PRESENTATION ON HIRE PURCHASE AND LEASING

BY MANOJ.K

Hire purchase

Hire Purchase is an agreement to hire an asset over a predefined period with an option to purchase as the end of the agreement. 

With a hire purchase agreement, after all the payments have been made, the business customer becomes the owner of the equipment. This ownership transfer either automatically or on payment of an option to purchase fee

Features Under hire purchase system, the buyer takes

possession of goods immediately & agrees to pay the total hire purchase price in instalments

Each instalments is treated as hire charges The ownership of goods passes from buyer to

seller on the payments of the instalments   In case the buyer makes any default in

payments of any instalments the seller has right to reposses the goods  

Normally a deposit is requested i.e. 10% Funding Period- periods are normally

between 3-7 years. 

Rather than pay for the asset outright using cash, it can often make sense for businesses to look for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business.The most common sources of medium term finance for investment in capital assets are Hire Purchase and Leasing.

Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments.

Many kinds of business asset are suitable for financing using hire purchase or leasing, including:

- Plant and machinery- Business cars- Commercial vehicles- Agricultural equipmentm..- Hotel equipment- Medical and dental equipment- Computers, including software packages -Office equipment

BANKS & HIRE PURCHASE BUSINESSThrough a recent notification issued on

7.9.1990 under clause(0) of sub section (1) of section 6 of banking regulation act ,1949 the government of India has permitted banks to engage in hire purchase business. Though the statutory framework now enables the banks to carry on hire purchase business, & to set up subsidiaries for undertaking such business the Reserve Bank of India is of the view that in the public interest & in the interest of banking policy

GUIDELINES FOR BANKS AS FAR AS HIRE PURCHASE BUSINESS IS

CONCERNED

I. For the present, banks shall not themselves

undertake directly (i.e, departmentally) the

business of hire purchase

II. Banks which have set up subsidiaries (i.e, a

company in which it holds not less than 51% of the

shares ) for the business of equipment ,

leasing ,merchant banking etc, may undertake the

hire purchase business either through such a

subsidiary or through a separate subsidiary.

Banks setting up a subsidiary for the purpose of carrying

hire-purchase business or through the existing subsidiaries

should furnish such information in such form at such time

as the Reserve Bank may require from time to time

While banks may invest in shares of other hire-purchase

companies within the limits specified in section 19(2) of

Banking Regulation act ,1949 with the Reserve Banks ,

prior approval they shall not act as promoters of such

companies

Standard provisions according to HP ACT 1959 To be valid, hire purchase agreements must be in writing and signed by

both parties. They must clearly set out the following information in a print

that all can read without effort:

a clear description of the goods

the cash price for the goods

the HP price, i.e., the total sum that must be paid to hire and then

purchase the goods

the deposit

the monthly installments and

a reasonably comprehensive statement of the parties' rights (sometimes

including the right to cancel the agreement during a "cooling-off" period).

The right of the hirer to terminate the contract when he feels like doing

so with a valid reason

The hirer's rightsTo buy the goods at any time by giving notice to the

owner and paying the balance of the Hire purchase price To return the goods to the owner — this is subject to the

payment of a penalty to reflect the owner's loss of profit With the consent of the owner, to assign both the benefit

and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating

Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.

The hirer's obligations

The hirer usually has the following obligations:

to pay the hire installments to take reasonable care of the goods (if the

hirer damages the goods by using them in a non-standard way, he or she must continue to pay the installments and, if appropriate, compensate the owner for any loss in asset value)

to inform the owner where the goods will be kept.

The owner's rights The owner usually has the right to terminate

the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner

to forfeit the deposit to retain the installments already paid and

recover the balance due to repossess the goods (which may have to be

by application to a Court depending on the nature of the goods and the percentage of the total price paid)

to claim damages for any loss suffered.

Advantages of Hire Purchasing

Cash flow: payment by instalments.

Writing down allowances apply.

Hire purchase is an alternative funding line to bank overdrafts

Attracts fixed rate interest.

Others same as Outright Purchase.

Disadvantage of hire purchasing

Inflexible: difficult to escape the outstanding settlement if say, a vehicle is no longer required.

High deposit compared to contract hire.

Business hire purchase appears as a debt on the balance sheet which could inhibit future borrowing.

More expensive than contract hire

Burden of controlling and running fleet

LEASING INTRODUCTION

Leasing, as a financing concept, is an arrangement between two parties, the leasing company or lessor and the user or lessee, whereby the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent.

The rentals are predetermined & payable at a fixed interval of time, according to conveniences of the parties.

DEFINATION

DICTIONARY OF BUSINESS AND MANAGEMENT

‘lease is a form of contract transferring the use or occupancy of land, space, structure, in consideration of a payment, usually in the form of a rent’

JAMES C. VAN HORNE ‘lease is a contract whereby the owner

of an asset grants to another party the exclusive right to use the asset usually for an agreed period of time for the payment of rent’

There are a variety of types of leasing arrangement:Finance Leasing

Operating Leasing

Finance LeasingThe finance lease or 'full payout lease' is closest to the

hire purchase alternative. The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease.

Although the business customer does not own the equipment, they have most of the 'risks and rewards' associated with ownership. They are responsible for maintaining and insuring the asset and must show the leased asset on their balance sheet as a capital item.

When the lease period ends, the leasing company will usually agree to a secondary lease period at significantly reduced payments. Alternatively, if the business wishes to stop using the equipment, it may be sold second-hand to an unrelated third party. The business arranges the sale on behalf of the leasing company and obtains the bulk of the sale proceeds

Operating LeasingIf a business needs a piece of equipment for a

shorter time, then operating leasing may be the answer. The leasing company will lease the equipment, expecting to sell it secondhand at the end of the lease, or to lease it again to someone else. It will, therefore, not need to recover the full cost of the equipment through the lease rentals.

This type of leasing is common for equipment where there is a well-established secondhand market (e.g. cars and construction equipment). The lease period will usually be for two to three years, although it may be much longer, but is always less than the working life of the machine.

Assets financed under operating leases are not shown as assets on the balance sheet. Instead, the entire operating lease cost is treated as a cost in the profit and loss account.

Difference between HP & LEASING1) ownership in a contract of lease ,the owner ship

rests with the lesser throughout & the lessee ( hirer ) has no option to purchase the goods .

2) Method of financing leasing is a method of financing business assets whereas hire purchase is a method of financing both business assets & consumer articles .

3) Depreciation in leasing, depreciation & investment allowance can not be claimed by the lessess, in hire purchase, deprecation & investment allowance can be claimed by the hirer.

4) Tax benefit the entire lease rental is tax deductible expenses .only the interest component of hire purchase instalments is tax deductible

Salvage value the lessee, not being the owner of the asset , does not enjoy the salvage value of the asset. The hirer, in purchase, being the owner of the asset, enjoys salvage value of the asset

Deposit lessee is not required to make any deposit whereas 10% deposit is required in hire purchase

Maintenance the cost of maintenance of the hired asset is to be borne by the hirer himself. in case of finance lease only, the maintenance of leased assets is the responsibility of the lessee.

Mutual benefit financial companies or nidhis, as they are known in India are public limited joint stock companies operating mainly in south India, particularly in tamilnadu . they are old institutions some of which have existed for 75 to 100 years.

Most of them issue shares of denomination of Re one and no one except promoters and directors can hold more than one share.

They have a large membership varying from 1,000 to 2,00,000. yet their share capital is very small.

The sources of their funds are share capital, deposits from their members, and deposits from the public.

MUTUAL BENEFIT FINANCIAL COMPANIES

Fixed depositRecurring deposits

Unlike other NBFIs, nidhis also accept demand deposits to some extent. they also borrow from banks . they may float special schemes for widows, pensioners, etc.

THE DEPOSITS THEY ACCEPT ARE

To advance loans to the members for house construction or repairs, marriages, redemption of old debts, meeting medical expenses, and so on.

FUNCTIONS OF NIDHIS

The loans are usually secured loans, given against the security of tangible assets such as house property , gold jewellery, or against shares of companies, LIC policies, fixed deposits, and so on. The terms on which loans are given are quite moderate. 1.They offer saving schemes which are linked with

assurances to make credit available when required by savers.

2.They make credit available to those whom commercial banks may hesitate to give credit or whom commercial banks are not able to reach.

3.They possess characteristics such as their local character, easy approach ability, and absence of cumbersome procedures, which make them suitable institutions for small areas.

4.Interest rates on their deposits and loans are comparable to those of commercial banks, and they work on sound principles of banking.

LOANS

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