Typically, the seller of loans continues to service them. The excess cashflow (remaining after deducting the interest and the principal and othermonies payable to the investors) and other fees accrue to the seller.

Features of a debt securitisation transaction include:
1) Legal true sale of assets to an SPV with narrowly defined purposes andactivities,
2) Issuance of securities collateralised by the underlying assets by the SPVto investors,
3) Reliance by the investors on the performance of the assets for repaymentrather than the credit of their originator (the seller) or the issuer(SPV),
4) Consequent to the above, bankruptcy remoteness from the originators,
5) Administration of assets by the originator, including continuation ofrelationships with the obligors (the borrowers of original loans),
6) Support for timely interest payments and principal repayment in the formof suitable credit enhancements,
7) Formal rating from one or more rating agencies.
Following amendments to the National Housing Bank Act in June 2000, and incontinuation of its role as the apex body in India for the promotion ofhousing finance, the National Housing Bank (NHB) has agreed to facilitatesecuritisation of the pool of housing loans originating from HDFC and LICHousing Finance Ltd.

In this transaction, the NHB has purchased from these HFCs a pool ofapproximately 11,000 retail loans, of an aggregate value of Rs 137 crore,which constitute the receivables to be securitised. The individual loanshave been classified into A and B class securities and only A classsecurities, carrying an aggregate value of Rs 101 crore, are being packagedinto Pass Through Certificates (PTCs), carrying a face value of Rs 10,96,024for LIC and Rs 10,04,816 for HDFC.

These certificates are being offered for retail subscription, aka theprivate placement route, through SBI Capital Markets and ICICI SecuritiesLtd, the arrangers for the issue.

The issue proceeds will be used by NHB to pay LICHF and HDFCHF partconsideration for the receivables purchased. Under the transaction, NHB hasmade an express declaration of trust with regard to the receivables andappointed itself the sole trustee to hold and administer the receivables astrust property for the benefit of the PTC holders. The trust will only relyupon collections against the receivables and the credit enhancementspecified in the memorandum for making payments to the PTC holders. The HFCsoriginating the housing loans will however continue to administer them evenafter securitisation in their capacity of servicing and paying (S&P)agent.

The principal terms of pass through certificates issued by NHB with regardto securitised debt originating from LICHF and HDFCHF are: LICHF Passthrough certificates of HDFCHF Senior Class A PTC, Senior Class B PTC,Subordinate Class A PTC, Senior Class B PTC, at face values Rs 10,96,024; Rs10,58,038; Rs 10,04,816; and Rs 10,07,254.

The pass through rate is 10.90 per cent, payable monthly with annualisedyield of 11.46 per cent. The scheduled repayment pattern is 84 monthlypay-outs, comprising principal and interest. Redemption of the principalamount will begin only after Class A PTCs are extinguished, except in thecase of prepayments.

Any company or corporate body, bank, financial institution, mutual fund,insurance company or society can apply for the allotment of PTCs. The NHBhas issued PTCs for a period of seven years with a face value of Rs10,96,024 each, with an interest coupon rate of 10.9 per cent computed atmonthly interest. Thus, if you buy an LIC Housing Finance PTC for Rs10,96,024, you get Rs 2,35,405 back at the end of the first year, Rs2,37,627 at the end of the second year, and so on.

Through the seven year tenure of the scheme, you get a return of a total ofRs 15,31,289 on an investment of Rs 10,96,024 at a coupon rate of 10.9 percent (See table).

In order to minimise the stamp duty costs payable on the transfer of assetsto the NHB, LIC Housing Finance has taken care to ensure that the loansforming part of the mortgage package are from the states of Karnataka, TamilNadu and Maharashtra. The governments in these states have fixed the rate ofstamp duty applicable to these securities at a nominal 0.1 per cent of thevalue of the instrument.