hire purchase leasing

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Roll No. Name Content Slide No.

111 Bharat Pawar Advantages & Disadvantages of Leasing

27-31

112 Sonal Mulay Legal Aspects of Leasing & Content of Lease agreement

12-16

113 Sneha Patil Types Of Lease 17-21

114 Bhavana Parab Lease Financing by Banks 22-26115 Tejas Lolam Banks & Hire purchase

business & Bank Credit40-46

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118 Mandar Desai (Group Leader)

Introduction, origin & Development, Conclusion

4-11 & 59

120 Madhuri Dolas Difference between Leasing & Hire Purchase

53-58

142 Preeti Chandavkar Features, Advantages & Disadvantages of Hire Purchase

32-39

143 Akshata Shinde Comparisons between Buying & Leasing

48-52

Roll No. Name Content Slide No.

Introduction: • Leasing is distinguished from most other forms

of finance by the fact that the financier (the lessor) is the legal owner of the leased asset.

• The asset user (the lessee) obtains the right to use the asset in return for periodic payments (lease rentals) to the lessor.

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Leasing, as a financing concept, is an agreement between two parties, the leasing company or lessor and the user or lessee.

The rentals are predetermined and payable at fixed intervals of time, according to the mutual convenience of both the parties.

However, the lessor remains the owner of the equipment over the primary period.

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Definition: “A lease is a form of contract transferring the use or occupancy of land, space, structure or equipment in consideration of a payment, usually in form of a rent”

Leasing is an important source of finance for the lessee. Leasing Co. finance for:

1.Modernization of business2.Balancing equipment3.Cars and other vehicles and durables4. Items entitled to 100% or 50% depreciation.5.Assets which aren’t being financed by

banks/institutions.

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Introduction:• Hire Purchase is the legal term for a contract,

in which persons usually agree to pay for goods in parts or a percentage at a time.

• When a sun equal to the original full price plus interest has been paid, the buyer may then exercise an option to buy the goods or return the goods to the owner.

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History of leasing dates back to 200 BC when Sumerians leased goods.

Romans had developed a full body law relating to lease for movable and immovable property.

Modern Leasing appeared first time in 1877 when Bell Telephone Co. began renting telephones in USA.

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Since WW II, the use of leasing has been greatly expanded and is constantly used for new products and new industries.

Henry Scholfeld set up US Leasing Corporation with a capital of $20,000 in May 1952.

The concept of financial leasing was pioneered in India during 1973, First company was set up by Chidambaram group in 1973.

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The origin of hire purchase system can be traced back to the advent of industrial development in UK.

Cowper wait & sons, a furniture dealer introduced the system of Hire purchase in USA, in 1807.

Bishogate piano-maker introduced the system of Hire purchase in 1846, in UK.

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In India, Hire purchase finance started only after WW I.

However, it was only after WW II that it’s growth assumed visible dimensions.

With the increase in economic activity, many Non-Banking financing companies entered the scene in the fifties and sixties.

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“The delivery of goods by one person to another, for some purpose, upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. The person delivering the goods is called the ‘bailor’ and the person to whom they are delivered is called the ‘bailee’.”

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THE FOLLOWING IMPLICATIONS FOR THE LESSER AND LESSE

The lesser has the duty to deliver the asset to the lessee,

The lessee has the obligation to pay the lease rentals as specified in the lease agreement

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Description of the lessor, the lessee, and the equipment.

Amount, time, and place of lease rental payments.

Time and place of equipment delivery. Lessee’s responsibility for taking delivery

and possession of the leased equipment. Lessee’s responsibility for maintenance,

repairs, registration, etc.

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Lessee’s right to enjoy the benefits of the warranties provided by the equipment manufacturer.

Insurance to be taken by the lessee on behalf of the lesser.

Variation in lease rentals. Option of lease renewal for the lease period. Return of equipment on expiry of the lease period.

Arbitration procedure in the event of dispute.15

Background• Company-owned fleet that included various makes & models of cars used by their sales staff and senior managers• High, uncontrolled and unpredictable maintenance costs.• Resale of used cars at the time of disposal was a challenge. Unpredictable resale values!• Decisions on choice of models not based on total cost of ownership or usage

Roadblocks• Top and middle management had difference of opinion on outsourcing of fleet

• Staff who owned company cars showed resistance to change 18

Solution• LeasePlan’s ‘Total Cost of Ownership’ (TCO) model for vehicle outsourcing made sure only efficient car models are used by the company; thereby reducing costs significantly• LeasePlan’s fixed monthly outflows provided the immunity from maintenance and damage risks• Resale risks for these vehicles are completely managed by LeasePlan• Existing fleet is outsourced to LeasePlan through Sale and Lease Back• All new vehicles are leased through LeasePlan• All old vehicles (more than 4 years old) were replaced with new leased vehicles from LeasePlan.

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Result• Savings! Company hived off their entire fleet to LeasePlan. Cost reduction between 20- 25%• Release of capital from non-core assets sitting on company’s books• Better accounting and peace of mind! Outflows have become predictable and under control• A definite cultural change in the staff

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A financial Lease is also known as Capital lease, Long-term lease, Net lease & Close lease

Under a financial lease, the rate of lease would be fixed based on the kind of lease, the period of lease, periodicity of rent payment, & the rate of depreciation & other tax benefits available.

The high cost of equipments such as office equipment, diesel generators, machine tools, textile machinery, containers, locomotives etc., is leased under financial lease.

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An operating lease is also known as service lease, short-term lease or true lease.

The lease is for a limited period may be in a month, six months, a year or few years.

Normally, the lease rentals will be higher as compared to other leases on account of short period of primary lease.

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A leverage lease is used for financing those assets which require huge capital outlay. The outlay for purchase cost is generally from ` 50 lakhs to ` 2 crore.Asset has economic life of 10 years or more.The Lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment, say 20%-50%

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A vendor leasing is one where the retail vendors tie up with the lease finance companies which give financing option to the customers of the vendors to purchase a product.

This type of lease is popular in auto finance.

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•Supplementing their conventional lending business, commercial banks have of late entered into the business of financing lessor of equipment or assets.

•The banker himself will not purchase equipment or asset meant for leasing out, bank would provide finance to the party

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Lessee selects the equipment from the manufacturer or distributor and negotiates the terms of warranties, maintenance etc. Delivery, installation, the price and terms of payments.

The lessor purchases the equipment either directly from the vendor or from the lessee following the delivery.

Lessor retains ownership of equipment while the lessee enjoys the use.

The lease is for non-cancelable period, lessor seeks to recover his investment with some profit during that period.

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Unlike in the case of financing lease, in an operating lease, the lessor leases same asset to different lessees successively after the expiration of each contract.

A single contract does not result in recovery of the capital cost in full.

This lease is usually for the period that is significantly shorter than the economic life of the equipment.

This lease is subject to cancellation by both side.

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While various definition attempt to convey the essential features of the lease, nuances exist.

There are long-term & Short-term leases.

There are leases with purchase option at the end of the lease period and leases that do not give the lessee such opportunity

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The lessor also relies on the residual value of the equipment to partly recover his investment. In an operating lease, the lessor leases the equipment to many lessees over the equipments economic life.

Operating lease, are usually confined to equipments having an established used or have an active second market

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Permit alternative use of funds A leasing arrangement provides a firm with

the use and control over asset without incurring huge capital expenditure.

Faster and cheaper credit Acquisition of assets under leasing

agreement is cheaper and faster than any other source of finance.

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Flexibility Leasing arrangements may be tailored to the

lessee’s needs more easily than ordinary financing. The lessee can utilize more funds for working capital needs.

Facilitates additional borrowingsLeasing may increase long-term ability to acquire funds. The lessee can utilize more funds for working capital needs.

Protection against obsolescence A firm can avoid risk of obsolescence by

entering into operating lease agreement.

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No restrictive covenants The restrictive covenants which are usually

imposed under debenture or loan agreement are absolutely absent in a lease agreement.

Hundred percent financing Lease financing enables a firm to acquire the

use of an asset without having to make a down payment. So, hundred per cent financing is assured to the lessee.

Boom to small firm It is a boon to small firms and technocrats

who are able to make promoters contribution as required by financial institutions.

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Lease is not a suitable mode of project finance

Certain tax benefits/incentives such as subsidy may not be available on leased equipment.

The value of real assets such as land and building may increase during lease period. In such a case, the lessee loses the advantage of a potential capital gain.

The cost of financing is generally higher than that of debt financing.

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A manufacturer who wants to discontinue a particular line of business will not in a position to terminate the contract except by paying heavy penalties.

In case of lease agreement, it is lessor who has purchased the asset from the supplier and not the lessee.

If the lessee is not able to pay rentals regularly, the lesser would suffer a loss particularly when the asset is a sophisticated one and less liquid.

In the absence of exclusive laws dealing with the lease transaction, several problems crop up between lesser and lessee resulting in unnecessary complications and avoidable tensions.

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Higher Purchase is the hiring of goods at a stated rental with the option to buy the goods at the end of the hire purchase term.

The individual availing HP financing is the hirer and the financier is the owner.

The rental payment is inclusive of the repayment of principal as well as interest.

The hire purchaser acquires the goods immediately on signing the hire purchase agreement but the ownership of the same is transferred only when the last installment is paid.

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HP transactions are governed by the Hire Purchase Act 1972.

The HP Act sets out the forms and contents of HP agreements, the legal rights, duties, obligations of hirers and financiers.

The HP Act is administered by the Ministry of Domestic Trade and Consumer Affairs.

Hire purchase should be distinguished from installment sale wherein property passes to the purchaser with the payment of the first installment.

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HP agreements must be in writing and signed by both the parties.

They must clearly lay out the following information:

A clear description of the goods The cash price for the goods The HP price The deposit The monthly installments Rights to parties

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Possession of goods

Each installment is treated as hire charges.

Ownership

Default in the payment

Terminate the agreement

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Spread the cost of finance

Interest-free credit

Higher acceptance rates

Sales

Debt solutions

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Personal debt

Final payment

Bad credit

Creditor harassment

Repossession rights

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The Government of India has permitted banks to engaged in ‘hire purchase’ business on Sep- 7- 1990. U/S 6 (1) (0) of the banking regulation act 1949.

By this notification the banks are unable to carry on hire purchase business, & to set up subsidiaries for undertaking such business.

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The subsidiary of commercial banks lends to the dealer or to finance intermediary who has already financed Articles sold by the dealers to the hire purchase contract.

The bank subsidiary has to take extra precaution, looking to the nature of transaction under hire purchase contract.

The bank subsidiary would make an assessment of the standing and financial position of the dealer or of the hire purchase of company.

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Banks shall not themselves undertake directly the business of hire purchase.

Only that banks which have set up subsidiaries for the business equipment leasing, merchant banking etc. may undertake hire purchase business.

An existing bank subsidiary that may here after transact hire purchase business or set up new subsidiary to transact such business.

The following guidelines should be made applicable to banks in ‘hire purchase business’......

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Customer Purposes Amount Period Repayment Security Monitoring & Control

Into consideration the principles of good lending and carry out the procedures below

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Customer

When approached for hire purchase facility, the subsidiary should take care to make the assessment of the standing and financial position of the business.

Purposes

The type of goods being used to finance in the hire purchase transaction is of great importance.

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Amount

Bank subsidiaries taking up hire purchase business would be well to discourage small individual loans.

Period The facility will normally be extended

over to three years.

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Repayment

Repayment is spread evenly or agreed over the loan period. Its should be adoptable to the hirer’s needs

Security Hire purchase advance is against

hypothecation of equipment / vehicles & pledge of hundis / pronotes & lodgment of hire purchase agreements.

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Monitoring & controlling The bank needs to control over the

ongoing situation. The bank will keep a running total of

these amounts, returning agreements which have become lapsed to their customers.

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There are many distinct differences between buying and leasing, regardless if such a transaction or agreement applies to property, machinery, equipment or other assets.

The differences lies in that a lease is conceptually very similar to the principles of “borrowing”. The owner of the leased property is not transferred under the terms of the lease agreement.

Purchasing , on the other hand, involves an agreement that outlines the terms under which the purchaser acquires ownership of the desired item, property or asset. The purchase agreement delineates the purchase price and the terms under which it is to be paid for the buyer.

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Responsibility is a key factor. In a purchase, the responsibility for the equipment

falls solely on the shoulders of the business owner. The ultimate responsibility for the life of the

equipment , after a purchase is complete, falls on the buyer.

RESALE VALUE In case of a purchase, the full value of the asset is

transferred to the purchaser, as the new owner. In a lease, the lessor has no claim to the asset upon

the conclusion of a lease cannot be, in part or in whole be recouped through a resale of the asset.

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Depreciation is a major consideration for individuals deciding between buying and leasing.

In business, there exists a basic rule of thumb : “ If it appreciates, buy it. If it depreciates, lease it”.

MAINTENANCE The instance of a lease the ultimate ownership is

retained by the lessor, it is in the lessor’s best interest to maintain the asset in its best working order.

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In the event of a purchase, the full value of the asset must be paid to the seller.

In the event of a lease, however, only a portion of the full value is assessed, typically around 50% however the figure varies based on the duration and type of lease.

As a corollary, a lessor could be granted the use of an asset that could otherwise be cost prohibitive.

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LEASING HIRE PURCHASE

In lease, ownership lies with the lesser. The lessee has the right to use the equipment and does not have an option to purchase.

Leasing is a method of financing business assets only.

in hire purchase, the hirer has the option to purchase. The hirer becomes the owner of the asset/equipment immediately after the last installment is paid.

Hire Purchase is a method of financing both business assets and consumer articles.

METHOD OF FINANCING

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In Leasing, depreciation and investment allowance cannot be claimed by the Lesser.

The entire lease rental is tax deductible expense.

In Hire Purchase depreciation and investment allowance can be claimed by the Hirer.

Only the interest components of the Hire Purchase installment are tax deductible.

TAX BENEFITS

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The lessee, not being the owner of the assets and does not enjoy the salvage value of the assets.

In Leasing the Lessee is not required to make any deposit.

The hirer, in purchase being the owner of assets and enjoy the salvage value of the assets.

In Hire Purchase, the Hirer is required to deposit 20% of the cost.

DEPOSIT

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In Leasing, the Lessee take the asset on a rent basis.

Lease financing is invariably 100% financing. It does not required any immediate down payment or margin money by the Lessee.

In Hire Purchase the asset is purchased by the Hirer.

In Hire Purchase, a margin equal to 20-25% of the cost of the assets to be paid the Hirer.

EXTENT OF FINANCE

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In Leasing, the maintenance of leased asset is the responsibility of the Lessee.

The leased assets are shown by way of footnote only.

In Hire Purchase, the cost of maintenance of hired assets is to be borne by the Hirer himself.

The assets on hire purchase is shown in the balance sheet of the Hire.

REPORTING

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Leasing today accounts for 6% of total capital investment in India.

The 8th plan envisages capital formation of `8000 billion, 50% of which is to take place in the private sector.

Leasing will play a significant role to account for at least 15% of gross capital formation

The infrastructure financing is very crucial for economic development and it can’t be accelerated without leasing industry.

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A Lease is a contract whereby the owner of the assets transfers the right to use the assets against payment of fixed rent which are called lease rentals.

The Lessor is the owner of the lease and Lessee is the user of the asset.

Hire Purchase is a contract of owner & hirer and after the contract, ownership is passed on the hirer on payment of full amount.

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hire purchase leasing

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