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Lease Financing

Lease Financing

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Published by Prabhat Maurya

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Published by: Prabhat Maurya on Jun 25, 2010
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06/08/2013

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Lease Financing
INTRODUCTION
Financial Services basically mean all those kinds of services provided in financialterms where the essential commodity is money. These services include: leasing,hire purchase, consumer credit, investment banking, commercial banking, venturecapital, insurance, credit rating, bill discounting, and mutual funds , stock  broking, housing finance, vehicle finance, mortgages and car loans, factoringamong other things.Various entities that provide these services are basically categorized into(a) Non –Banking Finance Companies(b)Commercial Banks, and(c) Merchant Banks.Financial Services in India is too vast and varied too have evolved at one placeand at one time. One of the main entities that offer financial services in India is Non-Banking Finance Companies. These NBFCs registered with Reserve Bank of India mainly perform fund based services to the customer. Fund based services of  NBFCs include: leasing, hire-purchase and other asset based services whereas fee based services of NBFCs include bill discounting, portfolio management andother advisory services.
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Lease Financing
LEASING
Leasing as financial service is a contractual agreement where the owner (lessor)of equipment transfers the right to use the equipment to the user (lessee) for anagreed period of time in return for a rental. At the end of the lease period the assetreverts back to the lessor unless there is a provision for the renewal of the contractor there is a provision for the transfers of ownership to the lessee. If there is anysuch provision for transfer of ownership, the deal is treated as hire purchase.Therefore, a lease could be generally defined as
-“A contract where a party being the owner (lessor) of an asset (leased asset)provides the asset for use by the lessee at a consideration (rentals), eitherfixed or dependent on any variables, for a certain period (lease period),either fixed or flexible, with an understanding that at the end of such period,the asset, subject to the embedded options of the lease, will be either returnedto the lessor or disposed off as per the lessor's instructions”.
Leasing was prevalent during the ancient Sumerian and Greek civilizations whereleasing of land, agricultural implements, animals mines and ships took place. The practice of leasing came into being sometime in the later half of the 19
th
centurywhere the rail road manufacturers in the U.S.A resorted to leasing of rail cars andlocomotives.The equipment leasing industry came into being in 1973 when the first leasingcompany, appropriately named as First Leasing This industry however remainedrelegated to the background until the early eighties, because the need for theseindustry was not strongly felt in industry. The public sector financial institutions – IDBI, IFCI, ICICI and the State Financial Corporations (SCFs) provided bulk of the term loans and the commercial banks provided working capital financerequired by the manufacturing sector on relatively soft terms. Given the easyavailability of funds at reasonable cost, there was obvious no need to look for alternative means of financing.
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Lease FinancingThe credit squeeze announced by the R.B.I coupled with the strict implantation of the Tandon & Chore committees’ norms on Maximum Permissible Bank Finance(MPBF) for working capital forced the manufacturing companies to divert a portion of their long – term funds for their working capital
.
HISTORY AND DEVELOPMENT OF LEASING
The history of leasing dates back to 200BC when Sumerians leased goods.Romans had developed a full body law relating to lease for movable andimmovable property. However the modern concept of leasing appeared for thefirst time in 1877 when the Bell Telephone Company began renting telephones inUSA. In 1832, Cottrell and Leonard leased academic caps, grown and hoods.Subsequently, during 1930s the Railway Industry used leasing service for itsrolling stock needs. In the post war period, the American Air Lines leased their  jet engines for most of the new air crafts. This development ignited immediate popularity for the lease and generated growth of leasing industry.The concept of financial leasing was pioneered in India during 1973. The FirstCompany was set up by the Chidambaram group in 1973 in Madras. Thecompany undertook leasing of industrial equipment as its main activity. TheTwentieth century Leasing Company Limited was established in 1979. By 1981,four finance companies joined the fray. The performance of First LeasingCompany Limited and the Twentieth Century Leasing Company Limitedmotivated others to enter the leasing industry. In 1980s financial institutions madeentry into leasing business. Industrial Credit and Investment Corporation was thefirst all India financial institution to offer leasing in 1983. Entry of commercial banks into leasing was facilitated by an amendment of Banking Regulation Act,1949. State Bank of India was the first commercial bank to set up a leasingsubsidiary, SBI capital market, in October 1986. Can Bank Financial ServicesLtd., BOB Financial Service Ltd., and PNB Financial Services Limited followedsuit. Industrial Finance Corporation’s Merchant Banking division startedfinancing leasing companies as well as equipment leasing and financial services.
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