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United Leasing Company_ Internship Report

INTERNSHIP REPORT
Subject:

INTERRELATION BETWEEN PRODUCTS, INTEREST RATES & TERMS OF FINANCE
Internship Organization:

United Leasing Company Limited 22 , Kazi Nazrul Islam Avenue, Dhaka

Prepared for: Internship Supervisor Mr. Imran Rahman Associate Professor IBA, Univ. of Dhaka Prepared by Maruf Haider ZR 33, BBA 10th Institute of Business Administration University of Dhaka.

April 3, 2013

United Leasing Company

United Leasing Company_ Internship Report

June 25, 2006 Mr. G. M. Chowdhury Chairman Internship & Placement Program Institute of Business Administration University of Dhaka Dear Sir: I am glad to submit my Internship Report for the Internship Program (BBA 10 th, herewith. I considered your remarks and instructions very carefully while preparing this report. I tried my level best to follow your schedule, format and discipline. I tried to comprehend all the areas related to this report. This has certainly enhanced my knowledge base with a practical orientation. Thank you for your consideration. Sincerely Yours,
2006

),

Maruf Haider ZR -33 , BBA 10th IBA Univ. of Dahaka

United Leasing Company

United Leasing Company_ Internship Report

TABLE OF CONTENTS

SECTION 1 –ORGANIZATION REPORT 1.1 1.2 1.3 1.4 BACKGROUND OF ULC CORPORATE OBJECTIVE CAPITAL, SPONSORS AND SHARE STRUCTURE BOARD OF DIRECTORS

1.4.1 EXECUTIVE COMMITTEE 1.5 ORGANIZATIONAL STRUCTURE

1.5.1 MANAGEMENT 2.1 2.2 2.3 3.0 4.1 5.1 LEASE PORTFOLIO AND SECTOR WISE EXPOSURE PERFORMANCE OF ULC AT A GLANCE SWOT ANALYSES OF ULC CREDIT OFFERS BY ULC CREDIT APPROVAL PROCESS OF ULC CONCLUSION

SECTION 2 - INTERNSHIP PROJECT 1.0 INTRODUCTION 2.0 EXECUTIVE SUMMERY United Leasing Company

United Leasing Company_ Internship Report 3.1 SCOPE & OBJECTIVES OF STUDY: 3.1 PRODUCTS/SCHEMES: 3.2 VARIABLES & PARAMETERS: 3.3 METHODOLOGY & ANALYSIS: 3.4 LIMITATIONS: 4.0 PRODUCT DEFINITIONS 4.1 THE DIFFERENCE BETWEEN LEASE AND HIRE PURCHASE 5.0 RELATIONSHIPS/ OBSERVATIONS/ANALYSIS 5.1 IMPLACIT RATE ACROSS PRODUCTS AND TERMS (Bearing of Type and Terms on Interest Rate) 5.2 INTEREST RATE SENSITIVITY OF BORROWERS (Relationship between Interest Rate and Loan Size)
5.3 PRODUCT BIAS (Frequency Distribution of Products)

6.0 CONCLUSION

United Leasing Company

it is recognized as a reliable financial partner among the business community. Its access to multilateral institutions like ADB and The World Bank permits it to arrange funds at competitive rates and get their assistance in areas such as staff training and information technology.2 CORPORATE OBJECTIVE The main objectives of the company are to assist the development of productive private sector industries particularly in their balancing and modernizing programs. The Company’s customers include most of the top corporate groups in the country including some of the multinationals. the Company’s major and most profitable business segments are leases to the small and medium enterprises. The shares of the company are quoted on the Dhaka Stock Exchange since 1994.1 BACKGROUND OF ULC United Leasing Company (ULC) Limited is the second oldest leasing company in Bangladesh. equipment to the industries & vehicles for commercial purpose. Incorporated as a public limited company under the Companies Act 1913. However.United Leasing Company_ Internship Report SECTION 1 –ORGANIZATION REPORT 1. In addition it also provides project finance for expansion of business. 1993. United Leasing Company Page 5 . The company mainly extends lease financing for machinery. 1. The Company enjoys a sound reputation for excellent customer service. It provides lease for all sorts of manufacturing equipment and for vehicles. As an associate of a long established foreign company. The primary activity of the company is to provide leases to different commercial organizations. ULC was also granted license under the Financial Institutions Act. It started its operation back in 1989 as a joint venture with reputed foreign and local sponsors.

71% 44% 23% Institutional General Public Table 01: Type. _ _ Share % 20% 9. Name and Share (%) of Sponsors. subscribed and paid up capital is Tk. Shareholding Structure of ULC Local 13% General Public 23% Institutional 44% Foreign 20% General Public Foreign Institutional Local Illustration 01: Shareholding Structure of ULC. 140 million. Octavious Steel & Company of Bangladesh Ltd. 1. SPONSORS AND SHARE STRUCTURE Authorized Capital of ULC is Tk.69% 1.00% 0. The sponsors and their current shareholding in the company are as follows: Type Foreign Local Name Lawrie Group Plc of the UK United Insurance Company Ltd National Brokers Ltd Duncan Brothers (BD) Ltd.3 CAPITAL.4 BOARD OF DIRECTORS United Leasing Company Page 6 . 1000 million and issued.United Leasing Company_ Internship Report 1.60% 1.

K. There are three branches in Chittagong. Ltd The Chandpore Tea Co. Alam (MD) M. Ataul Hoque Nominee of Lawrie Group Plc of the U. A.R. Aziz Ahmad Mr.S. He has a MBA and CA degree with more than 30 years of experience in Canada and Bangladesh with MNCs. S. National Brokers Limited Amo Tea Co. periodical accounts and other administrative matters. 1. Subhan Mr. Ltd Surma Valley Tea Co. Ltd United Insurance Company Ltd The Allynugger Tea Co. The Managing Director with the power and authority vested in him by the Board of Directors manages the overall operation of the Company. Chairman Directors Name Mr. Ltd Comp. O. Kafiluddin Mahmood Mr.1 Executive Committee United Leasing Company Page 7 . M. A. At present ULC’s staff strength is 60. The Board appoints the Chairman from among the Directors. Gazipur and Jessore. Lawrie Group Plc of the U.O. Sec. M. Nizam Mr. P. MBE Mr.4. A.K.United Leasing Company_ Internship Report Its Board of Directors consisting of nine members who are the nominees of the Institutional Shareholders supervises the Company’s management.M. M. (ULC web site) The Company policy is to attract. motivate and retain top quality financial service professionals. Wahed Mr. Moyeedul Islam Mr. Table 02: Board of Directors. A.R. M.A. Leggatt. Rouf Mr. An Executive Committee of the Board of Directors comprising of three Directors nominated by the Board and the Managing Director approve lease proposals.

1. The Committee is authorized to approve all financing proposals without any limit subject to the exposure limit specified in the policy statement.5. organizational structure of United Leasing Company Limited has been illustrated.5 ORGANIZATIONAL STRUCTURE Here. Operations HR CRM Finance Monitoring Marketing Services Marketing Commercial Treasury IT Accounts Illustration 02: Organizational Structure of ULC. It also reviews periodical accounts and other administrative matters.1 Management United Leasing Company Page 8 . 1. The Board has given authority to the Managing Director for approval of lease proposals up to an amount of Taka 1.0 million in the case of new lessees and up to Taka 2.United Leasing Company_ Internship Report The Board of Directors comprising the Managing Director and three other directors nominated by the Board appoints the Executive Committee.5 million in case of existing lessees.

A.1 LEASE PORTFOLIO AND SECTOR WISE EXPOSURE ULC provides lease finance to the following sectors: 1. Azim M. Financial intermediations 7. Apparels and accessories 4.United Leasing Company_ Internship Report Name and designation of management personnel are given below: Name Syed Ehsan Quadir M. Telecommunications 10. (ULC web site) 2. Chemicals United Leasing Company Page 9 . Food and Beverage 8. Transport 3. Russel Shahriar Designation Managing Director Deputy Managing Director General Manager Deputy General Manager Head of Accounts Head of Marketing Head of IT Head of Operations and Human Resources Head of Marketing Services Head of Monitoring Head of Treasury Head of Credit Table 03: Management of ULC. Agro based industries 11. Shahabuddin Avijit Bhattacharjee Mohiuddin Rasti Morshed Shahidul Islam Majumder Eva Rahman Ashfaqul Haq Chowdhury Jamal Mahmud Choudhury Sabrina Mehnaz Md. Textiles 2. Paper and printing 9. Construction and engineering 6. Other services 5. Ataul Hoque Md.

Hospitals 15. Sector wise Exposure (2004) has been illustrated below: Sectorwise Exposure (2004) Others 12% Ot. United Leasing Company Page 10 .United Leasing Company_ Internship Report 12. MFG Others Illustration 03: Sector wise Exposure (2004) of ULC.2 PERFORMANCE OF ULC AT A GLANCE Here. Pharmaceuticals 13. MFG 24% Textiles 20% Chemicals 13% Services 31% Textiles Chemicals Services Ot.2004) 2. IT firms Now. United Leasing Company’s performance from year 2000 to 2004 has been illustrated. Other manufacturing industries 14. (Annual Report.

(Appendix-01) Operating Revenue (restated) Taka (million) 326 396 473 553 618 2000 2001 2002 2003 2004 Year Year Taka(million) Illustration 05: Operating Revenue (restated). (Appendix-02) United Leasing Company Page 11 .United Leasing Company_ Internship Report Net Profit Taka(million) 95 75 77 110 154 2000 2001 2002 Year Year Taka(million) 2003 2004 Illustration 04: Net Profit.

United Leasing Company_ Internship Report Financial Assets (restated) Taka (million) 1959 2000 2364 2871 3406 4011 2001 2002 Year Year Taka(million) 2003 2004 Illustration 06: Financial Assets (restated). (Appendix-03) United Leasing Company Page 12 .

(Appendix-04) Contracts Taka (million) 1119 1299 1622 1867 2306 2000 2001 2002 Year Year Taka(million) 2003 2004 United Leasing Company Page 13 .United Leasing Company_ Internship Report Earning Per Share 220 Taka 136 108 110 158 Taka Year 2003 2004 2000 2001 2002 Year Illustration 07: Earning Per Share.

United Leasing Company Page 14 .2004) 2. (Appendix-05) (Annual Report. HSBC. this year they have introduced a new product syndicate financing and they are also planning to introduce house loan in near future. hard working and motivated human resources. At the moment they are the market leader as they are paying 32% Dividend and giving 2:1 Bonus Share to its shareholders this year.3 SWOT ANALYSES OF ULC Strengths: Η Η It was among the first in this industry and therefore enjoys first mover advantages. Η ULC has a very strong client base among the leasing companies. Square. which is more than any other leasing company in the country. Η ULC do not comply undue political influence. energetic. Transcom etc.United Leasing Company_ Internship Report Illustration 08: Contracts. Η Η ULC has very high skilled. ULC practices participative management. British American Tobacco Bangladesh. most of which are the giant local and multinational organization such as. Navana. believes and Η ULC is engaged in product diversification.

Another major weakness of ULC is it has a very low pay structure for entrylevel employees. Weaknesses: One thing might be their lack of commitment to one big huge investment project since they do not want to put all their eggs in one basket. which can become a de-motivating factor. Threats: Η Continuously increasing deflation rate result into less disbursement of fund.United Leasing Company_ Internship Report Η With its diversified business. Η Among visible nonfunctioning of development financial institutions. Η By introducing new products such as house loan ULC can expand its market. ULC is better equipped to compete in an ever changing and challenging business environment. Η Employees of ULC are not satisfied with their low salary structure and other benefits as a result they can switch to other competing financial organization. the demand for lease financing is also growing and consequently. Opportunities: Η With growth in our corporate sector. United Leasing Company Page 15 . the leasing industry remains the only vibrant financial intermediaries for the medium term financing with less than 5 % non-performing loans. Η There is a clear trend of increasing competition in the lease market with the entry of more leasing companies and leasing by commercial banks. the lease financing industry. ailing capital market and lack of interest of commercial banks in term financing.

e.United Leasing Company_ Internship Report Among the NBFIs doing business in Bangladesh United Leasing Compnay is the second largest in terms of Credit portfolio which totals around Tk. only the following six are traded in practice. Sale & Leaseback a. The deposit schemes offered do not have much variety. over the last 17 years of operation it has emerged to be a major player in non-bank lending market A detailed analysis of the products/ schemes offered by ULC is appended at the end of the report (Appendix 2) 4. Lease Local b. Lease finance: i. Working capital finance: i.0 CREDIT OFFERS BY ULC Among many products listed in its operational software. the ME) prepares the appraisal. Nonetheless. 1. Short Term Loan ii. Lease Foreign ii. 3. Then it is passed onto the United Leasing Company Page 16 . Term Loan Unlike most of the large NBFIs ULC does not have a merchant banking license. issue management & portfolio management services. Hire Purchase 2.1 CREDIT APPROVAL PROCESS OF ULC Dealing Officer (i. Six billion at present. Long Term Finance: i. Revolving Loan 3. whoever is responsible for bringing the client. and cannot perform underwriting. along with the help of the AGM or the Manager. Factoring iii. But the list of financial services ULC is offering is shorter compared to other NBFIs.

1 CONCLUSION Leasing industry of Bangladesh is growing rapidly. United Leasing Company Page 17 . Moreover. The increasing demand of leasing is inviting more and more new entrants into the industry. Marketing Executive Prepares Credit Appraisal Reviewed by GM Approved by MD/ Executive Committee Reported to Executive Committee (if approved by MD) Illustration 10: Credit Approval Process. Even banks have started leasing at a lower rate than the existing leasing firms. it is reported to the Executive Committee. with the liberalization of trade. 5.United Leasing Company_ Internship Report GM who reviews the appraisal. He may either approve of it right away or recommend it to the Executive Committee. The next person in the approval process is the MD himself. Even if the MD gives his approval for a particular appraisal.

United Leasing Company Page 18 . firms should collaborate with each other to increase their market share and hence tap the whole domestic market. To survive the strong competitive wave the future is going to bring.United Leasing Company_ Internship Report domestic firms are going to face high competition from foreign firms.

INTERNSHIP PROJECT 1. namely Sale & Lease Back & Hire Purchase. Lease – Local. Implicit Rate. Lease & Hire Purchase does not make any practical difference for the borrower. 2.g. IRR and Terms of different products. Short Term Finance and Term Loan. A specific discrepancy of the portfolio -regarding choice of finance scheme to offer. ROE varies across terms and asset type. The List includes Bill Discounting – Revolving. Apart from these key aggregate stats the composition of ULC’s outstanding portfolio on the basis of finance types and finance tenure was also studied. For a given amount of finance with same tenure and interest rate. offered by United Leasing Company Limited. All the observations and findings were explained from both empirical knowledge base and database analysis.0 EXECUTIVE SUMMERY ULC’s portfolio mainly comprises of two different types of product. But Return on Equity originates from accounting and taxation practices.0 INTRODUCTION The main focus of this internship paper was to study certain key features e. the entire cash flow will be the same and so will be the IRR. Hire Purchase – Foreign.United Leasing Company_ Internship Report SECTION 2 .was pointed out in the later part of analysis. Leasing-Sale & Lease Back. Hire Purchase Sale & Hire Back. The key statistics of portfolio were analyzed for interrelationship. In general it is such that –‘For United Leasing Company Page 19 . the rent / installment from both will be identical. Lease – Foreign.

rate for Bill Discounting and Short Term Finance is higher than Term Loan and Lease. Although Hire Purchase term is usually shorter than Lease. This is partly because of stronger negotiation power of large borrowers and SMEs’ inaccessibility to finance on the other end. in many other cases Hire Purchase was ignored quite unjustifiably. Indifference to slightly higher rents for smaller finance is also responsible. it was observed that -Interest rates for longer term finance schemes are lower than shorter term products. 3. The study of interest rate in relation to finance amount gave evidence that for smaller credits interest rat is charged higher and for larger credit the rate is lower. E. This bias is justified by one observation where we would see that in most cases the lease term was appropriate for choosing S&LB in stead of Hire Purchase. Nonetheless. Compared to Hire Purchase Interest Rate for Lease is higher. This phenomenon can be explained by a tenure matching of short term loans to short term funds which are expensive and about Hire Purchase a part of the tax benefit is passed on to borrower in terms of lower interest rate. But this observation had an exception. While studying the relationship between Interest Rate and Terms.0 SCOPE & OBJECTIVES OF STUDY: United Leasing Company Page 20 . ULC has a particular product bias toward Sale & lease back.g.United Leasing Company_ Internship Report shorter term return out of Hire Purchase is higher and in longer term return from Lease is higher’.

To find out the trend of Implicit Rates for the period January. NPV across different products/schemes. 2006 and identify seasonality if present. HIRE PURCHASE . LEASE .1 PRODUCTS/SCHEMES: The schemes listed in the following were included in the data range for analysis 1. SHORT TERM FINANCE 8. IRR2. Usually IRR is higher than IR 3 The difference between IR and IRR. To find out the difference in Terms/tenure across different products/schemes. To find out the interest rate sensitivity of clients to be depicted by a relation between Implicit Rate and Loan/Lease amount 3. 3.SALE & HIRE BACK 4.United Leasing Company_ Internship Report 1. 5.FOREIGN 5. Implicit Rate 1(herein after referred as IR). and Purchase option (End of term residual purchase price to be received from the borrower).LOCAL 6. 1 2 The rate used for calculation of monthly annuity repayments. To find out the difference in return parameters i. To find out the relationship between Return and Terms across different products/schemes. 4. United Leasing Company Page 21 . Spread3. were taken into account for relation and regression analyses across the schemes listed above.REVOLVING 2. LEASE . utilized to increase actual return from finance amount. 2000. LEASING-SALE & LEASE BACK 7.2 VARIABLES & PARAMETERS: The variables and aggregate statistics listed below.FOREIGN 3. HIRE PURCHASE .April.commonly called ‘rental’ or ‘Rent’ The Internal Rate of Return after estimating the impact of Lease Advance (Initial deduction from the finance amount). 2. BILL DISCOUNTING . TERM LOAN 3.e.

3 METHODOLOGY & ANALYSIS: 1. Min of Term 3. IRR. IRR.United Leasing Company_ Internship Report 1. Max of IRR 7. Average of IR 3. Term etc among different products are used to illustrate useful observations. Principal. IR. Avg. Time series analysis for interest rates throughout the last 24 months. Max of Term 13. The operational software VIEW United Leasing Company Page 22 . Max of Spread 10. Min of IR 5. Finance with structured payments was excluded from database for analysis. Spread is done to find out inter-relations between every two variables. 2.4 LIMITATIONS: 1. Multidimensional Correlation analysis among Term. Avg. Unequal monthly/quarterly repayments are rare. Charts and tables for Products and the given parameters like Average Implicit Rate. Min of Spread 11. Min of IRR 8. Average of IRR 6. 3. Average of Spread 9. 3. Average of Term 12. Max of IR 4. Count of Finance 2.

the lessor/borrower sells the asset to ULC & ULC leases it back to the lessor . IR when the rents/repayments are broken down into cascaded unequal installments.United Leasing Company_ Internship Report 21 used by ULC has certain problems in reporting key figures like IRR. Rather simple correlation analysis. ULC still offers the product with no practical difference from sale-leaseback.0 PRODUCT DEFINITIONS LEASING: Sale & Leaseback . 4. Hypothesis testing was not done to prove relationships and observations due to lack of explanatory variable. leases it back to Lessor HIRE PURCHASE Sale & Hire Back . rank and cross tabulations are used to support key observations.ULC opens LC or stands as guarantor to import the asset. Costs and Tenure of sources of funds for ULC was relevant in certain analyses. But data regarding this was not available. Lease Foreign . Lease Local -The asset is bought from local source & leased back to the Lessor.For an asset already bought and in use . 3. Hire Purchase –Local The asset is bought from local source United Leasing Company Page 23 . In general the equity participation from the part of borrower in Hire Purchase is higher. 2.Although much less frequent than sale-leaseback. ownership & depreciation benefit is retained by ULC.

the borrower pays back the principal plus the interest in a single tranche.1 THE DIFFERENCE BETWEEN LEASE AND HIRE PURCHASE Lease & Hire Purchase does not make ant practical difference in the cash stream of a particular finance. WORKING CAPITAL FINANCE: Short Term Loan -After disbursement by ULC. disbursement may be made in several tranches. Revolving Loan ( a line of credit offered by ULC.United Leasing Company_ Internship Report Hire Purchase – Foreign ULC opens LC or stands as guarantor to import the asset from a foreign source. usually 90 days. does not result in any ownership of asset for ULC at the beginning 4. the total outstanding will never exceed the approved limit. after a short interval. selects some of the renowned companies to which the borrower supplies and approves the relevant a/c receivables for immediate discounting.Long term finance repaid by borrower. the borrower needs to get the bill endorsed for payment in favor of ULC from its customers. Factoring ULC goes through the borrowers ledger. terms and conditions are set each time before disbursement) LONG TERM FINANCE: Term Loan . United Leasing Company Page 24 .

This difference in ROE across loan tenure originates from accounting and taxation practices. In Hire Purchase only interest income is reported as income. But Return on Equity from these two differs mainly due to terms (also on the basis of asset type). United Leasing Company Page 25 . The depreciation Schedule allows different percentage of depreciation (from Initial rate to Normal Rate) depending on the assets age. A detailed table in this regard is appended in appendix 1. the entire cash flow will be the same and so will be the IRR. The accounting standard in use requires that for Lease ‘Rent’ is reported as revenue and ‘Depreciation’ on leased asset as expense. So tax benefit and cash outflow relating to Tax is evenly distributed. the rent / installment from both will be identical. The integrated cash inflow –outflow from Finance and for tax is complicated and influences the complete return out of a Lease and return of a Hire Purchase. So it becomes a complex decision – when to offer which. The Depreciation Schedule is such that it allows unequal tax benefit in different years. The resultant difference will be ‘Income’.United Leasing Company_ Internship Report For a given amount of finance with same tenure and interest rate. But in general it is such that –‘For shorter term return out of Hire Purchase is higher and in longer term return from Lease is higher’. essentially how much expense is shown in different years is important. On Income ULC will have to pay Tax. not depreciation. So how much income. Cash outflow for Tax varies accordingly.

Average of IR Total 17 16.5 Total 15 14.LOCAL SHORT TERM FINANCE Type 4 Repayment Installments or Annuity United Leasing Company Page 26 TERM LOAN LEASE FOREIGN 13.1 IMPLACIT RATE ACROSS PRODUCTS AND TERMS (Bearing of Type and Terms on Interest Rate) The average interest rate charged for Rents 4 varies maximum with a range of two percent across the common schemes.5 .5 14 HIRE PURCHASE .FOREIGN HIRE PURCHASE . The following table depicts the observation while the table below gives figures.5 16 15.0 RELATIONSHIPS/ OBSERVATIONS/ANALYSIS 5.United Leasing Company_ Internship Report 5.SALE & HIRE BACK LEASING-SALE & LEASE BACK BILL DISCOUNTING REVOLVING LEASE .

61 Total 4.65 15.50 1.REVOLVING HIRE PURCHASE .72 15.FOREIGN SHORT TERM FINANCE LEASE .50 3.00 0.FOREIGN LEASE .50 4.18 15. IR 16.50 Average of Term Total 2.53 15.LOCAL United Leasing Company LEASING-SALE & LEASE BACK BILL DISCOUNTING REVOLVING TERM LOAN LEASE FOREIGN Page 27 Type .61 15.FOREIGN HIRE PURCHASE .00 2.00 3.20 15.SALE & HIRE BACK LEASE .LOCAL LEASING-SALE & LEASE BACK SHORT TERM FINANCE TERM LOAN Grand Total Avg.00 HIRE PURCHASE .SALE & HIRE BACK HIRE PURCHASE .00 1.65 14.United Leasing Company_ Internship Report AVERAGE OF IR Type BILL DISCOUNTING .38 14.50 0.

United Leasing Company Page 28 . Interest rates for longer term finance schemes are lower than shorter term product. Tenure Matching principal of assets and liabilities prescribes that since ULC pays higher interest rate for deposits and loans taken in the short run it should also charge a higher interest rate in the short run. 3. Empirically it has been seen that short term finances are riskier than long term finances. Firstly. rate for Bill Discounting and Short Term Finance is higher than Term Loan and Lease. E. 2. ROE is higher in the short sun. (See Appendix 1). 4. Compared to Hire Purchase Interest Rate for Lease is higher. for taxation purposes the accounting for Hire Purchase is different than lease and because of a different structure in the financed asset depreciation schedule. Although Short Term Finances are usually perceived as more risky. 2. Although Hire Purchase is provided for shorter terms.e.United Leasing Company_ Internship Report FINDINGS & EXPLANATIONS 1. Although Hire Purchase term is usually shorter than Lease.:1. The reasons for a higher interest rate in the short term are. The financed asset’s ownership in Hire Purchase will be in ULC’s name. Bill Discounting is abolished (modified and then revived as Factoring) while Short Term Finance is for the time being postponed. in case of Hire Purchase the risk is minimized by higher equity participation from the part of borrower. Hire Purchase return i. So part of this extra return advantage is passed on to the borrower in terms of lower interest rate. the product is different in certain aspects. In fact. while the borrower might have paid as high as 20% of the asset’s purchase price. The bad debt percentages for short term products are higher than long tenure finance.g.

The ranked tables below will give a clearer message United Leasing Company Page 29 . Implicit Rate and IRR.United Leasing Company_ Internship Report 5.911722 IRR Principal IR IRR 1 From the correlation coefficient we can say that there is a not so strong negative relationship of IR and IRR with Principal.2 INTEREST RATE SENSITIVITY OF BORROWERS (Relationship between Interest Rate and Loan Size) A common observation of ULC’s day-to-day loan/lease approvals will testify that the higher the finance amount the lower the interest rate. Although from risk perspective the opposite should have been true.207390541 IR 1 0.165177727 -0. In the following there is a summery correlation analysis among Principal Amount. Principal 1 -0.

000 100.SALE & HIRE BACK LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK Averages Principal 110.10 14.65 16.96 15.67 17.50 14.000 73.REVOLVING LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK TERM LOAN BILL DISCOUNTING .00 18.79 19.500 113.00 20.00 16.49 LOWEST 10 FINANCE AMOUNT Type LEASE .256.00 15.00 17.67 16.2 IR 12.000 98.000.44 18.00 14.850 115.FOREIGN LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK BILL DISCOUNTING .56 15.50 15.00 14.00 14.United Leasing Company_ Internship Report HIGHEST 10 FINANCE AMOUNT Type LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK HIRE PURCHASE .000 100. The tables above give evidence that the interest rate charged for higher finance amount averages lower than the interest rate charged for lower finance amount.04 15.17 14.000.370 100.00 14.00 18.5 IR 18.50 16.000 60.000.65 17.78 IRR 14.000 55.80 14.000 100.520 113.REVOLVING Averages Principal 55.000.000 154.491 70. United Leasing Company Page 30 .00 14.15 14.000 155.77 FINDING & EXPLANATION 1.271.03 14.000.00 16.23 14.000 81.00 14.000.FOREIGN HIRE PURCHASE .75 13.451 76.03 14.47 14.00 14.50 14.315 93.SALE & HIRE BACK LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK LEASING-SALE & LEASE BACK LEASE .000 70.456.00 12.000.00 13.755.00 15.000.000 150.96 17.000 100.18 IRR 20.294.

The increase in the annuity may go unnoticed. United Leasing Company Page 31 . Borrowers / Client with need of larger finance amount are larger in size. 2. 5. Moreover. The phenomena witnessed can be explained by the following observations. comparison and expertise often leave them without any idea about the Implicit Rate.3 PRODUCT BIAS (Frequency Distribution of Products) Among the products/finance schemes that are in the offer list of ULC Sale & Lease Back is much too common. whereas smaller size credit is in demand mainly from the part of SMEs. large organizations can win favorable terms. Apart from different types of lease. This is illustrated in the following pie diagram and frequency distribution. Term Loan stands next.:1. only the ‘Rent’ is disclosed. Lack of accessibility. or client might be indifferent to this ‘small monthly difference’. loan/lease advance are utilized to leverage the return out of small finances.United Leasing Company_ Internship Report 2. then Hire Purchase . SMEs due to lack of accessibility have to give in to the terms offered by lending institution. In case of SMEs not the Implicit Rate. Often they even lack expertise to gauge the Interest Rate. Because of better negotiation power and greater eligibility/ accessibility to finance. The same also implies that borrowers with larger finance need are more sensitive to the interest rate. 3. A higher interest with lower finance amount does not increase the monthly/quarterly annuity significantly.

REVOLVING HIRE PURCHASE . (see Appendix 1) Count of Term United Leasing Company Page 32 . At this length of the term return from Lease is higher than Hire Purchase.United Leasing Company_ Internship Report Total Count of Type Type BILL DISCOUNTING . 517).LOCAL LEASING-SALE & LEASE BACK SHORT TERM FINANCE TERM LOAN Type BILL DISCOUNTING – REVOLVING HIRE PURCHASE – FOREIGN HIRE PURCHASE .SALE & HIRE BACK LEASE .FOREIGN LEASE .SALE & HIRE BACK LEASE – FOREIGN LEASE – LOCAL LEASING-SALE & LEASE BACK SHORT TERM FINANCE TERM LOAN Grand Total Count 51 5 52 148 108 1070 21 109 1564 A reason for such bias in favor of Sale & Lease back and Lease as a whole is that most of the finances are for Four (4) year (freq.FOREIGN HIRE PURCHASE .

The following cross tabulation of Terms across types shows that contrary to the thumbs rule – ‘For shorter term Hire Purchase return is higher’. The frequency of finances is adversely in favor of Sale & Lease Back.FOREIGN Term 1 2 3 Grand Total 0 1 2 3 4 5 6 Grand Total HIRE SALE & LEASE – LEASE FOREIGN - LEASINGSALE BACK 20 96 380 496 PURCHASE PURCHASE HIRE BACK 8 29 14 51 & 0 1 2 3 4 5 6 LOCAL LEASE 9 20 49 78 1 7 22 30 Grand Total 38 157 465 660 5 Count 5 68 45 159 491 517 276 8 1564 But evenly noticeable is that a good many number of finances were provided for three or less years. (see Appendix 1) Lease is still the majority in 1 to 3 years range. FINDINGS & EXPLANATION 1. United Leasing Company Page 33 . In these cases Hire Purchase could have been profitable. Marketing force of ULC is biased toward Sale & Lease Back.United Leasing Company_ Internship Report Term (years) Total Count of Term Term Type HIRE .

Concentration of portfolio in a particular range of time scale 3-4 years should also be avoided. Majority finances belonged to 4+ year category. although Sale & Lease Back is frequent even in shorter terms (less than 3 years). in many instances Lease was preferred to Hire Purchase. Better fund management and credit risk analysis should be developed. although the later is supposed to be profitable. Initially this enhancement of offer may not fetch a good return. 3. 2. A particular product bias should be avoided. although larger credit appetite of existing clients has sustained its growth so far. The clientele is growing very slowly. but eventually this diversity will be needed to sustain the primary items of the offer. 4.1.0 CONCLUSION United Leasing Company has entered a self fueling cycle over the long period of operation. which are not yet at a standard level for ULC. To further enhance and diversify clientele ULC will have to add diversity to its scheme line. In earlier years. Prior to development of a return calculation model used by ULC. 6. Better matching of fund and scattering the schemes across the time scale would make the portfolio more stable. Marketing persons were not fully aware of this decision making criterion. United Leasing Company Page 34 .United Leasing Company_ Internship Report 2. The frequency of finances is adversely in favor of 3 to 4 years range. The reason behind this bias for sale & lease Back are. If tenure is shorter than 3 years Hire Purchase should have been preferable. so Lease was indeed the right choice. Revere worthy competitors are stretching their menu.

United Leasing Company_ Internship Report Over the years ULC has developed its pool of human resources both from business and non business academic background. United Leasing Company Page 35 . Then they can make decisions in the best interest of the organization and maximize its wealth. so that the entire workforce has comprehensive knowledge of financial aspects. thorough training should be arranged. If employees with non-business background are recruited anyway.

00% 30.00% Advance Up to 36 Months HP is better and beyond that Lease 25.00% Furniture & Fixure 10.00% is better Up to 72 Months HP is better and beyond that Lease 0.00% is better Up to 48 Months HP is better and beyond that Lease 0.00% is better * For Lease only United Leasing Company Page 36 .United Leasing Company_ Internship Report APPENDIX 1 Tax Depreciation Rate* Asset class Initial Rate Normal Rate Mode Arrear Up to 24 Months HP is better and beyond that Lease is better Up to 36 Months HP is better and beyond that Lease is better Up to 24 Months HP is better and beyond that Lease is better Up to 72 Months HP is better and beyond that Lease is better General Machinery Moulds/Moulding Machine 20.00% is better Up to 24 Months HP is better and beyond that Lease 0.00% Vehicles 20.

The company started ith 1. Local Purchase: When ULC purchases the equipment/vehicle on behalf of the client. but value added to it in the form of assistance in acquiring the asset itself and other services. Foreign purchase: When ULC purchases the equipment/vehicle on behalf of the client. What leasing offers is not the money alone. the documentation department has plenty of work. The major modes of finance offered by ULC are: Sale and Lease back: When ULC purchases the equipment/vehicle from the client and gives it on lease to the client. In a situation where the entrepreneur intends to acquire equipment urgently for balancing and United Leasing Company Page 37 . Leasing is fairly a new concept in Bangladesh and it provides finance for acquisition of asset as an additional source. from a local supplier. ULC does not offer this to individuals.1 LEASE FINANCE AND HIRE PURCHASE this product and with time they have diversified their product range. ULC has also introduced Hire Purchase scheme in their product portfolio. This scheme is allowed only for institutional clients. from a foreign supplier. the documentation department prepares the lease agreement only and the rest of the documents are prepared by the commercial section under the Finance department. that in the case of foreign purchase. In this case the client will be regarded as the supplier. Lease or Hire Purchase is asset Financing whereby the lessor (financier) gives the right to use an asset to the lessee (user) against regular payments termed as rent. This will give the clients another options to choose. But for local purchase. It is worthwhile to note at this point.United Leasing Company_ Internship Report APPENDIX 2 se financing is the main product of United Leasing Company. flexible with minimum documentation. (ULC Web site) Mainly ULC does asset based financing. The procedures adopted in leasing are fast.

leasing provides an ideal opportunity. 2. Provides up to 100% of the cost of the equipment: Often no deposits or advance payments are required. which requires rentals to be paid in advance. Clearly. unlike an overdraft. Provides certainty: A Lease or Hire Purchase is non-cancelable.1. is not 100% financing.United Leasing Company_ Internship Report modernizing without straining the resource otherwise available. Does not tie up valuable working capital or credit lines: A leasing facility preserves liquidity for other more appropriate uses. A sound hedge against inflation: Equipment can be acquired at current prices and rentals met out of future earnings. The lease term is normally related to the useful life of the equipment. 3. Nevertheless. however. 1. for a lessee which is a borderline credit risk or when there is a tax benefit arising from the lessee making a substantial initial rental. For a Lease or Hire Purchase of very low cost equipment. United Leasing Company Page 38 . which is repayable on demand and may be reduced during a credit squeeze. which a lessee could also tap. leasing often does provide a higher percentage of financing than an equivalent installment credit facility. be other sources of finance. There may. 5.1 Advantages Lease Finance and Hire Purchase 1. any leasing facility. 4. Offers cash flow benefits: Rentals fixed at the inception of a Lease or Hire Purchase assist expense budgeting and cash flow forecasting.

7. 10. 8. Straightforward: Leasing and hire purchase minimizes administrative costs and simplifies tax and accounting procedures. May avoid loan covenants or capital investment restraints: While leasing is not legally borrowing and so may circumvent restrictive loan covenants and capital budgeting. constraint lenders and head office financial controllers are now more aware of the leasing loophole. This treatment also has the effect of showing an artificially low gearing. United Leasing Company Page 39 . May be off balance sheet: Leasing is not borrowing and in many countries there is no accounting requirement to show leased equipment and the corresponding liability to make future rental payments on the balance sheet of the lessee. Tax efficient: Lease rentals are generally fully tax deductible as operating expenses. Avoids dilution of share ownership: Leasing may be the only way of acquiring the long-term use of major assets required by a business without increasing the capital base. Documentation is simplified.United Leasing Company_ Internship Report 6. Asset depreciation normally becomes the lessor’s responsibility. This feature should not encourage a lessee to overspend. Only a lessor may be willing to seek part of his reward through an arrangement to share in the residual value of leased assets. The tax benefits arising on the acquisition of equipment may also be maximized through a leasing arrangement by reflecting in the rentals the value of an investment incentive. 9.

1.2 Terms & Conditions Lease and Hire Purchase Items: Industrial Machinery or Equipment Office Equipment Medical Equipment Transport/Vehicle Tenure: Η Η Lease: 3 to 5 years. Maximum Limit Depends on: Η Requirement Equity Participation. Insurance Coverage: United Leasing Company Page 40 . and Η Merit of the Proposal. Hire Purchase: 1 to 2 years.1. Modes of Repayment: Η Equal installment. is not fully available to the lessee. monthly Η Payment structured to clients cash flow.United Leasing Company_ Internship Report which because of shortage of tax capacity or other reason.

1.3 Finance Procedure of Lease & Hire Purchase Initial approach discussion Finance application Credit appraisal review Agreement Purchase of equipment for Lease / HP Local purchase Purchase order Delivery Import of equipment Opening of letter of credit (L/C) Customer clearance Delivery Delivery United Leasing Company Page 41 . (ULC Web site) 1.United Leasing Company_ Internship Report Η Leased assets are to be duly covering all possible risk and premiums are to be paid by clients.

4. ULC approves the facility. 3. Η Benefits: Reduced Investment in Receivables: Sellers’ receive payment right after delivery and therefore sellers’ fund no longer tied up in receivables. 7. ULC disburse prepayment to seller. Buyer makes payments against invoices directly to ULC. 6. ULC reimburses the balance amount to seller after prepayment. Seller delivers goods/services to buyer. Seller approaches ULC for approving of factoring facility. Buyer (customer) places order on seller (ULC client).United Leasing Company_ Internship Report Execution Illustration 9: Finance Procedure Lease/Hire Purchase 1. Seller submit/assign invoices to ULC. United Leasing Company Page 42 . discount and service charges. 2. Factoring services includes: Sales Ledger Maintenance Collection of Receivables Reporting Η Only Seven steps: 1. 5.2 FACTORING OF ACCOUNTS RECEIVABLES Besides Financing.

High Quality Reports: ULC will provide detailed reports on the performance of client’s customers that will help the client direct client’s sales efforts. Service Charge: A nominal service charge is obtained for collecting receivables from buyers and providing reports. 1.3 BILL DISCOUNTING It is a short-term finance product that allows credit facility to clients against selected receivables for supply of goods and services to meet the short-term need. Collection of Receivables: ULC will monitor and collect the receivables on due time from customers. The credit facility is extended against Taka receivables only. it will help ULC support the client with other services. Η Costs: Discount: ULC charge competitive discount for prepayment against invoices. United Leasing Company Page 43 . And the customer that is the companies or firms for whom the client supplies or performs services in the ordinary course of client’s business has to be approved by ULC. sellers’ can increase business by delivering higher volume to existing buyers and also expand business with new ones. Sales Ledger Administration: ULC will administer clients’ sales ledger for the assigned customers. Any company/institutions/firm can avail this facility. Scope for Additional Financing: when seller (client) utilizes factoring facility properly.United Leasing Company_ Internship Report Expansion of Business: As cash flows improve.

ULC assumes the collection function (obtaining a post-dated cheque) and sends statements and reminders to the customer (debtor). ULC pays the client the remaining percentage of the invoice value. After entering into the Bill Discounting Agreement with ULC. and the discounting charge. And a certain percent of each bills/invoice will be offered in cash to the client. the client (supplier/dealer) invites his customer/debtor with the notification that all monies due on the invoice are assigned to and be paid to ULC. ULC makes prepayment (advances) to client up to a specific percentage of the invoice value in accordance with the approval. And this percent will also be selected by ULC. The mechanism of bill discounting can be summarized as follows: After selling the goods on credit. by printing an assignment clause on the invoice. Same securities that are provided for lease financing can also be used when clients apply for bill discounting. It provides liquidity to the client and they are allowed to avail this facility 2 times per month. United Leasing Company Page 44 . the client sells the invoice to ULC. After collecting the debt from the debtor/customer. ULC gets the payment and at periodic intervals the details of unpaid invoices and other control reports are submitted by ULC to the client.United Leasing Company_ Internship Report The minimum loan limit will be Taka 1 million and maximum will be Taka 10 million. This facility ranges from 30 to 120 days. after deducting the service charge.

purchasing power increases and eventually. minimum Tk. overdue invoice analysis and debtor payments report. 5.United Leasing Company_ Internship Report Η BENEFITS: Getting Instant Cash: As soon as the client sale the credit they get the instant cash on that credit sales directly from ULC. Sales ledgers is no more your headache: ULC’s operation is fully computerized and they keep the client informed through monthly sales analysis. Thus. Relieved of debt Collection: As ULC undertakes/assumes.000 (plus 15% VAT) and maximum Tk. Η Cost: Interest: Competitive rate Service charge: 0. United Leasing Company Page 45 . the client’s cash flow is accelerated. the responsibility of debt collection (obtaining postdated checks) on all the invoices factored and the client is relieved of the problems of debt collection. Besides the client gets the benefit of credit information systems available to ULC and a wealth of experience in the vital business of collecting cash. 10. Thus the client is relieved entirely of the cares and responsibility of maintaining a sales ledger and credit control. legal and documentation costs.25% of the total disbursed amount.000 (plus 15% VAT) to cover administrative expenses. their production and business moves up and credit rating improves.

This year United Leasing Co. In exchange of those the leader lessor takes the commission. and precisely the client should be financially sound. and other formalities. But a project might require more than their said limit. transactions. The lessee will contact with only the leader lessor. But in syndicate financing there is the only particular client to monitor.there is a leader lessor who makes all types of negotiations. As per Bangladesh Bank rule. The organization has to give individual efforts for the individual clients.United Leasing Company_ Internship Report 1. has also introduced syndicate finance for a leading industry. In the syndicate financing process. The risk of the project will be distributed equally among all the members of the syndicate. Syndicate financing is now a very useful and prospective product for non-banking financial institutes. Here the syndicate finance is fruitful. a financial institute can finance at best 30% of their paid up capital. there has some possibilities for to default. documentations.4 SYNDICATE FINANCE Syndicate finance is new concept in our leasing industry. Large size of financial intermediation is essential for the industrial development of our country. Now days it is considered as one of the most risk free project for the financial institutions. United Leasing Company Page 46 . But it is impossible for many NBFI’s for the government regulations. negotiation charge from the whole financial income out of their portion. Syndicate finance has some advantages over lease and other financial intermediations. If the huge amount distributed to many lessees.