Structured Finance: Meaning, Types, Benefits, Risks, and Examples

Structured finance includes several instruments and transaction structures. The appropriate structure depends on the underlying assets, cash flows, risk allocation and financing objective.

The regulatory treatment, permitted structures and risks vary across instruments. Investors and businesses should therefore assess the specific transaction documents rather than treating all structured-finance products as equivalent.

Structured finance can provide access to customised funding structures, liquidity and risk-allocation mechanisms for suitable transactions.

Access to capital

Structured finance can provide an alternative source of funding for large or specialised transactions that do not fit conventional lending structures.

Liquidity generation

Securitisation can convert eligible financial assets and their associated cash flows into securities, allowing the originating institution to raise funds against the underlying pool.

Risk distribution

A structured transaction can allocate different levels of credit risk among securities or participants. The RBI notes that securitisation can facilitate credit-risk distribution and improve lender liquidity when appropriately structured.

Customised financing

The structure can be designed around the characteristics of the underlying assets, expected cash flows, repayment priorities, and risk requirements of the transaction.

Capital management

For eligible regulated entities, structured transactions can form part of broader capital and balance-sheet management strategies, subject to applicable regulatory requirements.

Structured finance involves risks that can arise from the underlying assets, transaction structure, market conditions, and operational processes.

The RBI has specifically recognised that complicated and opaque securitisation structures can create financial-stability concerns, which is why regulated securitisation transactions are subject to prudential requirements.

Structured finance can be used where a transaction involves substantial funding requirements, identifiable assets or receivables, and a need to allocate risk or cash flows through a customised structure.

• Project finance: Funding large infrastructure or development projects against expected project cash flows.
• Receivables financing: Using eligible receivables or future cash flows within an appropriate financing structure.
• Real estate finance: Structuring funding around property-related assets or cash flows.
• Corporate transactions: Supporting certain mergers, acquisitions or other capital-intensive transactions.
• Securitisation: Converting eligible pools of financial assets into securities for investors.
• Working capital structures: Arranging funding around eligible business receivables or other assets.

The suitability of structured finance depends on the transaction's size, asset quality, cash-flow characteristics, legal structure, regulatory requirements and the parties involved.

Structured finance transactions can be subject to different regulatory frameworks depending on their structure and the entities involved.

For securitisation, the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021 apply to specified regulated entities, including scheduled commercial banks, certain all-India financial institutions, small finance banks and NBFCs. The framework sets requirements covering matters such as eligible assets, minimum holding periods, minimum retention requirements, disclosures and reporting.

The RBI's handbook also records requirements relating to securitisation, including restrictions on certain underlying assets and minimum retention requirements for specified regulated entities.

Because the applicable requirements depend on the transaction and participating entities, businesses and investors should review the relevant RBI directions and transaction documentation before entering into a structured-finance arrangement.

Structured finance differs from conventional finance mainly in its complexity, customisation and use of underlying assets or cash flows.

Structured finance is therefore not simply a larger version of a conventional loan. It involves a different method of designing and allocating funding, cash flows and risk.

Corporate finance covers the broader financial management of a company, while structured finance focuses on specialised financing arrangements.

Corporate finance can include decisions involving capital budgeting, debt, equity, working capital, investments, cash management and overall capital structure.

Structured finance addresses specific funding or risk-management requirements through customised structures. It can involve securitisation, asset pooling, receivables and differentiated risk allocation.

For example, deciding whether a company should raise debt or equity is a corporate-finance decision. Creating a securitisation structure around a pool of eligible receivables is an example of structured finance.

Structured finance is primarily relevant to businesses, financial institutions, investors, and other parties involved in complex financing transactions.

It can be relevant to:

• Financial institutions managing eligible asset pools.
• Large companies with substantial receivables or specialised funding requirements.
• Infrastructure businesses seeking project-based financing.
• Institutional investors evaluating structured securities.
• Investment and financial-market participants involved in securitisation transactions.

The complexity and transaction costs involved mean that structured finance is not automatically suitable for every business or funding requirement.

Structured finance is not automatically suitable for small businesses because it is designed for specific and often complex financing requirements.

A small business seeking funds for inventory, working capital, equipment or expansion may first assess conventional business financing. A standard business loan can be more straightforward where the funding requirement does not require asset pooling, securitisation or customised risk allocation.

For example, a manufacturer requiring Rs. 20 lakh for machinery and working capital would need to compare the cost, eligibility criteria, repayment structure and documentation of conventional business financing with any specialised funding arrangement available to it.

Once you have identified the setup, operating or expansion costs involved, arranging suitable business funding can help you plan these expenses within your available cash flow.

For businesses that need conventional funding rather than a complex structured-finance transaction, a Bajaj Finance Business Loan can be considered for eligible business requirements. It offers a loan range of Rs. 2 lakh to Rs. 80 lakh and repayment tenures of 12 months to 96 months. 

What are the eligibility criteria and documents for Bajaj Finance Business Loan?

Current eligibility criteria includes:

• Indian nationality.
• Self-employed work status.
• Business vintage of at least 3 years.
• CIBIL score of 650 or higher.
• Age requirements of 21 years at application and up to 80 years at loan maturity, subject to the applicable co-applicant requirements.

Documents required are:

• KYC documents - Aadhaar/ passport/ voter’s ID/ driving license
• PAN card
• Proof of business ownership
• Additional financial documents

• Click the 'Check Loan Offer' button to open the online application form.
• Enter basic details (Name, PAN, Date of Birth, PIN Code, Business details) and click 'CONTINUE'.
• Complete banking verification and continue.
• View your offer details, select the loan type (Term Loan, Flexi Dropline Loan, or Flexi Hybrid Loan), and choose the repayment tenure.
• Review the details and submit the business loan application.