PRESENTATION

ON
HIRE PURCHASE AND LEASING

By-
Krishan Sharma
MBA Student
M.A.I.T
Hire-Purchase
DEFINITION
 Goods are let out on finance by a finance company
to the hire purchaser customer.

 Buyer is required to pay an equal amount of

periodic installments during a given period.

 Ownership transfers at the payment of the last

installment. This ownership transfer either
automatically or on payment of an option to
purchase fee.
Features

 Buyer takes possession of goods immediately &

agrees to pay the total hire purchase price in
instalments
 Each instalments is treated as hire charges
 In case the buyer makes any default in payments of
any instalments the seller has right to repossess the
goods  
 Normally a deposit is requested i.e. 10%
 Funding Period- periods are normally between 3-7
years.
 Contd…
 The most common sources of medium
term finance for investment in capital
assets are Hire Purchase and Leasing.

 Leasing and hire purchase are financial

facilities which allow a business to use an
asset over a fixed period, in return for
regular payments.
 Assets

 Many kinds of business asset are suitable for

financing using hire purchase or leasing, including:

- Plant and machinery

- Business cars
- Commercial vehicles
- Agricultural equipment..
- Hotel equipment
- Medical and dental equipment
- Computers, including software packages
-Office equipment
BANKS & HIRE PURCHASE BUSINESS

 Through a notification issued on 7.9.1990 under

clause(0) of sub section (1) of section 6 of banking
regulation act ,1949
 The government of India has permitted banks to
engage in hire purchase business.
 The statutory framework now enables the banks to
carry on hire purchase business, & to set up
subsidiaries for undertaking such business the Reserve
Bank of India is of the view that it is in the public
interest & in the interest of banking policy.
 GUIDELINES FOR BANKS AS FAR AS HIRE
PURCHASE BUSINESS IS CONCERNED

I. For the present, banks shall not themselves undertake

directly (i.e., departmentally) the business of hire purchase

II. Banks which have set up subsidiaries (i.e., a company in

which it holds not less than 51% of the shares ) for the
business of equipment , leasing ,merchant banking etc, may
undertake the hire purchase business either through such a
subsidiary or through a separate subsidiary.
 Contd…
 Banks setting up a subsidiary for the purpose of carrying hire-
purchase business or through the existing subsidiaries should
furnish such information in such form at such time as the Reserve
Bank may require from time to time

 While banks may invest in shares of other hire-purchase

companies within the limits specified in section 19(2) of Banking
Regulation act ,1949 with the Reserve Banks , prior approval they
shall not act as promoters of such companies
Standard provisions according to HP ACT 1959

To be valid, hire purchase agreements must be in writing and signed

by both parties. They must clearly set out the following information
in a print that all can read without effort:
 a clear description of the goods and the cash price for the goods
 the HP price, i.e., the total sum that must be paid to hire and then
purchase the goods
 the deposit
 the monthly instalments
 a reasonably comprehensive statement of the parties' rights
(sometimes including the right to cancel the agreement during a
"cooling-off" period).
 The right of the hirer to terminate the contract when he feels like
doing so with a valid reason
The hirer's rights
 To buy the goods at any time by giving notice to the owner and paying
the balance of the Hire purchase price

 To return the goods to the owner — this is subject to the payment of a

penalty to reflect the owner's loss of profit

 With the consent of the owner, to assign both the benefit and the
burden of the contract to a third person. The owner cannot
unreasonably refuse consent where the nominated third party has good
credit rating

 Where the owner wrongfully repossesses the goods, either to recover

the goods plus damages for loss of quiet possession or to damages
representing the value of the goods lost.
The hirer's obligations

The hirer usually has the following obligations:

 to pay the hire instalments

 to take reasonable care of the goods (if the hirer

damages the goods by using them in a non-standard

way, he or she must continue to pay the instalments
and, if appropriate, compensate the owner for any
loss in asset value)
 to inform the owner where the goods will be kept.
The owner's rights
Right to terminate the agreement. This entitles the
owner
 to forfeit the deposit

 to retain the instalments already paid and recover

the balance due

 to repossess the goods (which may have to be by

application to a Court depending on the nature of

the goods and the percentage of the total price paid)
 to claim damages for any loss suffered.
  Advantages of Hire
Purchasing
 Cash flow: payment by
instalments.
 Writing down allowances
apply.
 Hire purchase is an
alternative funding line to
bank overdrafts
 Attracts fixed rate interest.
 Others same as Outright
Purchase.
Disadvantage of hire
purchasing
 Inflexible: difficult to escape
the outstanding settlement if
say, a vehicle is no longer
required.
 High deposit compared to
contract hire.
 Business hire purchase
appears as a debt on the
balance sheet which could
inhibit future borrowing.
 More expensive than contract
hire
 Burden of controlling and
running fleet
LEASE
AGREEMENTS

Lease and Hire Purchase

 LEASING

INTRODUCTION
 Leasing, as a financing concept, is an arrangement

between two parties, the leasing company or lessor

and the user or lessee, whereby the former arranges
to buy capital equipment for the use of the latter for
an agreed period of time in return for the payment
of rent.
 The rentals are predetermined & payable at a fixed

interval of time, according to conveniences of the

parties.
DEFINITION

DICTIONARY OF BUSINESS AND MANAGEMENT

‘lease is a form of contract transferring the use or
occupancy of land, space, structure, in consideration of
a payment, usually in the form of a rent’
JAMES C. VAN HORNE
‘lease is a contract whereby the owner of an asset
grants to another party the exclusive right to use the
asset usually for an agreed period of time for the
payment of rent’
TYPES OF LEASE

 Finance Leasing

 Operating Leasing
Finance Leasing

 The finance lease or 'full payout lease' is closest

to the hire purchase alternative. The leasing
company recovers the full cost of the equipment,
plus charges, over the period of the lease.

 Business customer have most of the 'risks and

rewards' associated with ownership. They are
responsible for maintaining and insuring the asset
and must show the leased asset on their balance
sheet as a capital item.
Contd…
 When the lease period ends, the leasing company
will usually agree to a secondary lease period at
significantly reduced payments.

 Alternatively, if the business wishes to stop using

the equipment, it may be sold second-hand to an
unrelated third party. The business arranges the
sale on behalf of the leasing company and
obtains the bulk of the sale proceeds
Operating Leasing

 If a business needs a piece of equipment for a

shorter time, then operating leasing may be the
answer.
 The leasing company will lease the equipment,
expecting to sell it second-hand at the end of the
lease, or to lease it again to someone else.
 It will, therefore, need not to recover the full cost
of the equipment through the lease rentals.
Contd…
 Common for equipment where there is a well-
established second-hand market (e.g. cars and
construction equipment).

 The lease period - two to three years, although it may be

much longer, but is always less than the working life of the
machine.

 Assets financed under operating leases are not shown as

assets on the balance sheet. Instead, the entire operating
lease cost is treated as a cost in the profit and loss account.
 LEASING IN INDIA

 Leasing has grown by leaps and bounds in the eighties

but it is estimated that hardly.

 Around 1% of the industrial investment in India is

covered by the lease finance, as against 40% in USA and
30% in UK and 10% in Japan.

 The prospects of leasing in India are good due to growing

investment needs and scarcity of funds with public
financial institutions.
Leasing in India Contd…
 This type of lease finances are particularly
suitable in India where a large number of small
companies have emerging.

 Leasing in the sphere of land and building has

been in existence in India for a long time,
while equipment leasing has become very
common in the recent years.
DIFFERENCE BETWEEN HIRE-
PURCHASE
AND LEASING
 Hire purchase vs
 The hirer has the option to
purchase the goods
 Is a method of financing
business assets & consumer
articles
 Depreciation & investment
allowance can be claimed
 Only the interest is tax
component deductible
 Hirer enjoys the salvage value
of the asset
leasing
 In leasing the lessee has no
option to buy the goods
 Is a method of financing
business assets only
 Depreciation & investment
allowance cannot be claimed
 Entire lease rental is tax
deductible
 Lessee does not enjoy the
salvage value of the asset
 Hire purchase vs leasing

 20% deposit is required in hire  No deposit is required in

purchase leasing

 In hire purchase we purchase the  In leasing we rent the goods

goods
 The extent of finance is 100%
 The extent of finance is not
as no down payment required
100% because of down payment
 Maintenance cost is borne by
 Hirer bears the cost of
the lesser except in finance
maintenance
lease
 Leased assets are shown by
 Asset is shown in b/s of the hirer
way of foot note only
 THANK U

Lease And Hire Purchase