Term Paper on

Leasing and
Hire purchase
Sub: Financial Management

Presented By
Hareesh.M
2014600120
Leasing
DEFINITION OF LEASING

Lease is a contract where by the owner of the asset (lesser) grants to another party (lessee), the
exclusive right to use the asset usually for an agreed period of time in written for the payment of rent.

CONCEPT OF LEASING

• Lease finance denotes procurement of assets through lease.

• In India, the concept was pioneered in 1973 when first leasing company was set up in Madras
and the eighties have seen a rapid growth of business.

A lease is a contractual agreement in which:

 A party owing an asset i.e. lesser

 Provides an asset for use to another party i.e. lessee

 For an agreed period of time i.e. lease period

 For a consideration i.e. lease rentals

MARKETING OF LEASING

Generally there are two types of marketing in leasing:

• B2C

• B2B

Marketing of leasing is done by financing many kinds of assets to consumers as well as business which
includes:

• Plant and machinery

• Business cars

• Commercial vehicles

• Agricultural equipments

• Hotel equipments

• Medical and dental equipments.

• Computers including software packages.

 • Office equipments etc.

LEASE FINANCING ORGANISATIONS IN INDIA

• NBFC

• Private sector manufacturing companies

• Infrastructure leasing and financial services ltd. (IL&FS).

• ICICI bank

• HDFC bank

• LIC

• Industrial reconstruction bank of India (IRBI).

• State industrial investment corporations (SIICS).

TYPES OF LEASING
• Financial lease- Long term non cancellable lease contract.

Ex: Plant, Machinery, Building

• Operating lease- Short term, cancellable lease agreements.

Ex: Tourist renting a car, Hotel rooms

• Leverage Lease- A leverage lease is used for financing those assets which require huge capital
outlay- 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%

• Sale and lease back-Special financial agreement in which the user may sell an asset owned by
him to the lessor and lease it back from him. Example: shipping Industry.

• Cross border lease-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.

1) Vendor Leasing

2) Wet lease & dry Lease

MERITS OF LEASING

• Convenience in case of short term need.

• No risk of technology Obsolescence.

• Efficient maintenance services.

• Low administrative and transaction cost.

• Debt Equity ratio remains unchanged.

• Benefits of Tax shield.

DEMERITS OF LEASING

• No benefit of residual value.

• High cost of leasing.

• No benefit of ownership.
 • Not flexible.

• Chances of disputes.

HIRE PURCHASE

• Hire purchase is a type of instalment credit under which the hire purchaser, called the 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.

• Hire purchase is used to buy expensive items which a person cannot afford to payout right: e.g.
a car

• The ownership or title of the same is transferred only when the last instalment is paid.

FEATURES OF HIRE PURCHASE

• Credit purchase

• Installment payment

• Possession at time of agreement

• Ownership till last installment

• Termination of the agreement

• Ownership of goods after all installments payment.

TYPES OF HIRE PURCHASE

• Consumer hire purchase

• Industrial hire purchase

ADVANTAGES OF HIRE PURCHASE

• Spread the cost of finance.

• Interest free credit.

• Higher acceptance rates.

• Sales

• Debt solutions.

DISADVANTAGES OF HIRE PURCHASE

• Personal debt
 • Final payment

• Bad credit

• Repossession rights.

DIFFERENCE BETWEEN LEASING & HIRE PURCHASE

LEASING HIRE PURCHASE

OWNERSHIP OF ASSET Ownership lies with The hirer has the
the lesser. option to purchase.
The lessee has the The hirer becomes the
right to use the owner of the
equipment and does assets/equipments
not have an option to immediately after the
purchase. installment is paid.

DEPRECIATION The depreciation is Here, the depreciation

claimed as an expense claim is allowed to the
in the books of lesser. hirer.

RENTAL PAYMENTS The rentals cover the The installment is

cost of using an asset. inclusive of the
Normally, it is derived principal amount and
with the cost of an the interest for the
asset over the asset time period the asset
life. is utilized.
 LEASING HIRE PURCHASE

DURATION Lease agreements are These agreements are

generally done for
longer duration and
for bigger assets like
land, property etc.
TAX IMPACT The total lease rentals
are shown as the
expenditure by the
lessee in the lease
agreement.
done mostly for
shorter duration and
cheaper assets like
hiring a car,
machinery etc.
In hire purchase, the
hirer claims the
depreciation of asset
as an expense.

REPAIRS AND Repairs and In hire purchase, the

MAINTENANCE maintenance of the responsibility lies with
asset in financial lease the hirer.
is the responsibility of
the lessee but in
operating lease, it is
the resposibility of the
lesser.

DIFFERENCE BETWEEN HIRE PURCHASE AND INSTALLMENT SYSTEM

 HIRE PURCHASE INSTALLMENT
SYSTEM
OWNERSHIP Transfer of ownership In case on installment
takes place after the payment system, the
payment of all ownership is
installments. transferred
immediately at the
time of agreement.
TYPE OF CONTRACT The hire purchase In installment
agreement is like a payment system, the
contract of hire agreement is like a
though later on it contract of credit
may become a purchase.
purchase after the
payment of last
installment.
POSSESSION In case of default Here, the vendor has
payment, in hire no right to take back
purchase system the the goods from the
vendor has a right to possession of the
back goods from the purchases; he can
possession of the hire simply sue for the
purchase. balance due.