Debt Capital Markets puzzles, solved step by step

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  1. 090A truck financier wants to sell a Rs 1,000 crore pool of loans into an asset-backed securitisation. Its average truck loan is Rs 20 lakh. How many loans does it need, and what would stop it simply using its whole book?Estimation and market sizingWarm upStructured creditCorporate banking

    Try it first

    How many Rs 20 lakh loans make Rs 1,000 crore?

    Show the worked solution

    About 5,000 loans, before any filters. Rs 1,000 crore is 1,00,000 lakh, and 1,00,000 divided by 20 is 5,000. The book cannot all go in because a pool takes only eligible loans: current on payments, held long enough to show a track record, and within concentration limits. If the notes must be overcollateralised by 10%, the pool needs about 5,500 loans.

    How do you avoid a units slip?

    If you are filling a Rs 1,000 box with Rs 20 notes, you need 50 notes; the only way to get it wrong is to mix up rupees and hundreds. Lakh and crore are the Indian version of that trap. Put both numbers in lakh before dividing: Rs 1,000 crore is 1,00,000 lakh, and 1,00,000 over 20 is 5,000. Say the conversion out loud; interviewers listen for it.

    Division gives 5,000 loans; eligibility decides whether the book can supply themWhole book12,000Overdue now-1,200Too recently disbursed-2,700Over concentration caps-900Eligible for the pool7,200needed: 5,000with 10% cover: 5,500Rs 1,000 crore / Rs 20 lakh = 1,00,000 lakh / 20 lakh = 5,000 loans. Loan counts are illustrations.
    In this illustrative book of 12,000 truck loans, overdue, recently disbursed and over-concentrated loans fall away, leaving 7,200 eligible, enough for the 5,000 loans a Rs 1,000 crore pool needs, or 5,500 with 10% overcollateralisation.

    Why can the financier not just use the whole book?

    Investors and rating agencies buy a pool with rules attached. Eligibility criteriaThe conditions every loan must meet to enter a securitised pool, such as being current on payments and having a minimum repayment history. typically exclude loans that are overdue, loans too new to have shown a repayment record, and loans that would push the pool over limits on any one borrower, region or vehicle type. So the pool size starts with simple division and ends with eligibility: the question is not how many loans exist but how many qualify. India's securitisation rules also set a minimum holding period and a minimum retention by the originator; confirm the current figures in the RBI's directions rather than relying on memory.

    What would change the count?

    Two things. First, Rs 20 lakh may be the average loan at disbursal; loans that have been repaying for a year or two have smaller outstanding balances. If the average outstanding is Rs 14 lakh, the pool needs about 7,143 loans. Second, structures often require the pool to exceed the notes sold, so Rs 1,000 crore of notes might need Rs 1,100 crore of loans. The financier also has a reason not to strip its best loans out: what remains on its own balance sheet gets worse.

    Where candidates lose it

    The common loss is a zero: 500 or 50,000 loans from mixing lakh and crore. Convert both figures to lakh before you divide.

    The second is stopping at 5,000. The follow-up is always about eligibility, and a candidate who can name three filters and the difference between disbursed and outstanding balance shows they know how a pool is actually put together.

    What the interviewer asks next

    • If 20% of the book is overdue or unseasoned, how large must the book be to fill the pool?
    • Why would investors want a cap on the share of loans from any one state?
    • Would you expect the pool's average loan to be larger or smaller than the book's, and why?