Unit 3: Securitization and plastic money
Management of Financial Services notes · PTU syllabus (MBA 912-18)
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Unit summary
Securitisation, factoring and plastic money convert receivables and credit into liquidity and convenience. This unit covers the meaning, features and process of debt securitisation, the development, types and procedural and financial aspects of factoring, forms of plastic money — credit and debit cards — the credit card process, and factors affecting the use of plastic money in India.
After this unit you can
- Explain the meaning, features and process of securitisation
- Explain factoring — types, procedure and financial evaluation
- Explain credit and debit cards and the card transaction process
- Analyse factors affecting the use of plastic money in India
PTU syllabus topics
- Meaning
- features and process of debt securitization
- factoring development
- types
- procedural and financial aspects
- plastic money forms (credit and debit cards)
- credit card processes
- factors affecting utilization in India
Receivables
Short-term (up to about 180 days)
Medium-term export receivables
Coverage
Usually up to 80–90% advanced
Usually 100%
Recourse
With or without
Without recourse
Use
Domestic and export trade
Capital goods exports
Topic 1
Securitisation and factoring
Factoring
Factoring is a financial service in which a business sells its receivables to a factor at a discount for immediate cash; the factor also manages the sales ledger and collections.
- 1Seller supplies goods on credit to buyer
- 2Seller assigns invoice to factor
- 3Factor pays 75–90% advance
- 4Factor collects from buyer on due date
- 5Factor pays balance less charges to seller
- Types: recourse (seller bears bad-debt risk) and non-recourse; disclosed and undisclosed; domestic and export factoring; forfaiting (export receivables, non-recourse, medium term).
- Legal framework: Factoring Regulation Act, 2011 (amended 2021); TReDS platforms (RXIL, M1xchange, Invoicemart) for MSME invoices.
Securitisation of debt
- Pooling illiquid loans (home, auto, microfinance) and selling them to an SPV that issues pass-through certificates (PTCs) to investors.
- Benefits: liquidity for lenders, risk transfer, capital relief, new investment instruments.
- Legal framework: SARFAESI Act, 2002; RBI Master Direction on securitisation (2021) — minimum holding period and minimum retention requirement.
Assets
Short-term trade receivables
Long-term loans and receivables
Buyer
Factor (bank/NBFC)
SPV funded by investors
Instrument issued
None
Pass-through certificates
Users
Businesses, MSMEs
Banks, NBFCs, HFCs
Financial evaluation of factoring
Advance received
Invoice value × Advance %
Discount charge
Advance × Interest rate × Days ÷ 365
Effective cost
(Discount charge + Commission) ÷ Advance × 365 ÷ Days
Example
Invoice ₹10 lakh, 80% advance, interest 12% for 90 days, commission 1%: advance ₹8 lakh; interest ₹23,671; commission ₹10,000; effective annual cost ≈ (33,671 ÷ 8,00,000) × 365 ÷ 90 ≈ 17.1%. Compare with savings in collection costs and bad debts.
Topic 2
Plastic money and the credit card process
Payment source
Credit line from the issuer
Own bank account balance
Billing
Monthly statement; interest-free period up to about 50 days
Amount debited immediately
Interest
36–42% p.a. on revolving balances
None
Credit score impact
Builds credit history
No impact
Risk
Overspending, debt trap
Limited to account balance
- 1Cardholder pays at POS or online
- 2Merchant's acquiring bank sends request
- 3Card network (Visa, Mastercard, RuPay) routes it
- 4Issuing bank authorises (OTP/PIN)
- 5Settlement to merchant less MDR
- Other plastic/electronic money: prepaid cards and wallets (PPIs), forex cards, co-branded cards, contactless (NFC) cards; RuPay (NPCI) is India's domestic network; RuPay credit cards on UPI.
- RBI rules: tokenisation of cards (2022), card-not-present transactions need additional factor authentication, cardholders can choose the network, no unsolicited cards, billing and closure timelines.
- Advantages: convenience, safety vs cash, records, rewards. Disadvantages: fraud, hidden charges, debt trap.
Topic 3
Factors affecting the use of plastic money in India
- Drivers: rising incomes and urbanisation, e-commerce, POS and QR acceptance, rewards and EMI offers, RuPay and UPI-linked credit cards, government push for digital payments, contactless payments.
- Barriers: low financial literacy, cash preference, fear of fraud, merchant reluctance (MDR), poor acceptance in rural areas, high interest on revolving credit, limited credit histories.
- Trends: credit cards in force exceed 10 crore (2025); UPI dominates retail digital payments; tokenisation and stronger authentication reduce fraud.
Key terms
- Securitisation
- Converting loan pools into tradable securities
- Pass-through certificate
- Security representing interest in a pooled loan portfolio
- Recourse factoring
- Seller bears bad debt risk
- MDR
- Merchant discount rate paid on card transactions
- Tokenisation
- Replacing card details with a unique token
Quick revision
- Securitisation: originator → SPV → PTCs → investors; benefits and RBI rules.
- Factoring: recourse/non-recourse, disclosed/undisclosed; TReDS; cost evaluation.
- Cards: credit vs debit; transaction flow; RBI tokenisation.
- Plastic money drivers and barriers in India.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is securitisation?
- Q2.What is an SPV?
- Q3.Distinguish factoring and forfaiting.
- Q4.How is the cost of factoring computed?
- Q5.Distinguish credit and debit cards.
- Q6.What is tokenisation?
Long-answer questions
- Q1.Explain the meaning, features and process of securitisation.
- Q2.Explain factoring, its types and procedural and financial aspects.
- Q3.Explain credit and debit cards and the card transaction process.
- Q4.Discuss the factors affecting the use of plastic money in India.
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