Conceptual · Article 2.1.7.7
Pass Through Certificates (PTCs).
How Thousands of Loans Become One Rated Certificate.
Published as on 22 July 2026
A Pass Through Certificate is the security a securitisation trust issues to investors against a pool of loans — vehicle EMIs, home loans, microfinance or lease receivables bundled together and sold as certificates. As borrowers pay, the collections are "passed through" the trust pro-rata to certificate holders. It is the dominant securitisation instrument in India, distinct from the Direct Assignment route where a single buyer simply purchases a loan pool with no tradable paper. PTCs carry a yield premium over equivalent-rated bonds — payment for credit, prepayment and liquidity risk — but with a ₹1 crore minimum ticket, mandatory ratings and thin secondary trading, they remain a largely institutional instrument.
₹1 crore
Minimum Ticket
115TCA
Pass-Through Tax
~43%
Vehicle-Loan Pools
Institutional
Access · Thin Liquidity
Executive Summary · Page 2
Executive Summary · 6 Findings
A PTC turns a bank's or NBFC's illiquid loan book into tradable securities. The lender sells a pool of loans to a bankruptcy-remote trust; the trust issues certificates; the borrowers' EMIs flow through the trust to the certificate holders. For the investor, the question is not "what is the issuer's credit?" but "how will this specific pool of thousands of borrowers actually pay?" — a structured-credit question answered through rating, seniority and credit enhancement, not a single balance sheet.
Covers what a PTC is and why securitisation exists, the five parties and the cash-flow chain, seniority/tranching and credit enhancement, the RBI 2021 and SEBI May-2025 rules (MHP, MRR, listing, ₹1 crore ticket), the Section 115TCA pass-through tax regime with 10% TDS under 194LBC, the credit/prepayment/liquidity/servicer risk set, PTC versus Direct Assignment, the PSL-driven bank demand, and six questions Indian investors ask.
Key Findings
A certificate backed by a pool of loans, not a single issuer.
A PTC is a securitised debt instrument. A bank or NBFC sells a pool of loans — say 5,000 vehicle loans — to a special-purpose trust, which issues certificates to investors. Borrowers' EMIs are collected and "passed through" the trust pro-rata to certificate holders, both interest and amortising principal. Your claim is on the pool's cash flows, not on the originator's balance sheet.
The dominant securitisation route — distinct from Direct Assignment.
India securitises loans two ways. In a PTC, a trust issues tradable, rated certificates to multiple investors. In a Direct Assignment (DA), an originator simply sells a pool bilaterally to one buyer, with no trust and no certificates. PTCs are the structured, multi-investor instrument; DAs the simpler single-buyer transfer. Bankruptcy remoteness — a clean "true sale" into the trust — is what protects PTC holders if the originator fails.
Rating, seniority and credit enhancement do the heavy lifting.
Every PTC is mandatorily rated by CRISIL, ICRA, CARE or India Ratings. Pools are tranched into senior and junior slices; the junior tranche absorbs losses first. Enhancement is layered — excess spread, then cash collateral/over-collateralisation, then subordination — so a senior tranche can be rated well above the originator's own credit. A AAA PTC is a structured-credit rating on a pool, not the same thing as a AAA corporate bond.
Pass-through tax under Section 115TCA, with 10% TDS.
The securitisation trust is not taxed separately. Under Section 115TCA income passes to PTC holders retaining its character — interest stays interest, taxed at the holder's slab rate, reported under Schedule PTI. From FY 2025-26 the trust deducts a uniform 10% TDS under Section 194LBC for residents (40% for non-residents, subject to DTAA), claimable as credit. Gains on sale are capital gains: slab up to 24 months, 12.5% without indexation beyond.
The originator must keep skin in the game — MRR and MHP.
RBI's 2021 Directions force discipline. A Minimum Holding Period (3 months for pools up to 2-year tenor, 6 months beyond) stops loans being originated purely to sell. A Minimum Retention Requirement makes the originator hold 5–10% of the pool — un-hedged, un-sold — for the transaction's life, so its incentive to underwrite and service well survives the sale.
Yield premium, but real risk and thin liquidity — largely institutional.
PTCs pay more than equivalent-rated corporate bonds for two reasons: a complexity premium for analysing a pool, and an illiquidity premium for a near-absent secondary market. Credit, prepayment and servicer risks are genuine. With a ₹1 crore minimum, the buyers are mutual funds, insurers, banks (for priority-sector compliance) and family offices — retail exposure comes indirectly, through debt funds.
At A Glance
| Metric | Value | Detail |
|---|---|---|
| Instrument | Securitised note | Trust-issued |
| Backing | Pool of loans | Not one issuer |
| Regulators | RBI + SEBI | SSA / SDI |
| Min Ticket | ₹1 crore | Institutional |
| Rating | Mandatory | Structured credit |
| Tax | Sec 115TCA | Slab, 10% TDS |
| Liquidity | Thin | Mostly held to term |
| Best Use | Income, institutional | Yield-premium play |
Exhibit 01: The Loss-Absorption Waterfall
| Layer | Absorbs Loss | Order |
|---|---|---|
| Excess spread | Surplus interest | First |
| Cash collateral / OC | Funded buffer | Second |
| Junior tranche | Subordinated slice | Third |
| Senior PTC | Only when exhausted | Last |
Illustrative of a typical Indian PTC structure. The junior tranche is often retained by the originator as part of its Minimum Retention Requirement, so the lender absorbs losses ahead of senior investors. This layering — not the originator's own credit — is why a senior tranche can carry a higher rating than the originator.
The Opening · Page 3
The Opening
A bank hands out 5,000 vehicle loans across India. Each is an asset that throws off a monthly EMI — but sitting on the books, that capital is locked up. So the bank sells the pool to a dedicated trust, and the trust issues certificates to investors. When borrowers pay their EMIs, the money flows through the trust and is distributed proportionally to the certificate holders. That is a Pass Through Certificate: the loans stay, the cash flows are what change hands, and the collections quite literally pass through. Securitisation converts illiquid loan books into tradable securities — freeing lenders to lend again, and channelling capital to segments like microfinance, affordable housing and vehicle finance.
"You are not lending to the originator — you are buying a claim on how thousands of borrowers behave. That is the whole discipline of structured credit: the certificate is only as good as the pool beneath it and the enhancement wrapped around it."
Pool, Not Promise
The mechanics. Five parties make it work: the originator (the bank or NBFC that made and sold the loans), the special-purpose trust that holds the pool and issues the PTCs, the trustee acting as fiduciary for all holders, the servicer (usually the originator) that collects EMIs into a Trust and Retention Account, and the rating agency that grades the certificate. The cash-flow chain runs Borrower → Servicer → Trust and Retention Account → Trustee → PTC holders.
The FY 2025-26 context. India's securitisation market — PTCs and Direct Assignments together — crossed ₹1.88 lakh crore in FY 2023-24 and was projected to top ₹2 trillion the following year, driven by bank demand for priority-sector-eligible pools and heavy issuance from vehicle-finance and microfinance NBFCs. Vehicle loans were the largest PTC asset class, near 43% of volumes.
Structure
Part I
What a PTC Is, the Five Parties & How Cash Flows
Part II
Rating, Tranching, Credit Enhancement & the Rules
Part III
Taxation, the Risk Set & PTC versus Direct Assignment
Part IV
The Verdict: An Institutional Yield-Premium Tool
Suited To
✓ Mutual funds, insurers, pension funds
✓ Banks meeting PSL targets
✓ Family offices at ₹1 crore+
✓ Investors who can price pooled credit
Not Suited To
✕ Retail investors (₹1 crore floor)
✕ Anyone needing liquid exit
✕ Those wanting a single-issuer bond
✕ Investors unable to assess the pool
Part I
What a Pass Through Certificate Is, Who Builds It, and How the Cash Flows
Securitisation in plain terms — an illiquid loan book turned into tradable certificates; the five parties whose roles make the structure work; and the pass-through chain that carries every borrower's EMI to the certificate holder.
Part I · Page 4
The Five Parties
| Party | Role |
|---|---|
| Originator | Sells the loan pool |
| SPV / Trust | Holds pool, issues PTCs |
| Trustee | Fiduciary for holders |
| Servicer | Collects EMIs (usually originator) |
| Rating Agency | Grades the certificate |
The special-purpose trust is the keystone. Set up as a private trust with no other assets or liabilities, its sole job is to hold the pool and issue certificates. Because it is legally separate from the originator, a clean "true sale" makes it bankruptcy-remote — if the originator fails, holders' claim stays on the pool, not the lender's balance sheet.
The Cash-Flow Chain
Borrower → Servicer → TRA → Trustee → Holder
Borrowers pay EMIs to the servicer, which deposits them into a Trust and Retention Account under the trustee's control. The trustee distributes each holder's proportionate share of interest and amortising principal. As the underlying loans repay, the PTC amortises alongside them — you receive principal back over the life of the certificate, not just at the end.
What Gets Securitised
| Asset Class | Note |
|---|---|
| Vehicle loans | Largest, ~43% FY24 |
| Home loans (RMBS) | Mortgage-backed pools |
| Microfinance | Mostly via DA route |
| Lease receivables | Equipment / infra rentals |
| Trade receivables | Short-tenure obligations |
NBFCs are the single largest source of PTCs — vehicle-finance, microfinance and housing-finance companies most of all — with banks securitising auto, home and agricultural credit. Home-loan pools form Residential Mortgage-Backed Securities (RMBS), a PTC sub-type.
Part II
Rating, Seniority and Credit Enhancement — and the RBI/SEBI Rulebook
How tranching and layered enhancement let a senior slice out-rate its own originator; and the dual RBI-and-SEBI framework — minimum holding periods, retention requirements, the ₹1 crore ticket and the May-2025 listing reforms — that governs every Indian PTC.
Part II · Page 6
How the Rating Is Built
Tranching — Senior over Junior
The pool is split into a senior tranche and one or more junior tranches. The junior slice absorbs the first losses, protecting the senior holders. This is why a senior PTC can be rated above the originator's own credit — its safety comes from structure, not the lender's balance sheet.
Credit Enhancement — Layered Buffers
Excess spread (interest collected minus coupon paid) cushions first; cash collateral / over-collateralisation adds a funded buffer; subordination puts the junior tranche behind the senior. Enhancement absorbs losses up to a threshold — beyond it, senior holders bear the shortfall.
A AAA PTC ≠ a AAA Bond
A PTC rating (CRISIL, ICRA, CARE or India Ratings — mandatory) grades pool performance and enhancement, weighing borrower profile, historical default and recovery, diversification, and legal robustness. A corporate AAA grades one company's standalone credit. Same letters, different questions.
The Rulebook (RBI + SEBI)
RBI SSA Directions, 2021 — Primary Framework
Minimum Holding Period (MHP): 3 months for loans of original tenor up to 2 years, 6 months beyond — the originator must season the loan before selling. Minimum Retention (MRR): 5% of book value for pools up to 24 months, 10% for longer or bullet pools, 5% for RMBS regardless — un-hedged, un-sold, for the life of the deal. Listing: a PTC offered to 50+ investors must list.
SEBI SDI Regulations — Updated May 2025
For listed securitised debt instruments, SEBI aligned with RBI in May 2025: a ₹1 crore public-offer minimum, mandatory demat form, a 3-year originator track record, no re-securitisation or synthetic securitisation, and a 25% single-obligor cap. Privately placed PTCs — the bulk of volume — remain governed mainly by RBI's SSA Directions.
Retention at a Glance
| Pool | MRR | MHP |
|---|---|---|
| Tenor ≤ 24 months | 5% | 3 months |
| Tenor > 24 months / bullet | 10% | 6 months |
| RMBS | 5% | Per tenor |
Per RBI (Securitisation of Standard Assets) Directions, 2021. The retained interest cannot be hedged or sold — it is genuine skin in the game, keeping the originator exposed to the pool's performance throughout.
Part III
Taxation, the Surviving Risks, and PTC versus Direct Assignment
The Section 115TCA pass-through regime and 10% TDS under 194LBC; the credit, prepayment, liquidity and servicer risks a rating does not erase; and how the certificate-issuing PTC route differs from the single-buyer Direct Assignment.
Part III · Page 8
Taxation (FY 2025-26)
Pass-Through Under Section 115TCA
The securitisation trust is a pass-through entity — not taxed at the trust level. Income flows to holders retaining its character: interest stays interest, taxed at the holder's slab rate and reported under Schedule PTI. No reclassification, no double tax.
TDS Under Section 194LBC — 10%
From 1 April 2025 the trust deducts a uniform 10% TDS on distributions to all resident investors (down from 25%/30%), rationalised by the Finance Act 2025. Non-residents face 40%, subject to DTAA relief. TDS is an advance credit — claimable in full against the holder's tax while filing.
Capital Gains on Sale
PTCs are treated as unlisted debt for capital gains in most cases. Held 24 months or less, gains are STCG at slab; beyond 24 months, LTCG at 12.5% without indexation (Finance Act 2024). The Section 50AA slab-rate rule applies to debt-fund units, not directly-held PTCs. Given thin liquidity, most holders realise coupon, not gains.
The Risks That Survive
Credit & Prepayment — The Central Pair
Credit: if enough borrowers default, enhancement absorbs the first losses — beyond the threshold, holders bear the shortfall. Prepayment: borrowers repaying early (common in vehicle loans) shorten the PTC and force reinvestment of returned principal at prevailing — often lower — rates.
Liquidity & Servicer Risk
Liquidity: most Indian PTCs have almost no secondary market — plan to hold to term. Servicer: collection depends on the servicer (usually the originator); if it faces stress, EMI collection can stall even when borrowers pay. The trustee can appoint a backup, but the handover takes time.
PTC vs Direct Assignment
| Aspect | PTC | Direct Assignment |
|---|---|---|
| Structure | Trust + certificates | Bilateral sale |
| Investors | Multiple | Single buyer |
| Tradable | In principle, yes | No certificate |
| Rating | Mandatory | Not issued |
PTCs are the dominant, structured, multi-investor route; DAs the simpler single-buyer transfer (favoured for much microfinance). The choice turns on the originator's objective, the target investor base, and whether priority-sector credit is sought.
Part IV
The Verdict
A pool priced on structure. An institution's instrument.
Part IV: The Verdict · Page 10
30-Second Summary
A Pass Through Certificate is the security a securitisation trust issues against a pool of loans, passing the pool's collections pro-rata to certificate holders. It is India's dominant securitisation instrument — distinct from the single-buyer Direct Assignment — governed by RBI's 2021 Directions and, when listed, SEBI's SDI Regulations. Value rests on structure: mandatory rating, senior/junior tranching, and layered credit enhancement that can lift a senior slice above the originator's own credit.
Income is taxed in holders' hands under the Section 115TCA pass-through regime — character preserved, slab rate, 10% TDS under 194LBC — with capital gains at slab up to 24 months and 12.5% beyond. The instrument pays a yield premium for genuine credit, prepayment, liquidity and servicer risk. With a ₹1 crore minimum and thin secondary trading, PTCs are largely institutional; retail investors touch them indirectly, through debt funds. Do the pool analysis, or don't buy the certificate.
"The rating tells you how the structure is expected to behave; it does not tell you the pool cannot deteriorate. In structured credit the discipline is permanent — you keep watching the borrowers, the enhancement and the servicer, because the certificate only pays what the pool actually collects."
The Final Orientation
ADWIZR · July 2026
Decision Rules
Use Correctly As
✓ A yield-premium income holding
✓ Senior tranche, well-enhanced pool
✓ PSL compliance for a bank buyer
✓ Held-to-term institutional capital
Misuse Destroys Value
✕ A retail "high FD" substitute
✕ Money needing a liquid exit
✕ Buying rating without pool work
✕ Treating it as issuer credit
Three Misconceptions
What Investors Get Wrong
(1) "A AAA PTC is a AAA bond." One grades a pool and its enhancement; the other a single company. (2) "The certificate is tradable, so it's liquid." In principle tradable, in practice thin — most are held to term. (3) "The originator's rating is my risk." With a true sale and tranching, a senior PTC can out-rate its originator.
Who Buys, and Why
The PSL Driver
Mutual funds, insurers, pension and provident funds, family offices — and banks, which invest in PTCs backed by priority-sector-eligible loans to count toward their PSL targets (40% of Adjusted Net Bank Credit for most banks). This PSL demand is a key structural driver of PTC pricing and volumes.
Investor FAQ
Questions Indian Investors Ask
Six questions, answered directly.
Investor FAQ · Page 12
Frequently Asked Questions
Q1 Is a PTC the same as a bond?
Q2 Can a retail investor in India buy PTCs directly?
Q3 How are PTCs taxed in India?
Q4 How is a PTC different from a Direct Assignment (DA)?
Q5 What is the Minimum Retention Requirement (MRR) and why does it matter?
Q6 What protects a senior PTC holder if borrowers in the pool default?
Key Terms & Definitions
Pass Through Certificate (PTC)
The security a securitisation trust issues to investors against a pool of loans. Borrowers' repayments are collected and "passed through" the trust pro-rata to certificate holders, both interest and amortising principal. India's dominant securitisation instrument, distinct from the single-buyer Direct Assignment route.
Securitisation
The process of converting illiquid loans on a bank's or NBFC's books into tradable securities by selling a pool to a special-purpose trust that issues certificates. It frees the lender's capital for fresh lending and channels credit to segments such as microfinance and affordable housing.
Bankruptcy Remoteness / True Sale
The legal separation of the loan pool from the originator. Once the pool is genuinely sold ("true sale") into the trust, holders' claim rests on the pool, not the originator's balance sheet — so if the originator fails, the certificate is insulated (though servicing can be temporarily disrupted).
Tranching & Credit Enhancement
Splitting the pool into senior and junior slices so the junior absorbs losses first, plus layered buffers — excess spread, cash collateral / over-collateralisation, subordination — that absorb losses before senior holders. Together they let a senior tranche be rated above the originator's own credit.
Minimum Retention Requirement (MRR)
The un-hedgeable, un-sellable slice (5–10% of book value) an originator must retain for the deal's life under RBI's 2021 Directions. Its purpose is skin in the game — keeping the originator exposed to the pool so it underwrites and services responsibly.
Section 115TCA
The income-tax pass-through regime for securitisation trusts: the trust is not taxed separately, and income is taxed in the PTC holders' hands in the same character as the underlying (interest at slab), with TDS under Section 194LBC, reported under Schedule PTI.