The document discusses hire purchase financing provided by banks and financial institutions in India. It defines hire purchase as a method of selling goods where the buyer makes periodic installment payments and ownership passes after the final payment. Key points include: 1) Hire purchase allows buyers to obtain goods without full upfront payment and spreads costs over installments. Ownership remains with the seller until final payment. 2) Banks can provide hire purchase financing through subsidiaries and must follow guidelines like limiting direct involvement and investment amounts. 3) When providing credit, banks assess customers, goods being financed, amount, repayment period and obtain security like hypothecation of goods. Monitoring of repayments is also important.

1. 
Index
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No.
Particular
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No.
1 Meaning & Features.
2 Advantages & Disadvantage.
3 Hire Purchase Cost & Charactestics.
4 Legal Position.
5 Origin & Developments.
6 Banks & Hire Purchase Business.
7 Banks Credit For Hire Purchase Business.
8
Hire Purchase System Vs Installment Credit System.

2. The Indian Financial service industry has undergone a metamorphosis since
1990. During the late seventeenths and eighties the Indian financial Service industry was
dominated by commercial banks and other financial Institution which after to the
requirement of the Indian Industry. However after the economic liberalization, the entire
financial sector has undergone a sea saw change and now we are witnessing the
emergence of new financial product and services almost everyday. Thus the present
scenarios are characterized by financial innovation and financial creativity. Hire
purchase is one of the important services provided by banks and financial Institution.
Meaning:
Hire purchase is a method of selling goods. In a hire purchase transaction the
goods are let out on hire by a finance company (creditor) to the hire purchase customer
(hirer). The buyer is required to an amount in periodical installments during a given
period. The ownership of the property remains with the creditors and passes on to the
hirer on the payment of the last installment.
Definitions:
The mode of acquiring ownership of consumer durables by individuals and
productive assets by manufacturers, whereby the payments for the product is
conveniently spread over a period of two or three years, is known as Hire Purchase
System. Hire Purchase serves as convenient tools of credit in situation where it is
difficult to save in advance to make the purchase of expensive article but find it easier to
make regular payment, weekly or monthly, after they receive the article.
Features of hire purchase agreement
The Hire purchase agreement serves as the basis of Hire Purchase Financing Following
are some of the feature:
1. Under hire purchase system the buyer takes possession of goods immediately and
agrees to pay the total hire purchase price in installments.
2. Each installment is treated as hire charges.
3. The ownership of the goods passes from the seller to the buyer on the payment of
the installment.
4. In case the buyer makes any default in the payment of any instalment the seller
has the right to possess the goods from the buyer and forfeit the amount already
received treating it as hire charges.
5. The hirer has the right to terminate the agreement any time before the property
passes. That is he has a option to return the goods in which case he need not pay
installments falling due thereafter. However, he cannot recover the sums legally
represent hire charge on the goods in question.

3. Advantages of Hire Purchase System:
Hire Purchase Financing is an ideal mode of consumer and industrial credit in many
countries. Presently it has become a recognize methods of doing business whenever it in
involves the sale of durable and high-price goods. Hire Purchase finance offers the
following advantages.
1) No immediate cash: Hire purchase finance helps asset creation without having
to immediately part with the cash.
2) Easy Possession: The hire purchase financing system helps individual of limited
means to realize their dreams by facilitating the possession of article.
3) Economic Growth: Hire purchase finance helps the growth of the economy by
enhancing, investment and sales. In additions the mass sale of expensive and
durable goods also contributes to employment generation It helps mass production
and accelerates industrials developments and economic growth.
4) Thrift: Hire purchase inculcates/forces the saving habit on the buyer so that it
becomes possible to pay installment without defaults.
5) Relief to Buyer: It relieves the buyer of arranging for loans and advances, which
eventually involves financial burden to pay for the asset. It is considered to be
advantageous especially for the small sector farmer and industrials.
Disadvantages of Hire purchase System.
1) Available only to reputed buyers.
2) Induces mindless, indiscriminate and liberal purchase, which may lead to
bankruptcy.
3) Buyer has to mortgage future income.
4) Danger of buyer losing property during the depression as the value of the property
diminishes.
5) Danger of the buyer having to lose even the paid installments in the event if
default.
6) Higher prices thus making the purchase and expensive proposition.
7) Loss to seller in the even of default by the buyer, which may result in the seller
having to repossess an article, which may not fetch much market value.

4. Hire Purchase Cost:
Hire purchase finance is a lucrative form of financial investments. Although the
fields appears speculative provides a high interest of income to traders. In fact traders
earn doubles the nominal interest rates. Under the various system of consumer credit,
interest is calculated on the nominal rate that is added to the cash prices of the asset
purchased. The amount of the installment is determined by dividing the purchase price
with the number of the months of credit provided by the trader. Interest liability remains
the same throughout the period credit as interest is calculated on the fixed cost price of
the assets.
For the trader the higher the installments price us justified on the ground that there
is am inherent risks of default an repossessions, and the article not fetching a price
sufficient to pay for the unpaid installments.
Person with the regular and stable income or capacity to pay installment from
their current income or competent to enter into contract suitable in Hire purchase system.
It is not suitable for married women or minor person without independent sources of
income and personal prosperity. Foreigner and persons having no permanents resident in
the country are disqualified for such credit sale.
Characteristics:
Following are the charterstics features of hire purchase financing:
Popular Methods: Hire purchase is the most popular methods used for the sale
of expensive and durable goods on credit.
Retention Right: In a hire purchase, the seller sell on credit to buyer, the
security begins the seller's right to retain property rights on the goods sold.
Installments: The hire purchase price is paid in installment spread over a fixed
period.
Ownership: The property rights in goods sold remain with the seller, and the
buyer gets legal ownership of the article only after the payment of the last payments.
Agreements: The hire purchase transactions take place through a formal written
agreements signed by the seller and the buyer. The agreement provides for the
payment of the price in the form of fixed equitable installment spreads over a
specified period of time, the installment being in the nature if rental payables on the
fixed dates.
Possessions: the buyer is given possession of the goods on payment of the first
rental amount in cash, known as the down payments.
Default: When the buyer defaults, i.e. fail to either pay specified installment or
insure the article in accordance with the terms of the contract, the seller has the right

5. to terminate the hire purchase agreement and take repossession of the article. If the
agreement is terminated because of default, the hirer or buyer will have to claim to
the amount already paid, since that the amount is already treated as rental charges.
No Breach of trust: Under the hire purchase agreement the buyer simply hires
the articles. The buyer cannot commit any criminal breach of trust. If the buyer does
so and manages to sell the articles, the seller can recovers the article from the sub-
buyer, since there is no transfer of ownership.
Legal position
The Hire Purchase Act, 1972 defines a hire purchase agreement as, ‘an agreement
under which goods are let on hire and under which the hirer an option to purchase them
in accordance with the terms of agreement under which:
1. Payment is to be made in installments over a specified period.
2. The possession is delivered to the purchaser at the time of entering into a contract.
3. The property in the goods passes to the purchaser on payment of the last
installment.
4. Each installment is treated as hire charges so that if default is made in payment of
any installment, the seller is entitled to take away the goods.
5. The hirer/purchaser is free to return the goods without being required to pay any
further installments falling due after the return.
Hire purchase agreement
There is no prescribed from for a hire purchase agreement, but if has to be in
writing and signed by both the parties to the agreement.
A hire purchase agreement must contain the following particulars:
The description of goods in a manner sufficient to identify them.
The hire purchase price of the goods.
The date of commencement of the agreement.
The number of installments in which hire purchase price is to be paid, the amount,
and the due date.

6. Origin & development
The growth and development of hire purchase system can be traced back to the
advent of industrial development in U.K., Henry Moore, a Bishogate piano_ maker
introduced the system of hire purchase in 1846in U.K. Cowperwait & sons, a furniture
dealer introduced the hire purchase system in U.S.A. in 1807. The singer manufacturing
company started selling sewing machine under hire purchase agreement. The idea was
developed by wagon companies, which were formed to finance the purchase of wagon by
collieries. The wagon companies bought the wagons and then let them out collieries
under hire purchase agreement.
Manufacturer or dealers themselves financed all early hire purchase transactions.
Subsequently independent finance house came into existence to offer hire purchase of
wide variety of consumer articles, automobiles and industrial machinery on hire
purchase.
In India, hire purchase finance started only after I world war. However it was only
after II world war that its growth assumed visible dimension. The concept of hire
purchase was not quite popular in the pr independence period though a few were
endeavoring to increase the volume of their business with the provision of extending
credit to intending buyers. With the increase in economic activity, many Non- Banking
Financial Companies entered the scene in the fitness and six tees.
The pioneer in the field Commercial Credit Corporation Limited, Morton and
General Finance Limited and Investment Supply Limited. These companies were setup
predominantly to finance road transport sector. The volume of hire purchase business was
around Rs. 635 crores in 1987-88, out of which automobile accounted for 55 per cent.
Today about 25 per cent of sale of commercial vehicles is accounted by hire purchase. It
is estimated by the Federation Hire Purchase Association that the stock-on- hire of hire
purchase companies comprising corporate and non-corporate entities would be
approximately Rs. 3000 Cores now.
In addition to commercial vehicles, purchase of consumer articles like household
appliance, air conditioners, refrigerators, office furniture and equipment is financed
through hire purchase. In recent years, the consumer durable goods market is
experiencing an unprecedented boom. The growing Indian middle-class 100 to 150
million growing at a rate of 20 percent per annum and their willingness to mortgage the
future for to-days enjoyment have led to spectacular growth in hire purchase business.
The institutions engaged in the hire purchase business in organized sector include
commercial banks, co-operative banks, State Finance Corporations National Small
Industries Corporations and in the unorganized sector they comprise a large number of
partnership firms and individuals.
National Small Industries Corporation supplies machinery small-scale industry
under hire purchase. The Industrial Development Bank Of India indirectly participate in
financing hire purchase business by way of rediscounting usance bills/promotes arising
out of sale of indigenous machinery on hire purchase basis. The Industrial Credit and
Investment Corporation also have a discounting scheme of usance bills under hire
purchase scheme.

7. Banks and hire purchase business
Through a recent notification issued on 7.9.1990 under clause (0) of Sub Section
(1) of Section 6 of the Banking Regulation Act., 1949 the Government of India has
permitted banks to engage in ‘hire-purchase’ business. Through the statutory framework
now enables the banks to carry on hire purchase business, and to set up subsidiaries for
undertaking such business the Reserve Bank of India is of the view that in the public
interest and in the interest of banking policy; the following guidelines should be made
applicable to banks so far as hire-purchase business is concerned:
(1) For the present, banks shall not themselves undertake directly (i.e.,
departmentally) the business of hire purchase.
(2) 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. Other banks may set up subsidiaries to transact
hire-purchase business either exclusively or together with the business of
equipment leasing. Banks desirous of undertaking hire-purchase business through
an existing or new subsidiary as above, will require prior approval of the Reserve
Bank of India.
(3) An existing bank subsidiary that may hereafter transact hire-purchase business or
a new subsidiary set up to transact with business, as provided in clause(2) above,
shall engage itself in the financing of other companies or concerns engaged in
hire-purchase business.
(4) Investment of the bank in the shares of its subsidiary set up for undertaking
equipment leasing and/or hire-purchase business together with investment or the
bank in shares of other companies carrying on equipment leasing and/or hire
purchase business, shall not in the aggregate exceed 10 percent of the paid-up
capital and reserves of the bank.
(5) While banks may invest in shares of other hire-purchase companies within the
limits specified in Section19 (2) of the banking Regulation Act., 1949 with the
Reserves Banks., prior approval. They shall not act as promoters of such
companies.
(6) Any application to be made to the Controller of Capital Issues in connection with
the setting up of a new subsidiary or for subsequent issue of capital shall need
prior clearance form the Reserve Bank of India.
(7) Banks settings up a subsidiary for the purpose of carrying hire-purchase business
or through the existing subsidiaries should furnish such information in such form
and at such at time as the Reserve bank may required from time to time.

8. Banks Credit for Hire Purchase Business
The subsidiary of commercial banks lend to dealer or to finance intermediary who
has already financed articles sole by the dealer to the hirer under the hire purchase
contract. While considering proposal from a dealer or hire purchaser financing
companies, the bank subsidiaries has to take extra precaution looking to the particular
nature of transaction under the hire purchase contract.
When offered this type of business, the bank subsidiary would make an assessment of
the standing and financing position of the dealer of the hire purchase company and take
into consideration the principles of the stood lending and carry out the procedure below.
1) Customer: When approached for hire purchases facility the subsidiary should
take care to make the assessments of the standings and financial position of the
business customers.
2) Purpose: the type of the goods being used to finance in the hire purchase
transaction is of the great importance. In the event of default the bank may
reconsider repossessions the goods and selling them to cleat the advance. Thus if
the goods can be readily sold elsewhere (e.g. a relatively new car) them these
agreements are better security than those for (say camera) which will have lower
resale value.
3) Amount: Bank subsidiaries taking up hire purchase business would do well to
discourage small individuals loans. In order to ensure proper servicing and
monitoring it is also essential to have floor limit I the amount of individual hire
purchase transaction. While it may be amount of individuals hire purchase
transactions. While it may be about Rs. 50,000 for automobile sector, it may be
about Rs. 10,000 for consumer durables.
4) Period: The facility will normally be extended over to three years.
5) Repayment: Repayment are spread evenly or agreed over the loan period. The
repayment should be adaptable to the hirer needs. The repayment can usually be
tailor made suit the income generated from the use of asset so that it is self-
financing. Sometimes repayment holidays can be allowed and repayment is
delayed until the asset is operational or producing profit. To ensure timely
recovery in the case of car two wheeler and consumer durable financing it would
be preferable to have institutional tie-ups with employers/employees cooperative
societies for the which eligibility criteria cab be laid down.
6) Security: Technically hire purchase advance is against hypothecation of
equipment/vehicles and pledge of hundies/promotes and lodgment of hire
purchase agreement. The bank subsidiary will ask borrower to complete the
bank's form of security under an equitable/hypothecation charge. If the borrower
is a limited company which is not if sufficient strength to allow equitable facility

9. and if suitable security is not avaible it is normal to obtain a debenture over the
asset of the company under which a floating charge is obtained.
7) Monitoring and Control: the banks need to exercise control over the on-going
situation. A periodical certificate should be obtained from the finance company at
the monthly intervals stating the total amount of outstaying but excluding those
hire purchase agreement which have become in arrears and are more than suggest
that the particular hirer is an permanent default. The bank will keep a running
total of these amount returning agreement which have become lapsed to their
customer.
Safeguard:
The following important factor should be considered when granting credit for Hire
Purchase sale system.
 Perishability of goods.
 Capital resources of the trader for the investments.
 The Three C's of the buyer's financial and moral character, capacity and
capital.
 Degree of competitions to be met and stability of the trade.
 Duration of the credit a shorter period when the business is risks and a
longer period during the sales seasons with the usual period ranging from
the five to seven or ten years.

10. Hire purchase system is always confused with Installment credit system Following are
point which distinguish between them:
Hire Purchase System Installment Credit System
Actual Sale
Hire Purchase becomes an actual sale only
one the pavement of the last installment
The payment of the first installment is
sufficient to make Installment an outright
sale.
Legal Ownership
The buyer obtains possessions without
legal ownership until the last payment.
The buyer obtains both ownership and
possession immediately after the agreement
is executed and the first installment is paid
to the seller.
Hirer/owner
The buyer is merely hiring the article and
hence not its real owner
The buyer is the rightful owner on payment
of the first installment.
Right to sell
A Hire Purchase cannot sell the article
until the last hire a charge is paid.
The buyer can sell the article at any time.
Legal Protection
The seller gets maximum protection of the
law.
The buyer gets maximum protection by the
law.
Default
The buyer can lose both the article and the
entire amount paid if there is default.
No risk of loses to buyer even on default.
Seller's Ownership
The seller can get back ownership and
possessions if there is default.
The seller cannot repossess but has remedy
can sue buyer in the court.
Bad Debt
Limited risk of Bad debt High risks of Bad debts.