Valuable PTC facts you should know!

Shruti Dahiwal
/ Categories: Knowledge
Valuable PTC facts you should know! 1535 0

What is a PTC?

A pass-through certificate or PTC is a certificate issued to an investor against mortgage-backed security. It entitles the investor/buyer of the certificate to receive periodic interest payments that are due on the underlying asset. This characteristic of PTCs makes it similar to debt instruments.

It should be noted that a PTC does not make the holder its owner. It only makes him eligible to receive payments that are due on the underlying security. Also, PTCs are compulsorily rated by credit rating agencies such as CRISIL and Fitch.

Let’s understand the concept of PTC with the help of an example.

X lends money to Y. Y has to repay this loan to X in the form of instalments (interest + principal payment). After some time, X needs money for his business. He securitizes the loan given to Y and sells it to Z for some monetary consideration. Now, X has received the money he required to raise, and the periodic payments that Y was going to pay him, will now be paid to Z.

Here, X could be institutions like banks or private organizations, Y could be corporates or individuals and Z could be financial institutions such as banks, mutual funds and insurance companies.

How are these loans/ receivables securitized?

Banks or private organizations that need funds, convert the loans receivable by them into debt instruments. Further, they create a special purpose vehicle (SPV) through which these instruments are sold to investors. By doing so, the assets become liquid and ease the process to raise funds.

How do PTCs help the parties involved?

PTCs free up the funds that are due to the original lender. These funds can be used by the lender either for further lending or for financing other plans and projects. On the other hand, the buyer/ investor of PTC gets fixed interest payments regularly. No part of this transaction affects the borrowers adversely and they can continue making loan repayments as per the pre-decided terms. Thus, this arrangement is suitable for all the parties involved in the transaction.

Rate this article:


You don't have permission to post comments.