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Roll No. Name Content Slide

No.

111 Bharat Pawar Advantages & Disadvantages 27-31

of Leasing

112 Sonal Mulay Legal Aspects of Leasing & 12-16

Content of Lease agreement

113 Sneha Patil Types Of Lease 17-21

114 Bhavana Parab Lease Financing by Banks 22-26

115 Tejas Lolam Banks & Hire purchase 40-46

business & Bank Credit

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Roll No. Name Content Slide
No.

118 Mandar Desai Introduction, origin & 4-11 &

(Group Leader) Development, Conclusion 59

120 Madhuri Dolas Difference between Leasing 53-58

& Hire Purchase

142 Preeti Chandavkar Features, Advantages & 32-39

Disadvantages of Hire
Purchase

143 Akshata Shinde Comparisons between 48-52

Buying & Leasing

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 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 business
2. Balancing equipment
3. Cars and other vehicles and durables
4. 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.

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 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
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 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 borrowings

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

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

 Customer
 Purposes
 Amount
 Period
 Repayment
 Security
 Monitoring & Control

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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.
 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.

METHOD OF FINANCING
 Hire Purchase is a method of
 Leasing is a method of
financing both business assets and
financing business assets only.
consumer articles.

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LEASING HIRE PURCHASE

 In Leasing, depreciation and  In Hire Purchase depreciation and

investment allowance cannot be investment allowance can be
claimed by the Lesser. claimed by the Hirer.

TAX BENEFITS
 The entire lease rental is tax
 Only the interest components of the
deductible expense. Hire Purchase installment are tax
deductible.

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LEASING HIRE PURCHASE

 The lessee, not being the owner of  The hirer, in purchase being the
the assets and does not enjoy the owner of assets and enjoy the
salvage value of the assets. salvage value of the assets.

DEPOSIT
 In Hire Purchase, the Hirer is
 In Leasing the Lessee is not
required to deposit 20% of the
required to make any deposit.
cost.

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LEASING HIRE PURCHASE

 In Leasing, the Lessee take the  In Hire Purchase the asset is

asset on a rent basis. purchased by the Hirer.

EXTENT OF FINANCE
 In Hire Purchase, a margin equal
 Lease financing is invariably 100%
to 20-25% of the cost of the assets
financing. It does not required any
to be paid the Hirer.
immediate down payment or
margin money by the Lessee.

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LEASING HIRE PURCHASE

 In Leasing, the maintenance of  In Hire Purchase, the cost of

leased asset is the responsibility of maintenance of hired assets is to be
the Lessee. borne by the Hirer himself.

REPORTING
 The assets on hire purchase is
 The leased assets are shown by
shown in the balance sheet of the
way of footnote only.
Hire.

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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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