News: Pass-Through Certificates (PTCs) have become a highly innovative tool in structured finance, addressing liquidity challenges while offering investors diversified exposure to a pool of underlying assets. Pass-Through Certificates (PTCs).
About Pass-Through Certificates (PTCs)
- These are debt instruments that allow investors to earn returns from a pool of underlying loans or receivables.
- These could include assets such as home loans, auto loans, microfinance loans, commercial loans, or trade receivables.
- The loans are bundled together and sold to a Special Purpose Vehicle (SPV) or Trust, which then issues the PTCs to investors.
- These certificates give investors the right to receive payments from the future cash flows generated by the underlying loans.
- PTCs are typically preferred by High Net Worth Individuals (HNIs), Ultra-HNIs, and institutional investors who are looking for investment opportunities that offer better returns than traditional fixed-income products.
How Do PTCs Work?
- The process begins when a lender, such as a bank or non-banking financial company (NBFC), sells a pool of its loans to a Special Purpose Vehicle (SPV) or Trust. This SPV becomes the legal owner of those loans.
- The SPV then issues Pass-Through Certificates to investors, who effectively become entitled to receive the repayments made by the borrowers of those loans.
- As borrowers repay their EMIs (Equated Monthly Instalments), the SPV distributes these payments proportionately to the PTC holders.
- This entire process is known as securitisation — converting illiquid loans into marketable securities.
Key Features of Pass-Through Certificates (PTCs)
- Short-Term Tenure: PTCs usually have a tenure of 6–12 months, ideal for investors seeking short-term returns without long capital lock-in.
- Higher Returns: They offer better returns compared to traditional options like FDs or some debt mutual funds, for similar risk levels.
- Regulated & Transparent: Governed by RBI and SEBI, PTCs ensure investor protection, transparency, and adherence to securitisation norms.
- Risk Diversification: Backed by a pool of loans, PTCs spread risk across borrowers. Credit enhancements further safeguard investments.
- Digital & Accessible: PTCs are issued digitally, allowing online access to documents and a seamless subscription process.
