hire purcharse and leasing

7/28/2019 Hire purcharse and leasing

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ACKNOLEDGEMENTIt gives us immense pleasure to present this project on

FINANCIAL MARKETS & SERVICES.This project has given us the opportunity to closely study the topic

HIRE PURCHASE & LEASINGWe are highly obliged with the support & guidance given by the

PROFESSOR ANITA DAKSHINA MAMWe are presenting this project a part of our syllabus for the academic year

2013, semester -V as a part of our BBI COURSE.


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GURU NANAK KHALSA COLLEGE OF

ARTS SCIENCE & COMMERCE

MEMBERS

SR.NO ROLL

NO

NAME OF THE STUDENT

1. 5. RAJBIR SINGH BHINDER

2. 14. RAAZ KAPOOR

3. 25. AKSHAY POOJARY

4. 26. JINESH PUNMIYA

5. 31. MANPREET SINGH

6. 44. ABHISHEK SONKAR


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INDEXSR.NO SUBJECT SIGN1. Concept & Meaning of hire purchase

2. Main objects of Hire purchase Co.3. Evolution of Hire purchase4. Advantages & Disadvantages of Hire Purchase5. Concept of Lease financing6. Meaning of Lease financing7. Importance of Lease financing8. Types Of Lease Agreements9. Difference Between Finance & operating lease

10. Advantages & Disadvantages of Leasing

11. Distinguish Between Lease Financing & HirePurchase12. Top COS of Leasing and Hire PurchaseCurrentscenario of leasing in India


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CONCEPT AND MEANING OF HIRE PURCHASE

Hire purchase is a type of instalment credit under which the hire purchaser, calledthe hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the

repayment of principal as well as interest, with an option to purchase. Under this

transaction, the hire purchaser acquires the property (goods) immediately on signing

the hire purchase agreement but the ownership or title of the same is transferred

only when the last instalment is paid. The hire purchase system is regulated by the

Hire Purchase Act 1972. This Act defines a hire purchase as an agreement under

which goods are let on hire and under which the hirer has an option to purchase

them in accordance with the terms of the agreement and includes an agreement

under which:

1) The owner delivers possession of goods thereof to a person on condition that

such person pays the agreed amount in periodic instalments. 233

2) The property in the goods is to pass to such person on the payment of the last

of such instalments, and

3) Such person has a right to terminate the agreement at any time before the

property so passes.

Hire purchase should be distinguished from instalment sale wherein property passes

to the purchaser with the payment of the first instalment. But in case of HP

(ownership remains with the seller until the last instalment is paid) buyer gets

ownership after paying the last instalment. HP also differs form leasing.


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Main objects of Hire Purchases Company

1. To carry on the business of letting on hire or selling under hire purchasesystem or otherwise on such terms and conditions as may be decided by the Board

from time to time, automobiles and other vehicles of every kind and description,

material handling equipment like typewriters, adding machines and calculators,

televisions, radios, transistors, electronic equipment of all kinds, fans, meters,

coolers, air conditioners, refrigerators and other electrical appliances, telephone and

intercom systems, in any part of India or abroad.

2. To purchase, sell, or hire out or sell on hire purchase system all kinds of motorvehicles, motor cycles, aeroplanes launches, boats, mechanical or otherwise, sewing

machines, radio sets, gramophones, pianos and musical instruments, cameras,

electric fans, cinematograph machines and apparatus, heaters, refrigerators and

other electrical domestic appliances furniture, wooden and metallic, household

equipments and all classes of machinery that the Company may deem fit.

3. To do the business of manufacturing, selling, repairing, purchasing or dealing

on hire purchase system or otherwise motor cars, motor cycles, cycles, cycles,sewing machines, typewriters, numbering machines, radios, radiograms,

refrigerators, Frigidaire, wireless sets and electrical appliances.

What can you finance with hire purchase? Cars and vans Buses and coaches

Plant and machinery

Agricultural equipment

Construction and materials handling equipment


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Evoloution of Hire Purchase

The British concept of hire-purchase has, however, been there in India for more than

6 decates.The first hire-purchase company is believed to be Commercial Credit

Corporation,successor to Auto Supply Company. While this company was based in

Madras, Motor and General Finance and Instalment Supply Company were set up in

North India.These companies were set up in the 1920s and 1930s.

Development of Hire-purchase took two forms:

1. Consumer durables

2. Automobiles

Consumer durables hire-purchase was promoted by the dealers in the

respective equipment.

Thus, Singer Sewing Machine company, or Murphy radio dealers would

provide instalment facilities on hire-purchase basis to the customers of theirproducts.

The other side developed very fast - hire-purchase of commercial vehicles.

The dealers in commercial vehicles as well as pure financing companiessprang up.

The value of the asset being good and repossession being easy, this branch

of financing activity flourished fast, although until recently, most of automobilefinancing business was in hands of family-owned businesses.


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The Advantages of Hire Purchase Agreements to theconsumers

Spread the cost of finance. Whilst choosing to pay in cash ispreferable, this might not be possible for consumer on a tight budget. A hirepurchase agreement allows a consumer to make monthly repayments over apre-specified period of time;

Interest-free credit. Some merchants offer customers the opportunity topay for goods and services on interest free credit. This is particularly commonwhen making a new car purchase or on white goods during an economicdownturn;

Higher acceptance rates. The rate of acceptance on hire purchaseagreements is higher than other forms of unsecured borrowing because thelenders have collateral;

Sales. A hire purchase agreement allows a consumer to purchase sale itemswhen they aren't in a position to pay in cash. The discounts secured will savemany families money;

Debt solutions. Consumers that buy on credit can pursue a debt solution,such as a debt management plan, should they experience money problemsfurther down the line.


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The Disadvantages of Hire Purchase Agreements to theconsumers

Personal debt. A hire purchase agreement is yet another form of personaldebt it is monthly repayment commitment that needs to be paid each month;

Final payment. A consumer doesn't have legitimate title to the goods untilthe final monthly repayment has been made;

Bad credit. All hire purchase agreements will involve a credit check.Consumers that have a bad credit rating will either be turned down or will beasked to pay a high interest rate;

Creditor harassment.

Opting to buy on credit can create money problems should a familyexperience a change of personal circumstances;

Repossession rights. A seller is entitled to 'snatch back' any goods whenless than a third of the amount has been paid back. Should more than a thirdof the amount have been paid back, the seller will need a court order or forthe buyer to return the item voluntarily


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CONCEPT 0F LEASE FINANCING

Lease financing denotes procurement of assets through lease. The subject of

leasing falls in the category of finance. Leasing has grown as a big industry in the

USA and UK and spread to other countries during the present century. In India,

the concept was pioneered in 1973 when the First Leasing Company was set up in

Madras and the eighties have seen a rapid growth of this business. Lease as a

concept involves a contract whereby the ownership, financing and risk taking of

any equipment or asset are separated and shared by two or more parties. Thus, the

lessor may finance and lessee may accept the risk through the use of it while a

third party may own it. Alternatively the lessor may finance and own it while the

lessee enjoys the use of it and bears the risk. There are various combinations in

which the above characteristics are shared by the lessor and lessee.


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MEANING 0F LEASE FINANCINGA lease transaction is a commercial arrangement whereby an equipment owner or

Manufacturer conveys to the equipment user the right to use the equipment in return

for a rental. In other words, lease is a contract between the owner of an asset (the

lessor) and its user (the lessee) for the right to use the asset during a specified

period in return for a mutually agreed periodic payment (the lease rentals). The

important feature of a lease contract is separation of the ownership of the asset from

its usage.Lease financing is based on the observation made by Donald B.

Grant:

Why own a cow when the milk is so cheap? All you really need is milk and not

the cow.

IMPORTANCE 0F LEASE FINANCINGLeasing industry plays an important role in the economic development of a country

by providing money incentives to lessee. The lessee does not have to pay the cost of

asset at the time of signing the contract of leases. Leasing contracts are more

flexible solessees can structure the leasing contracts according to their needs for

finance. The lessee can also pass on the risk of obsolescence to the lessor by

acquiring those 229 appliances, which have high technological obsolescence. To

day, most of us are familiar with leases of houses, apartments, offices, etc.


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TYPES OF LEASE AGREEMENTS

FINANCIAL LEASELong-term, non-cancellable lease contracts are known as financial leases.

Theessential point of financial lease agreement is that it contains a condition

whereby the lessor agrees to transfer the title for the asset at the end of the lease

period at a nominal cost. At lease it must give an option to the lessee to purchase

the asset he has used at the expiry of the lease. Under this lease the lessor recovers

90% of the fair value of the asset as lease rentals and the lease period is 75% of the

economic life of the asset. The lease agreement is irrevocable. Practically all the

risks incidental to the asset ownership and all the benefits arising there from are

transferred to the lessee who bears the cost of maintenance, insurance and repairs.

Only title deeds remain with the lessor. Financial lease is also known as capital

lease. In India, financial leases are very popular with high-cost and high technology

equipment.

Capital / Financial leasing

Operating lease

Sale and Lease Back

Leveraged Leasing

Direct leasing


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OPERATING LEASE

An operating lease stands in contrast to the financial lease in almost all aspects. This

lease agreement gives to the lessee only a limited right to use the asset. The lessor

is responsible for the upkeep and maintenance of the asset. The lessee is not given

any uplift to purchase the asset at the end of the lease period. Normally the lease is

for a short period and even otherwise is revocable at a short notice. Mines,

Computers hardware, trucks and automobiles are found suitable for operating lease

because the rate of obsolescence is very high in this kind of assets.

LEVERAGED LEASINGUnder leveraged leasing arrangement, a third party is involved beside lessor and

lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from

the third party i.e., lender and the asset so purchased is held as security against the

loan. The lender is paid off from the lease rentals directly by the lessee and the

surplus after meeting the claims of the lender goes to the lessor. The lessor, the

owner of the asset is entitled to depreciation allowance associated with the asset.

Sells Asset Leases Asset

SALE AND LEASE BACKIt is a sub-part of finance lease. Under this, the owner of an asset sells the asset to a

party (the buyer), who in turn leases back the same asset to the owner in

consideration of lease rentals. However, under this arrangement, the assets are not

physically exchanged but it all happens in records only. This is nothing but a paper


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transaction. Sale and lease back transaction is suitable for those assets, which are

not subjected depreciation but appreciation, say land. The advantage of this method

is that the lessee can satisfy himself completely regarding the quality of the asset

and after possession of the asset convert the sale into a lease arrangement. The

sale and lease back transaction can be expressed with the help of the following

figure

Under this transaction, the seller assumes the role of a lessee and the buyer

assumes the role of a lessor. The seller gets the agreed selling price and the buyer

gets the lease rentals. It is possible to structure the sale at agreed value (below or

above the fair market price) and to adjust difference in the lease rentals. Thus the

effect of profit /loss on sale of assets can be deferred.


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DIRECT LEASING

Under direct leasing, a firm acquires the right to use an asset from the manufacturer

directly. The ownership of the asset leased out remains with the manufacturer itself.

The major types of direct lessor include manufacturers, finance companies,

independent lease companies, special purpose leasing companies etc

Basic differences between the finance and the operatinglease

No. Characteristics Finance Lease Operating Lease

1. Tax treatment As trade of goods As trade of services

2. Financial aspect Long-term loans Long-term lease

3. Legal ownership Lessor Lessee

4. Economic ownership Lessee Lessor

5.Tax savings for the

userDepreciation and interest Rent

6. Risks of using good Lessee Lessor

7. Lease period OptionalUp to 75% of the

asset's economic life

8. VAT invoicing

At the inception of leasetransaction, on the total

value of the financed asset+ VAT on interest

On the individualrental, each rental

being taxed, net rental+ VAT


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ADVANTAGES OF LEASING

There are several extolled advantages of acquiring capital assets on lease:

(1) SAVING OF CAPITAL:

Leasing covers the full cost of the equipment used in the business by

providing 100% finance. The lessee is not to provide or pay any margin

Manufacturer Lessor Lessee money as there is no down payment. In this way

the saving in capital or financial resources can be used for other productive

purposes e.g. purchase of inventories.

(2) FLEXIBILITY AND CONVENIENCE:

The lease agreement can be tailor- made in respect of lease period and lease

rentals according to the convenience and requirements of all lessees.

(3) PLANNING CASH FLOWS

Leasing enables the lessee to plan its cash flows properly. The rentals can

be paid out of the cash coming into the business from the use of the same

assets.

(4) IMPROVEMENT IN LIQUIDITY :

Leasing enables the lessee to improve their liquidity position by adopting the

sale and lease back technique.


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Disadvantages of short-term leasing Cannot recover lease costs as equity in land

Cannot benefit from appreciation in land value

Limited control over land and improvements

Less ability to plan or make improvements

May be unable to get credit from lenders

May lose investments in infrastructure and land if lease is terminated

Disadvantages for the tenant

Reduces net income without contributing to long-term accumulation of

wealth in property

Cannot rely on land appreciation as a retirement fund

Typically more complex legal documents and higher legal costs

Can make loans more difficult or impossible to get without land as

security for a loan


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the internationally available statistics published by the London FinancialGroup.

The Group's data, published every year in the World Leasing Yearbook would place

India at some 36thplace! When it comes to size, India has the obvious advantage of

being such a vast nation

FACTORS RESPONSIBLE FOR GROWTH OFINDIAN LEASINGWith the exception of 1996-97 and 1997-98, the 1990s have generally been a

Good decade for Indian leasing. The average rate of growth on compounding basis

works out to24% from 1991-92 to 1996-97. Broadly, the following factors have been

responsible for the growth of Indian leasing, in no particular order:

No entry barriers

any one could float a leasing entity, and even an existing company not in leasing

business can write a lease purely for tax shelters.

Fast growth in car market:

Needless to state with facts, the growth in car leasing volume has been the highest

over these years - the spurt in car sales with the entry of several new models was

funded largely by leasing plans.

Access to public deposits:

Most leasing companies in India have relied, some heavily, on retail public funds in

the form of deposits. Most of these deposits were raised for a 1 year tenure, and on

promise of high rates of interest, at times even more than the regulated rate (which

was lifted in 1996 to be reintroduced in 1998)


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hire purcharse and leasing

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