Pass-Through Certificates (PTCs)

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)

1. Short-Term Tenure:  PTCs usually have a tenure of 6–12 months, ideal for investors seeking short-term returns without long capital lock-in.
2. Higher Returns: They offer better returns compared to traditional options like FDs or some debt mutual funds, for similar risk levels.
3. Regulated & Transparent: Governed by RBI and SEBI, PTCs ensure investor protection, transparency, and adherence to securitisation norms.
   
4. Risk Diversification: Backed by a pool of loans, PTCs spread risk across borrowers. Credit enhancements further safeguard investments.
5. Digital & Accessible:  PTCs are issued digitally, allowing online access to documents and a seamless subscription process.