MANAGEMENT OF FINANCIAL SERVICES UNIT 4

heavy taxation and meager internal resources forced by many companies to look for alternative means of financing the projects. Leasing has emerged as a new source of financing capital assets. Lease rentals can be conveniently paid as per agreement over the lease period. .LEASING AND HIRE PURCHASE y Leasing: background: high rate of inflation. severe cost escalation. y Concept: leasing is an arrangement between two parties( lesser and lessee(user)). The former arranges to buy capital equipment for the use of the lather for an agreed period of time in return for the payment of rent.

structure or equipment.van Horne . in consideration of a payment. space.dictionary of B&M ‡ ´lease is a contract where by the owner of any asset(lesser) grants to another party(lessee) the exclusive right to use the asset usually for an agreed period of time in return for the payment of rent ----. ----. usually in the form of a rent.James c.DEFINITION: y Lease is a form of contract transferring the use or occupancy of land.

taxes. . Lessee has to decide the asset required and select the supplier 2. y Cars and other vehicles y Assets entitled 100% or 50% depreciation. plant etc. STEPS IN LEASINGTRANSACTION: 1. machinery.LEASING AS A SOURCE OF FINANCE y Leasing is an important source of finance for the lessee. Leasing companies finance for: y Modernitization of business y Equipment. insurance and other expenses. Entering into lease agreement with the lesser a)Lease period during which the lease is irrecoverable b)Timing and amount of periodical rental payment c) Details of any option to renew the lease or to purchase the new asset at the end of the period d) Details regarding payment of cost of maintenance and repairs.

In this.: office equipment.  OPERATING LEASE/ SERVICE/SHORT. vehicles etc. there could be a purchase option also. the lesser contacts the manufacturer and requests him to supply the asset to the lessee. textile machinery. locomotives.g. TYPES OF LEASE:  FINANCIAL/CAPITAL/NET/ CLOSE/ LONG-TERM LEASE: it is just like an installment loan it is a legal commitment to pay for the entire cost of the equipment plus interest over a specified period of time. . e. containers. etc are leased under this type. to buy the equipment at the end of period. JAPAN. The lesser makes payment to the manufacturer after the asset has been delivered and accepted by the lessee. In this. copy machines. diesel generators.3) After the lease agreement is signed. The financial lease is very popular in India and also other countries like US. the contractual period between lesser and lessee is less than the full expected economic life of equipment. The lessor fulfills service function.TERM/ TRUE LEASE: it is a rental agreement. machine tools. Eg: computers. Leasing company assumes risks of obsolesce. UK.

E. Lender provides loan to the lessor.: coal mining.e. rs.50. 3 CROSS BOARDER LEASE: it is international leasing and is also known as transactional leasing.g.00. ships etc.000 to rs 2crores. under the mortgage of the asset.3 LEAVERAGE LEASE: this is used for financing those assets which require huge capital outlay( i. pipe lines. .with 10 or more years of life) 3 parties: lessor. Indian leasing industry unlikely to deal in export border lease for aircraft etc. lessee and lender. It relates to a lease transaction between 2 countries persons including export leasing.

ADVANTAGES OF LEASING y Permit alternative use of funds y More funds for working capital y No debt equity ratio restriction y Faster and cheaper credit y Flexibility( to suit the needs of lessee) y Protection against obsolesce y Boon to small firms y 100% financing without down payment .

DISADVANTAGES OF LEASING y Not suitable to protect finance y No tax benefits y Loss of capital gain to lessee when the value of an asset increases y Cost of financing is higher than debt financing y Less liquidity of the asset in case the lessee becomes defaulter y Suppliers breach of contract y Problems between lessor and lessee LEGAL ASPECTS OF LEASING: lessor has the duty to deliver the asset to the lessee. . Lessee has the obligation to pay the lease rentals as specified in the lease agreement.

the lessee and the equipment. time and place of lease rental payments  Time and place of equipment delivery  Responsibilities of lessor and lessee  Insurance  Repairs and maintenance . y BOOKS OF LESSEE: to be shown by the way of a foot note in the balance sheet.VI OF THE COMPANIES ACT).  amount. As an asset in the balance sheet and income in income statement under the heading gross heading.ACCOUNTING TREATMENT y BOOKS OF LESSOR: (sec. Lease rentals to be charged to income statement. CONTENT OF A LEASE AGREEMENT:  description of the lessor.

 SALES TAX PROVISIONS: lessor is not entitled for the concessional rate of central sales tax. Lease rentals are taxable under the lead profits and gains of business or profession.deductible expenses. . Variation in lease rentals  Renewal of lease/ return of asset  Arbitration procedure in the event of dispute  INCOME TAX PROVISIONS: lessee can claim lease rentals as tax.

NSIC company of India ltd.: SBI·s SBU(SMALL Hire purchase and finance companies e.g. IRBI.g. ECIL ETC. Other public sector organizations (manufacturing companies) e.: bharat electronics ltd.g. Subsidiaries of banks e.: BUSINESS UNITS) sundaram finance ltd.: Pure leasing companies e.to burst up sales In house leasing: to avoid IT . the Grover leasing ltd. IFCI.g.g. The 20th century FCL. Subsidiaries of manufacturing group vendor leasing.: the first leasing ICICI.STRUCTURE OF LEASING INDUSTRY Public sector Private sector Leasing divisions of financial institutions e.

tax advantage on depri tax advantage on investment allowance + salvage value.0. Rent per month :PRE TAX LR *100/TOTALCOST OF THE ASSET *1/2 . E.751.g.tax lease rental y Pre TLR: PTLR *100/TAX RATE y From this.909. II.: PV factor @10% discount.Determination of lease rentals Step I: find out the total cost of the asset. the lease rental for each month can be calc (expressed in terms of per thousand and per month). I yr: 0. For 5 yrs is 3. y Total cost : asset cost + freight+ insurance + taxes+ installation Step II: ascertain the cash flows to the lessor on account of ownership of the asset y Cash flow= amount of depreciation. e.826.: annuity discount factor at 10% disc. III-0. y MRLR = COST OF THE ASSET} TOTAL PV OF CASH FLOWS Step V: calculate post tax lease rentals y PTLR: MRLR/ PV factor of annuity.105 Step VI: calculate pre.g. Step IV: ascertain the minimum required net recovery through lease rentals. Step III: calculate PV of cash flows: cash flows* PV factor.

Leasing accounts for 6% of the total capital investment in India 2. World leasing industry is growing at 10% 3.PROBLEMS OF LEASING AND PROSPECTS y Un healthy competition y Tax considerations y Lack of qualified personnel y Heavy stamp duty in some states y Delayed payment and bad debts Prospects: 1. Leasing has great prospects in India: convenient and flexible option. .

but not title y Installment payment is treated as hire charges y Ownership is transferred on the payment of last installment y Seller can repossess the goods on buyers default y Hirers can terminate the agreement at any time before the property passes. 1972: governs the hire purchase transactions on India. y THE HIRE PURCHASE ACT. .HIRE PURCHASING y Hire purchasing is a method of selling goods y Two parties: creditor( finance company and the hirer) y Goods are let out on hire basis y Possession of goods on the spot.

Hire purchase Creditor/ hirer Consumer goods Can be claimed by hirer Ownership Method of financing Depreciation Leasing Owner Business assets Can·t be claimed by the lessee Rental is deductable Interest component is deductable Hirer can enjoy 70-80% Hirer Tax benefits Solvage value Extent of finance Maintenance Lessor can enjoy 100% Lessor/lessee Hire purchase and credit sale Hire purchase and installment purchase .

bank credit for the hire purchase business: y Procedure: y Customer and his financial position y Purpose y Amount y Period y Repayment y Security y Monitoring and control .

Sign up to vote on this title
UsefulNot useful