1. In the Securitisation process, the "Special Purpose Vehicle" (SPV) is set up to:
Originate the loans.
Buy the pool of assets from the Originator and issue Security Receipts to investors.
Collect monthly EMIs from borrowers.
Audit the bank.
Explanation:
The SPV (usually a Trust) isolates the assets from the bankruptcy risk of the Originator. It buys the loans and issues securities backed by the cash flows from these loans to investors.
2. A "Pass Through Certificate" (PTC) implies that:
The investor cannot sell the certificate.
The originator retains the risk.
The SPV guarantees the payment.
The cash flows from the underlying assets are passed through to the investors, minus service charges.
Explanation:
In a PTC structure, the SPV acts as a conduit. As borrowers repay loans, the SPV passes these cash flows directly to the investors who hold the PTCs.
3. In securitisation, "Credit Enhancement" is provided to:
Reduce the loan amount.
Improve the credit rating of the securities issued by the SPV to attract investors.
Increase the interest rate.
Hide bad loans.
Explanation:
Credit enhancement (like cash collateral or over-collateralization) absorbs initial losses, making the senior tranches of securities safer and higher-rated.
4. In a Securitisation transaction, a "Clean-up Call" option allows the Originator to:
Call back the loan from the borrower immediately.
Clean the balance sheet of all debts.
Repurchase the remaining securitised assets from the SPV when the outstanding pool balance falls below a certain level (e.g., 10%).
Call the investors for a meeting.
Explanation:
A Clean-up Call is an option permitting the originator to purchase the remaining assets in a securitisation scheme when the outstanding securities usually fall to 10% or less of the original issuance. This is done because the cost of servicing small remaining balances outweighs the benefits.
5. In securitisation, a "Clean-up Call" allows the originator to buy back the assets when the outstanding pool principal falls to:
10% or less
20% or less
5% or less
15% or less
Explanation:
RBI guidelines allow a Clean-up Call option to the originator to purchase remaining assets when the outstanding securities are not more than 10% of the original amount, facilitating the winding up of the SPV.