Question

Provide two economic benefits of securitization. For each, explain why a person or an organization is better off with securitization and why the same outcome can not be achieved without securitization. Mention one adverse consequence of securitization.

Answer 1

The two economic benefits os securitization are :

1. It helps in providing liquidity to the person or the organization. The illiquid assets such as receivables on loans sanctioned by bank, etc are converted into liquid assets and helps in releasing capital which would be otherwise stuck.

Without securitization, the illiquid assets cannot be converted into loand and thus, they become illiquid assets and therefore, securitisation helps in converting illiquid assets into liquid assets

2. Lowers cost : The help of securitisation helps in loweing the funding cost to the organisation. For example, if the bond had a BBB rating but the company is AA , the company can avail benefit of AAA- rating of bond. Without securitisation, the cost of the bond would have been much higher.

The one adverse consequences of securitisation is that it is a complex process to handle because there are multiple parties involved in the securitization process.