Pass-Through Certificate (PTC)

Banks and NBFCs make loans, but they don't always want to hold them to maturity — they'd rather free up capital to lend again. Securitisation lets them sell those loans to investors, and the instrument that makes it work is the Pass-Through Certificate (PTC).

How the Structure Works

A lender pools together many similar loans — home loans, auto loans, microfinance loans or commercial vehicle loans — and transfers them to a Special Purpose Vehicle (SPV), usually a trust. The SPV issues PTCs to investors. As borrowers in the underlying pool repay their principal and interest, those cash flows are collected and 'passed through' the SPV directly to the PTC holders, after fees. Investors thus earn returns tied directly to the performance of the loan pool, rather than to the originating lender's general balance sheet.

Why It Exists

For the originator, securitisation through PTCs achieves several goals: it frees up capital and balance-sheet space, transfers credit risk to investors, and provides fresh liquidity to keep lending. For NBFCs and microfinance institutions in India, selling loan pools as PTCs (or via the Direct Assignment route) is a crucial funding channel, especially when bank funding tightens. Banks, in turn, buy PTCs partly to meet Priority Sector Lending (PSL) targets by acquiring pools of qualifying loans.

Risks and the Investor Angle

PTCs carry credit risk (borrowers in the pool may default), prepayment risk (if borrowers repay early, the expected cash flows shorten), and depend heavily on the quality of the underlying pool and the originator's servicing. To protect investors, deals use credit enhancement — over-collateralisation, cash reserves, or the originator retaining a junior tranche so it shares in losses. The RBI regulates securitisation tightly, including a Minimum Holding Period and Minimum Retention Requirement so originators keep skin in the game. PTCs are typically held by institutional and qualified investors rather than retail, but they're a vital, if invisible, part of how credit flows through India's financial system — turning illiquid loans into tradable securities.