Covered bonds are typically senior debt securities, which means that they have a higher priority than other debt instruments in the event of a default.

Securitization, on the other hand, involves the sale of assets, such as mortgage loans, to a special purpose vehicle (SPV). The SPV then issues debt securities that are backed by the underlying assets. Unlike covered bonds, securitization can be used to create junior debt securities, which may have a higher risk but also offer higher returns.

Both covered bonds and securitization have their advantages and disadvantages. Covered bonds tend to be more stable than securitized products, but they may provide less upside potential for investors. Securitization can be more complex and risky than covered bonding, but it may offer greater returns for investors willing to take on more risk.

Key differences between covered bonds and securitization

There are a few key differences between covered bonds and securitization in India. For one, securitization is generally done by financial institutions whereas covered bonds are issued by banks. Secondly, while the cover pool for a covered bond remains with the issuer bank, in securitization, the assets are transferred to a special purpose vehicle (SPV). This means that if the issuer bank becomes insolvent, investors in the covered bond will still have access to the cover pool, but investors in securitization may not. Finally, covered bonds tend to be more expensive for issuers than securitization.