MES-Pillai Institute of Management Studies and

Research (PIMSR),
New Panvel

Master of Management Studies (MMS)

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 MMS - Semester – III

Subject (Elective): Banking and Financial Services

Institutions (BFSI)

Chapter-5 : Hire Purchase Finance

and Consumer Credit
Lecture date : 6.12.2023

by
Dr. K.G.S. MANI

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Lecture date : 6.12.2023
Chaper-5 : Hire Purchase Finance
(1) Definition – Hire Purchase :
(i) A hire-purchase can be defined as a contractual arrangement
under which the owner (hire-vendor, seller) lets his goods on
hire to the hirer and offers an option to the hirer for purchasing
the goods in accordance with the terms of the contract.
(ii) Hire Purchase is a method of selling goods. In a hire purchase
transaction, goods are let out on hire by a finance company /
bank (owner or creditor) to ‘hirer’ (customer, hire-purchaser).
Hire-purchaser is required to pay an agreed amount in
periodical instalments during a given period. Ownership on
assets remain with creditors and passes on to hirer after
payment of last instalment.
(iii) In the hire-purchase transaction the goods are let on hire, the
purchase price is to be paid in instalments and hirer is allowed
an option to purchase the goods by paying all the instalments.

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(iv) According to the Hire Purchase Act 1972, an agreement which
fulfils the following conditions is also a hire purchase agreement
(a) The possession of goods is delivered by the owner thereof to a
person (hirer) on condition that such person (hirer) pays the
agreed amount in periodic instalments.
(b) The property in such goods is to pass on to such person (hirer)
on payment of last of such instalments, and
(c) Such person (hirer) has the right to terminate the agreement at
any time before the property so passes to him (hirer).
(v) The distinct features of a hire purchase transactions are as
under:
(d) The option to purchase the goods at any time during the term
of the agreement, and
(b) The right available to the hirer to terminate the agreement at
any time before the payment of the last instalment.

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(2) Modalities of Hire Purchase contract :
In hire-purchase contract there are three parties, namely, the
seller (hire-vendor), the financier (a non-banking financial
company) (NBFC), the hirer (customer). It is therefore, a
tripartite deal. A tripartite hire-purchase contract is arranged
with the following modalities.
(i) A dealer (hire-vendor) (examples: Aarcee Electronics, Vijay
Sales) contacts a finance company (Non-banking Finance
company) (example: Shriram Finance Co.) to finance the hire
purchase deals submitted them. For this purpose, they enter
into a contract drawing out the terms, warranties for which the
dealer gives to the hirer(customer) with each transaction and
so on.
(ii) The hirer(customer) selects the goods and expresses his desire
to acquire them on hire-purchase. The dealer arranges for a full
set of documents to be completed to make a hire-purchase
agreement with a customer. The documents are generally
printed by the finance company.
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(iii) The hirer(customer) then makes a cash down payment on
completing the proposal form. The down payment is generally
retained by the dealer (hire-vendor) as a payment on account
of the price to be paid to him by the finance company(example:
Shriram Finance Company Ltd)
(iv) The dealer (hire-vendor) then sends the documents to the
finance company (example: Shriram Finance Co.) requesting
them to accept and finance the hire purchase transactions.
(v) The finance company, if it decides to accept the transactions,
signs the agreement and sends a copy to the hirer (customer),
along with the instructions as to the payment of the
instalments. The finance company also notifies the same to the
dealer (hire-vendor) and asks him to deliver the goods to the
hirer (customer).
(vi) The dealer (hire-vendor) delivers the goods to the hirer against
acknowledgements and the property in the goods passes on to
the finance company.

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(vii) The hirer (customer) makes the payment of the hire instalment
periodically to the finance company.
(viii) On completion of the hire term, the hirer (customer) pays the
last instalment and the property in the goods passes on to the
customer (hirer).

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(3) Method of Accounting (Reporting) :
The interest charged and the principal component are to be
separately disclosed in the books of the hirer (hire-purchaser or
customer) and the hire-vendor (seller). The relevant method
of reporting for hire purchase finance transactions is presented
below :

(a) Disclosure in the Hirer’s books (Hire-purchaser or

customer) :
(i) The annual interest and depreciation charge must be debited to
the P & L account every year. Until the loan is repaid in full.
(ii) The principal component of outstanding hire purchase each
year must be shown in the Balance Sheet by way of current
liability of hire purchase outstanding within one year, and by
way of secured loan of hire purchase outstanding for periods
more than one year.

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(b) Disclosure in the Hire-vendor’s books (Seller) :
(i) Cost of Hire Purchase deal shall be debited to Profit & Loss
Account.
(ii) The interest received from the hirer each year constitutes
finance income and shall be credited to P & L account.

(4)Rights and Obligations of Hirer-purchaser (customer) :

(a)Rights of Hirer (customer) :
The Hire Purchase Act 1972, provides the following rights to the
hirer:
(iii) Right of protection :
Hirer has the right to protection. It is not possible for hire-
vendor to terminate the hire purchase agreement on account of
default in payment of hire charges by the hirer, or due to
unauthorised act or breach of express conditions, unless the
hire vendor gives notice in writing to the hirer in this regard.

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(ii) Right to Notice: When the hire charges are weekly or for
a period less than that, one week notice is to be given, and in
all other cases a two weeks notice is to be given.

(iii) Right of Repossession: The right of repossession is not

available to the hire-vendor, if the instalment amounts are not
paid by the hirer (hire-purchaser).

(iv) Right to Statement: The hirer has the right to obtain a

statement on payment of Re 1, containing details such as the
amount paid by the hirer, the amount and the date upon which
the instalment becomes due but has not been paid, the amount
of instalment, which will become payable, etc.

(v) Right to excess amount: The hirer has the right to obtain
any amount in excess of the value of goods repossessed, over
and above the amount of instalments payable by the hirer, in
the event of default for payment.
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(iv) Right to Statement: The hirer has the right to obtain a
statement on payment of Re 1, containing details such as the
amount paid by the hirer, the amount and the date upon which
the instalment becomes due but has not been paid, the amount
of instalment, which will become payable, etc.
(v) Right to excess amount: The hirer has the right to obtain
any amount in excess of the value of goods repossessed, over
and above the amount of instalments payable by the hirer, in
the event of default for payment.

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(b) Obligations of Hirer (customer, hire-purchaser):
i) Obligations of hirer to comply with agreement,
ii) Obligation of hirer in respect of care to be taken of goods,
iii) Obligation of hirer in respect of use of goods,
iv) Obligation of the hirer to give information as to whereabouts
of goods.

(6) Rights and Obligations of the Hire-Vendor (owner or seller) :

(a) Rights of the owner :
(i) Rights of owner to terminate hire purchase agreement for
default in payment of hire or unauthorised act or breach of
express conditions.
(ii) Right of owner to retain the hire amounts paid by the hirer,
on termination of hire agreement.

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(b)Obligation of the Hire-vendor :
(i) To provide, free of cost, a true copy of hire purchase agreement
signed by owner , to the hirer, immediately after execution of
hire purchase agreement.
(ii) It is the duty of owner to supply the asset, on receipt of
payment from the hirer as per the terms of hire purchase
agreement.

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(7) CONSUMER CREDIT (Consumer Finance):
(i) Meaning of Consumer Credit :
The term ‘consumer credit or consumer finance’ refers to the
activities involved in granting credit to consumers to enable
them possess own goods meant for every use. Consumer
Finance or Consumer Credit includes all asset-based financing
plans offered to primarily individuals to acquire durable
consumer goods. In a consumer credit transaction, the
individual-consumer-buyer pays a fraction of the cash purchase
rice at the time of the delivery of the asset and pays the
balance with interest over a specified period of time. There are
four important sources of consumer finance namely, (i)
manufacturers/dealers (electronic goods), (ii) NBFC finance
companies, (iii) banks, (iv) credit card companies. They finance
items such as, car, scooter, Home theatre, TV, refrigerator, wet
grinder, washing machine, water filter, modular kitchen, home
appliance, personal computer, laptop, cooking range, food
processor and so on.
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(ii) Purpose of Consumer Finance :
Banks provide consumer finance in the form of personal loans
for expenditure on education or to meet shortfalls in family
budgets aimed at providing liquidity and cash support. This also
applies to cash withdrawal facility extended by credit card
companies. Manufacturers/dealers in consumer durables,
finance companies (NBFCs), banks, along with credit card
companies also provide consumer credits for the purchase of
goods.

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(v) Sources of Consumer Finance :
The various sources of consumer finance available to people
are as under :
(a) Traders : The predominant agencies that are involved in the
provision of consumer finance are traders or dealers in
consumer durable goods (TV, Refrigerator, Air-conditioner, etc).
(b) Commercial Banks : Commercial banks take keen interest in
providing directly or indirectly, the finance for consumer
durables. Banks lend large sums of money at ‘wholesale’ rates
to commercial or sales finance companies.
(c) Non-banking Finance Companies (NBFCs) constitute another
important source of consumer finance (Two wheelers, Motor
Cars, etc) (example: Bajaj Finance Ltd).
(d) Credit Card Institutions : Credit card institutions arrange for
credit purchase of consumer goods through the respective
banks which issue credit cards (SBI Credit Card ).

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(vi) Salient Features of Consumer Finance :
The salient features of consumer finance are : (1) parties to the
transaction, (2) structure of the transaction, (3) mode of
payment, (4) repayment period and rate of interest, and (5)
security.
(1) Parties to the transaction: The parties to a consumer credit
transaction depend upon the nature of the transaction. (i) In a
bipartite arrangement, there are two parties, namely borrower-
consumer-customer, and dealer-cum-financier, (ii) A tripartite
arrangement where the parties are dealer, financier and the
customer. The dealer in this type of arrangement arranges for
credit from the financier (banks).
(2) Structure of transaction: A consumer credit arrangement can be
structured in three ways as under :
(i) Hire-Purchase : The customer has the option to purchase the
assets. But he may not exercise the option and return the goods
according to the terms of the agreement. Most of the tripartite
consumer credit transaction are of this type.
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(ii) Conditional Sale : The ownership is not transferred to the
customer until the total purchase price including the credit
charge is paid. The customer cannot terminate the agreement
before the payment of the full price.
(iii) Credit Sale : The ownership is transferred to the customer on
payment of the first instalment. He cannot cancel the
agreement.
(3) Mode of payment : From the point of view of payment, the
consumer credit arrangements fall into two groups, namely,
(i) down payment schemes, and (ii) deposit-linked schemes.
The down payment may range between 20 – 25 percent of the
cost while the deposit-linked may vary between 15 – 25
percent of the amount financed at compound rate of interest.
Some arrangements also provide zero deposit scheme with
higher equated monthly instalments (EMI).

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(4) Payment period and Rate of Interest : A wide range of options
are available. The repayment period ranges between 12 – 60
monthly instalments. The rate of interest is normally expressed
at a flat rate, the effective rate of interest is generally not
disclosed. In some schemes, the rate of interest is not
disclosed, instead the EMI associated with the different
repayment periods is mentioned. Most of the schemes provide
for easy repayment. They also provide for either a rebate for
prompt payment and charge for delayed repayment.
(5) Security: The security is generally in the form of a first charge
on the asset purchased. This known as primary security. In
additional, the bank may also insist on collateral security or
secondary security for securing the finance extended. Third
party guarantee may also be taken by the financers (banks).
The consumer cannot sell/pledge/hypothecate the assets to
other banks. The financing bank has sole right on the asset till
the loan and interest are fully repaid.

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(vii) Structure of Consumer Loans :
In order to attract consumers, lenders (banks) provide various
loan products containing different features. However, there are
three important aspects which are common to all consumer
loans. They are, (1) Loan Amount, (2) Interest charges for
the borrowed period, (3) Loan amount together with interest
to be repaid by the borrower in a given period by instalments.
In a hire purchase transaction, e.g. car loans, the legal
ownership is retained with the financier whereas in an
instalment credit e.g. Refrigerators, TVS, the ownership vests
with the buyer subject to unpaid vendor’s lien on such goods.
The repayment period varies between 36 and 60 months. The
moto followed by the finance companies is to entice the
customer with ‘Buy now and Pay later’ instead of ‘save now and
buy later’.

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(viii) Basis of Credit Evaluation :
While carrying out credit evaluation of a consumer, the
bank/finance company (NBFC) gives emphasis on three ‘C” of
lending, viz. Capacity, Capital and Character. Capacity and Capital
focuses on the ability of the borrower to repay. Character, on the
other hand, stresses on the willingness of the borrower to repay
by strictly following the repayment schedule stipulated by the
bank/finance company. The financing bank/finance company.
(a) Present/Future earnings potential of the individual and the
amount of surplus available for repayment.
(b) Past track record, social status and reputation of the individual.
(c) Existing level of debts, initial contribution/safety margin the
borrower can provide by means of tangible security so as to
protect the interest of the lenders in the form of third party
guarantees. (It is to be noted that consumer loans are costlier
than business loans)
(d) Credit Score (Credit rating from a Credit Rating Agency) is
preferred, although not mandatory.
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(ix) Regulation of Consumer Finance :
Consumer Finance provided to the automobile sector by the
Non-Banking Financial Companies (NBFCs) are governing by
the Reserve Bank of India’s regulations where the registration
of NBFC, maintenance of minimum Net Owned Funds and
Capital Adequacy on an ongoing basis are mandatory. For
Banks engaged in consumer finance, the Banking Regulation
Act and RBI guidelines are required to be strictly adhered to.

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THANK YOU

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