Asset Backed Securities : A Brief Explanation
When a person is interested to borrow from others, it happens that the other person would try to cover his risk and request for a collateral to back any other receivable or the cash flows from other assets . Such backing of the loan or bond by the other receivables instead of the paying capacity of the person are asset backed securities.
The assets are generally not single but many of them as a group and interconnected and cannot be sold independently. Such assets as a pool are securitized and are sold to investor. This type of transactions helps in improving the credit rating also as the entry is removed from the bank records also hence the liability part gets reduced. Bank has a benefit in reducing the high risk assets before getting converted in to NPA.
Post this transaction the cash flow of the owner of ABS would get reduced though other entries in balance sheet would improve. It is some similarity with mortgage based security where banks issue sell as single security for homes issued by pooling together through the process of securitization – Payday Loans Near Me