Question

    What of the following statement(s) correctly describes

    Securitization?  
    A Pooling of loans of a single borrower to form a single loan against same collateral Correct Answer Incorrect Answer
    B Polling of all NPA accounts and converting these loans into the bank’s capital Correct Answer Incorrect Answer
    C Pooling of deposits for arranging for the repayment of NPAs of the bank Correct Answer Incorrect Answer
    D Pooling of financial assets for forming/converting into a scrip for sale in a financial market Correct Answer Incorrect Answer
    E All of the above Correct Answer Incorrect Answer

    Solution

    Securitization is a process by which a company pools its different financial assets/debts to form a consolidated financial instrument which is issued to investors. In return, the investors in such securities get interest.   This process enhances liquidity in the market. This serves as a useful tool, especially for financial companies, as its helps them raise funds. If such a company has already issued a large number of loans to its customers and wants to further add to the number, then the practice of securitization can come to its rescue.  
     
    In such a case, the company can club its assets/debts, form financial instruments and then issue them to investors. This enables the firm to raise capital and provide more loans to its customers. On the other hand, investors are able to diversify their portfolios and earn quality returns.  

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