INDIAN FINANCIAL SYSTEM

M. COM SEMESTER II

LEASING AND HIRE PURCHASE

Dr. GEETIKA T. KAPOOR

Department Of Commerce
Leasing and
Hire purchase
DEFINITION OF LEASING

Lease is a contract whereby 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.
The subject of leasing falls in the category of finance.
• Leasing has grown as a big industry in the USA and UK and
spread to other countries during the present century.
• 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.
• Lease as a concept involves a contract whereby ownership, financing
and risk taking of any equipment or asset are separated and shared
by two or more parties.
• Thus, the lesser may finance and lessee may accept risk through the
use of it while a third party may own it.
• Alternatively, the lesser may finance and own it while the lessee
enjoys the use of it and bears the risk.
FEATURES OF LEASING

• 2 Parties
•  Selection of an asset
•  Purchase of an asset
•  Use of the asset
•  Rentals and installments payment
•  Recovering the cost of an asset.
•  Option of acquiring ownership of the asset.
• 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.
LEASE FINANCING

• Lease financing is one of the important sources of medium- and long-

term financing where the owner of an asset gives another person,
the right to use that asset against periodical payments. The owner of
the asset is known as lessor and the user is called lessee.
• The periodical payment made by the lessee to the lessor is known as
lease rental. Under lease financing, lessee is given the right to use
the asset but the ownership lies with the lessor and at the end of the
lease contract, the asset is returned to the lessor or an option is
given to the lessee either to purchase the asset or to renew the lease
agreement.
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.
PROCESS OF LEASING

provides assets for

use for an agreed
time period.

LESSER LESSEE

pays lease rentals

for using the asset.
TYPES OF LEASE

FINANCIAL LEASE OPERATING LEASE

• In an operating lease, risk and
• Finance lease, also known as Full rewards are not transferred
Payout Lease, is a type of lease completely to the lessee. The term
wherein the lessor transfers of a lease is very small compared to
substantially all the risks and the finance lease. The lessor
rewards related to the asset to the depends on many different lessees
lessee. Generally, the ownership is for recovering his cost. Ownership
transferred to the lessee at the end along with its risks and rewards lies
of the economic life of the asset. with the lessor. Here, a lessor is not
The lease term is spread over the only acting as a financier but he
major part of the asset life. Here, a also provides additional services
lessor is only a financier. An required in the course of using the
example of a finance lease is big asset or equipment. An example of
industrial equipment. an operating lease is music system
leased on rent with the respective
technicians.
SALE AND LEASE BACK- DIRECT LEASE

• In the arrangement of sale and • A direct lease is a simple lease

leaseback, the lessee sells his where the asset is either owned
asset or equipment to the lessor by the lessor or he acquires it. In
(financier) with an advanced the former case, the lessor and
agreement of leasing back to equipment suppliers are one
the lessee for a fixed lease and the same person and this
rental per period. It is exercised case is called ‘bipartite lease’. In
by the entrepreneur when he a bipartite lease, there are two
wants to free his money, parties. Whereas, in the latter
invested in the equipment or case, there are three different
asset. parties viz. equipment supplier,
lessor, and lessee. And it is
called a tripartite lease. Here,
equipment supplier and lessor
are two different parties.
SINGLE INVESTOR LEASE- LEVERAGED LEASE

• Single investor lease, there are • Leveraged lease, on the other

two parties – lessor and lessee. hand, has three parties – lessor,
The lessor arranges the money lessee, and the financier or
to finance the asset or lender. Equity is arranged by the
equipment by way of equity or lessor and debt is financed by
debt. The lender is entitled to the lender or financier. Here,
recover money from the lessor there is a direct connection of
only and not from the lessee in the lender with the lessee and
case of default by a lessor. in a case of default by the lessor.
Lessee is entitled to pay the The lender is also entitled to
lease rentals only to the lessor. receive money from the lessee.
Such transactions are generally
routed through a trustee.
DOMESTIC AND INTERNATIONAL LEASE- SUB LEASE

SUB LEASE
• When all the parties to the lease • A sublease is a rental agreement
agreement reside in the same where the original lessee(tenant)
country, it is called domestic lease. rents out the premises to another
• The International lease is of two person called the sub-tenant or sub-
types – Import Lease and Cross- lessee. The new tenant gets few
Border Lease. When lessor and lessee rights as the sub-lessee. The original
reside in the same country and tenant (lessee) can only give those
equipment supplier stays in a rights to the new tenant (sub-lessee)
different country, the lease which he has got from the original
arrangement is called import lease. landlord (lessor). He cannot pass on
When the lessor and lessee are more rights of use on the property.
residing in two different countries The flow of rent is from the sub-
and no matter where the equipment lessee to the lessee and the
supplier stays, the lease is called lessor/owner. The risk of rent is
cross-border lease. always mainly borne by the lessee. In
case the sub-lessee is unable to make
full or timely payment to the original
lessee, the lessor is still entitled to his
timely rents and the risk is borne by
the lessee.
Advantages of Lease Financing
To Lessee:
• Use of Capital Goods:
A business will not have to spend a lot of money
At present leasing activity shows an increasing for acquiring an asset but it can use an asset by
trend. Leasing appears to be a cost-effective paying small monthly or yearly rentals.
alternative for using an asset.
Tax Benefits:
To Lessor:
A company is able to enjoy the tax advantage on
• Assured Regular Income: lease payments as lease payments can be
Lessor gets lease rental by leasing an asset during deducted as a business expense.
the period of lease which is an assured and regular • Cheaper:
income.
Leasing is a source of financing which is cheaper
• Preservation of Ownership: than almost all other sources of financing.
In case of finance lease, the lessor transfers all the • Technical Assistance:
risk and rewards incidental to ownership to the
lessee without the transfer of ownership of asset Lessee gets some sort of technical support from
hence the ownership lies with the lessor. the lessor in respect of leased asset.
• Benefit of Tax: • Inflation Friendly:
As ownership lies with the lessor, tax benefit is Leasing is inflation friendly, the lessee has to pay
enjoyed by the lessor by way of depreciation in fixed amount of rentals each year even if the cost
respect of leased asset. of the asset goes up.
• High Profitability: • Ownership:
The business of leasing is highly profitable since After the expiry of primary period, lessor offers the
the rate of return based on lease rental, is much lessee to purchase the assets— by paying a very
higher than the interest payable on financing the small sum of money.
asset.
 Disadvantages of Lease Financing

To Lessor: To Lessee:
• Unprofitable in Case of Inflation: • Compulsion:
Lessor gets fixed amount of lease rental Finance lease is non-cancellable and even if
every year and they cannot increase this a company does not want to use the asset,
even if the cost of asset goes up. lessee is required to pay the lease rentals.
• Double Taxation: • Ownership:
Sales tax may be charged twice: The lessee will not become the owner of the
First at the time of purchase of asset and asset at the end of lease agreement unless
second at the time of leasing the asset. he decides to purchase it.
• Costly:
• Greater Chance of Damage of Asset:
Lease financing is more costly than other
As ownership is not transferred, the lessee sources of financing because lessee has to
uses the asset carelessly and there is a great pay lease rental as well as expenses
chance that asset cannot be useable after incidental to the ownership of the asset.
the expiry of primary period of lease.
• Understatement of Asset:
As lessee is not the owner of the asset, such
an asset cannot be shown in the balance
sheet which leads to understatement of
lessee’s asset.
Car leasing is something that recently
became popular in India.
...
There is usually a down payment but
because of the ever so increasing
competition, a lot of companies offer a
zero down payment system.
•ORIX. ...
•Mahindra Finance. ...
•AVIS Leasing. ...
•ALD Leasing. ...
•SMAS Auto Leasing India PVT LTD.
Meaning of Hire-Purchase

• Hire purchase is governed by the Hire Purchase Act,1972.It is a special

system of credit purchase and sale. In this buyer pays the price in
installments i.e. monthly ,quarterly or yearly etc. and also some amount of
interest.
• Goods are delivered to the buyer at the time of hire purchase agreement but
buyer will become the owner of goods only on the payment of the last
installment. Such installments are to be treated as hire of these goods until a
certain fixed amount has been paid ,when these goods become the
property of the hire.
• Either the buyer or the seller has a right to terminate the agreement at any
time before the property so passes. Every agreement shall be in writing and
signed by all the parties thereto.
• In the case of default, in the payment by the buyer, the seller has got a right
to repossess the goods, as ownership lies with the seller, till the payment of
last installment.
• The buyer cannot pledge, sell or mortgage the assets as he is not the owner
of the assets till the last payment is made.
FEATURES OF HIRE PURCHASE

 Credit purchase
 Installment payment
 Possession at time of agreement
 Ownership till last installment
 Right to use goods as a bailer
 Termination of the agreement
 Ownership of goods after all installments
payment.
INSTALLMENT CREDIT system

 Installment credit, also called Installment Plan, or

Hire Purchase Plan in business, credit that is
granted on condition of its repayment at regular
intervals, or instalments, over a specified period of
time until paid in full.
 The goods are advanced to the purchaser after
making initial fractional payment called a down
payment.
ADVANTAGES AND DISAVANTAGES OF HIRE
PURCHASE
•  Spread the cost of •  Personal debt
finance. •  Final payment
•  Interest free credit.
•  Bad credit
•  Higher acceptance •  Creditor enhancement.
rates.
•  Repossession rights.
•  Sales
•  Debt solutions
 LEASING HIRE PURCHASE
OWNERSHIP OF ASSET Ownership lies with the The hirer has the
lesser. The lessee has option to purchase.
the right to use the The hirer becomes the
equipment and does owner of the
not have an option to assets/equipments
purchase. immediately after the
installment is paid.
DEPRECIATION The depreciation is Here, the depreciation
claimed as an claim is allowed to the
expense in the books hirer.
of lesser.

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 is
life. utilized.
 LEASING HIRE PURCHASE
DURATION Lease agreements are These agreements are
generally done for done mostly for shorter
longer duration and duration and cheaper
for bigger assets like assets like hiring a car,
land, property etc. machinery etc.

TAX IMPACT The total lease rentals In hire purchase, the

are shown as the hirer claims the
expenditure by the depreciation of asset
lessee in the lease as an expense.
agreement.
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.
 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 payment
agreement is like a system, the agreement
contract of hire is like a contract of
though later on it may credit purchase.
become a 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.
TOP 10 LEASING AND HIRE PURCHASE
COMPANIES IN INDIA

Bajaj Finance

M&M Financial

Shriram Trans

Shriram City

Cholamandalam

Manappuram Fin

Magma Fincorp

Sundaram Fin

Capital Trust

SREI Infra
THANK YOU