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MANAGEMENT OF FINANCIAL
SERVICES
UNIT 3
LEASING
Agreement between two parties – Leasing company or Lessor
and the User or Lessee – agreed period of time – on rental
basis – lessor is the owner
Essential elements of Leasing :-
1. Parties to the contract :-
2. Asset :-
3. Ownership Separated from user :-
4. Term of Lease :-
5. Lease Rental
6. Mode of termination of Lease :-
Classification of Leasing
Classification of
Leasing
Finance lease
and Operating
Lease
Sale and lease
back, and direct
lease
Direct Lease
Bipartite Lease
Direct Lease
Tripartite Lease
Single investor
lease and
leveraged lease
Domestic lease
and International
Lease
Domestic lease
International
lease
Import Lease
Cross Border
Lease
Steps Involved in Leasing Transactions
1 Lessee has to decide the asset required and select the suppler.
He has to decide specification, price, warranties, terms of
delivery, servicing etc.
2 Then enter an agreement with terms and conditions:-
a) The basic lease period during which the lease is irrecoverable.
b) The timing and amount of periodical rental payments during the
lease period.
c) Detail of any option to renew the lease or to purchase the asset
at the end of the period.
d) Details regarding payment of cost of maintenance and repairs,
taxes, insurance and other expenses.
3 After the agreement supply the assets and make payments to
the manufacturer.
Advantages of Leasing
A] To the Lessee :-
1. Financing of Capital goods :-
2. Additional source of Finance :-
3. Less Costly :-
4. Off Balance sheet Financing :-
5. Ownership preserved :-
6. Avoid conditionality :-
7. Flexibility in structuring of Rentals :-
8. Simplicity :-
9. Tax Benefits
10. Obsolescence Risk is Averted :-
B] To the Lessor :-
1. Full Security :-
2. Tax Benefit :-
3. High Profitability :-
4. Trading of Equity :-
5. High Growth Potential :-
Limitation of Leasing
Limitation of
Leasing
Restriction on
Use of
Equipment
Limitation of
Financial Lease
Loss of Residual
Value
Consequences of
Default
Understatement
of Lessee’s Asset
Double Sales Tax
Contents of lease Agreement
1. Description of the lessor, the lessee and the equipment.
2. Amount, time, and place of rental payment.
3. Time and place of equipment delivery.
4. Lessee’s responsibility for taking delivery and possession of the leased
equipment.
5. Lessee’s responsibility for maintenance, repairs, registration, etc and the
lessors rights in case of default by the lessee.
6. Lessee’s right to enjoy the benefits of the warranties provided by the
equipment manufacturer/ suppliers.
7. Insurance to be taken by the lessee on behalf of the lessor.
8. Variation in lease rentals if there is a change in certain external factors
like bank interest rates, depreciation rates.
9. Option of lease renewal for the lessee.
10. Return of equipment on expiry of the lease period.
11. Arbitration procedure in the event of dispute.
Structure of Leasing Industry in India
Structure of
Leasing Industry
in India
Private Sector
Leasing
Pure leasing
companies
Hire purchase
and Finance
Companies
Subsidiaries of
Manufacturing
Group Companies
Public Sector
Leasing
Financial
Institution
Subsidiaries of
Banks
Other Public
Sector
Organization
Problems of Leasing
Problems of
Leasing
Unhealthy
competition
Lack of qualified
personnel
Tax
considerations
Stamp Duty
Delayed
Payment and
Bad Debts
HIRE PURCHASE
Method of selling goods – hire by Finance Company – amount in
periodical installments – ownership of creditor pass on hirer
on the full payment.
Features :-
1 Buyer takes possession of goods immediately and agrees to
pay the price in installments.
2 Each installment is treated as hire charges.
3 Ownership of goods passes on the hirer on the payment of
last installment.
4 If buyer make any default , seller has right reposes the goods
and forfeit the amount as a hire charges.
5 Hirer has right to terminate the agreement any time before
the property passes. He has option to return the goods but
he cannot recover the sums already paid
Hire Purchase Agreement
1. The description of goods in a manner sufficient to identity
them.
2. The hire purchase price of the goods.
3. The date of commencement of the agreement.
4. The number of installments in which hire purchase price is to
be paid, the amount and due date.
Difference Between Leasing and Hire Purchase
Leasing Hire Purchase
Ownership Rest with Lessor Ownership pass from creditor to
hirer
Method of
Financing
Financing business assets Business assets and consumer
articles
Depreciation Can not be claim by the lessee Can be claim by the hirer
Tax benefits Lease rental is tax deductible
expenses
Only interest is tax deductible
Salvage value Lessee can not enjoy salvage
value
Hirer enjoy salvage value
Deposit Lessee is not required 20% deposit is required
Rent- Purchase Rent Purchase
Extent of
Finance
100% Financing 20 to 25 % paid by the hirer
Maintenance Responsibility of Lessee Hirer himself
Reporting Not shown in Balance Sheet Asset shown in Balance Sheet
Bank credit for Hire Purchase Business
Procedure
Customer
Purpose
Amount
Period
Repayment
Security
Monitoring
and Control
DEBT SECURITISATION
Securitization of debt or asset refers to the process of liquidating
the illiquid and long term assets like loans and receivable of
financial institutions by issuing marketable securities against
them.
It is a technique by which a long term, non negotiable and high
valued financial assets like hire purchase is converted into
securities of small value which can be tradable in the market
just like shares.
Various stages involved in the working of securitization
Various
stages
Identification
Process
Transfer
Process
Issue Process
Redemption
Process
Credit Rating
Process
Benefits of Securitization
Benefits of
Securitization
Additional source
of fund
Greater
profitability
Enhancement of
Capital Adequacy
Ratio
Spreading of
Credit Risk
Lower cost of
Funding
Provision of
Multiple
Instrument
Higher rate of
return
Prevention of Idle
Capital
Bette than
Traditional
Instruments
Other Benefits
Securitization and Banks
Securitization and
Banks
Innovative and low
cost source of fund
Better capital
adequacy norms
Creation of more
credit
Increased
profitability
Too for Asset-
liability Mgmt.
& Risk Mgmt.
Causes for Unpopularity of Securitization in India
1. New concept :-
2. Heavy stamp duty and registration fees :-
3. Cumbersome Transfer Procedure :-
4. Difficult in Assignment of Debts :-
5. Absence of Standardized Loan Documentation :-
6. Inadequate Credit Rating Facility :-
7. Absence of Proper Accounting Procedures :-
8. Absence of proper Guidelines :-
HOUSING FINANCE
Mortgage loan provide against immovable property – Housing
and Urban Development Corporation (HUDCO) , Housing
Boards , LIC, Commercial Banks and Private housing finance
companies.
National Housing Bank
Establish in 1988 – subsidiary of RBI – Began its operation with
total capital of Rs. 170 crore – during 1989-90 issue bonds
amounted Rs. 60 crores – guarantee by Central Government
with interest rate 11.5% - in 1995- 96 capital of NHB was
raised Rs. 300 crore with additional capital contribution of Rs.
50 Crore by RBI.
Business of NHB
Subject to the provision of NHB Act , NHB is authorized to
transact all/any of the following kinds :-
1 Promoting, establishing, supporting of housing financing institutions.
2 Making of loans and advances or rendering any other form of financial
assistance, for housing activities.
3 Subscription to purchasing stocks, shares, bonds, debentures and
securities of every other description.
4 Undertaking research and survey on construction techniques.
5 Formulating schemes for the economically weaker section of society.
6 Organizing training program/ seminars on matters relating to housing.
7 Providing guidelines to HFI to ensure their growth on sound lines.
8 Providing technical/ administrative assistance to HFI.
9 Acting as agent of the central / state government or any authority under
RBI.
10 Any kind of business which the government may on the recommendation
of the RBI.
Housing Financial System
Housing Financial
System
Central and State
government
Housing and Urban
Development
Corporation (HUDCO)
Insurance organization
/ Corporation
Commercial Banks
Co-operative Banks
State Housing Finance
Societies (SHFS)
Housing Development
Finance Corporation
Ltd.(HDFC)

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Other Financial Services-Leasing and Hire Purchase; Debt Securitization; Housing Finance.

  • 2. LEASING Agreement between two parties – Leasing company or Lessor and the User or Lessee – agreed period of time – on rental basis – lessor is the owner Essential elements of Leasing :- 1. Parties to the contract :- 2. Asset :- 3. Ownership Separated from user :- 4. Term of Lease :- 5. Lease Rental 6. Mode of termination of Lease :-
  • 3. Classification of Leasing Classification of Leasing Finance lease and Operating Lease Sale and lease back, and direct lease Direct Lease Bipartite Lease Direct Lease Tripartite Lease Single investor lease and leveraged lease Domestic lease and International Lease Domestic lease International lease Import Lease Cross Border Lease
  • 4. Steps Involved in Leasing Transactions 1 Lessee has to decide the asset required and select the suppler. He has to decide specification, price, warranties, terms of delivery, servicing etc. 2 Then enter an agreement with terms and conditions:- a) The basic lease period during which the lease is irrecoverable. b) The timing and amount of periodical rental payments during the lease period. c) Detail of any option to renew the lease or to purchase the asset at the end of the period. d) Details regarding payment of cost of maintenance and repairs, taxes, insurance and other expenses. 3 After the agreement supply the assets and make payments to the manufacturer.
  • 5. Advantages of Leasing A] To the Lessee :- 1. Financing of Capital goods :- 2. Additional source of Finance :- 3. Less Costly :- 4. Off Balance sheet Financing :- 5. Ownership preserved :- 6. Avoid conditionality :- 7. Flexibility in structuring of Rentals :- 8. Simplicity :- 9. Tax Benefits 10. Obsolescence Risk is Averted :- B] To the Lessor :- 1. Full Security :- 2. Tax Benefit :- 3. High Profitability :- 4. Trading of Equity :- 5. High Growth Potential :-
  • 6. Limitation of Leasing Limitation of Leasing Restriction on Use of Equipment Limitation of Financial Lease Loss of Residual Value Consequences of Default Understatement of Lessee’s Asset Double Sales Tax
  • 7. Contents of lease Agreement 1. Description of the lessor, the lessee and the equipment. 2. Amount, time, and place of rental payment. 3. Time and place of equipment delivery. 4. Lessee’s responsibility for taking delivery and possession of the leased equipment. 5. Lessee’s responsibility for maintenance, repairs, registration, etc and the lessors rights in case of default by the lessee. 6. Lessee’s right to enjoy the benefits of the warranties provided by the equipment manufacturer/ suppliers. 7. Insurance to be taken by the lessee on behalf of the lessor. 8. Variation in lease rentals if there is a change in certain external factors like bank interest rates, depreciation rates. 9. Option of lease renewal for the lessee. 10. Return of equipment on expiry of the lease period. 11. Arbitration procedure in the event of dispute.
  • 8. Structure of Leasing Industry in India Structure of Leasing Industry in India Private Sector Leasing Pure leasing companies Hire purchase and Finance Companies Subsidiaries of Manufacturing Group Companies Public Sector Leasing Financial Institution Subsidiaries of Banks Other Public Sector Organization
  • 9. Problems of Leasing Problems of Leasing Unhealthy competition Lack of qualified personnel Tax considerations Stamp Duty Delayed Payment and Bad Debts
  • 10. HIRE PURCHASE Method of selling goods – hire by Finance Company – amount in periodical installments – ownership of creditor pass on hirer on the full payment. Features :- 1 Buyer takes possession of goods immediately and agrees to pay the price in installments. 2 Each installment is treated as hire charges. 3 Ownership of goods passes on the hirer on the payment of last installment. 4 If buyer make any default , seller has right reposes the goods and forfeit the amount as a hire charges. 5 Hirer has right to terminate the agreement any time before the property passes. He has option to return the goods but he cannot recover the sums already paid
  • 11. Hire Purchase Agreement 1. The description of goods in a manner sufficient to identity them. 2. The hire purchase price of the goods. 3. The date of commencement of the agreement. 4. The number of installments in which hire purchase price is to be paid, the amount and due date.
  • 12. Difference Between Leasing and Hire Purchase Leasing Hire Purchase Ownership Rest with Lessor Ownership pass from creditor to hirer Method of Financing Financing business assets Business assets and consumer articles Depreciation Can not be claim by the lessee Can be claim by the hirer Tax benefits Lease rental is tax deductible expenses Only interest is tax deductible Salvage value Lessee can not enjoy salvage value Hirer enjoy salvage value Deposit Lessee is not required 20% deposit is required Rent- Purchase Rent Purchase Extent of Finance 100% Financing 20 to 25 % paid by the hirer Maintenance Responsibility of Lessee Hirer himself Reporting Not shown in Balance Sheet Asset shown in Balance Sheet
  • 13. Bank credit for Hire Purchase Business Procedure Customer Purpose Amount Period Repayment Security Monitoring and Control
  • 14. DEBT SECURITISATION Securitization of debt or asset refers to the process of liquidating the illiquid and long term assets like loans and receivable of financial institutions by issuing marketable securities against them. It is a technique by which a long term, non negotiable and high valued financial assets like hire purchase is converted into securities of small value which can be tradable in the market just like shares.
  • 15. Various stages involved in the working of securitization Various stages Identification Process Transfer Process Issue Process Redemption Process Credit Rating Process
  • 16. Benefits of Securitization Benefits of Securitization Additional source of fund Greater profitability Enhancement of Capital Adequacy Ratio Spreading of Credit Risk Lower cost of Funding Provision of Multiple Instrument Higher rate of return Prevention of Idle Capital Bette than Traditional Instruments Other Benefits
  • 17. Securitization and Banks Securitization and Banks Innovative and low cost source of fund Better capital adequacy norms Creation of more credit Increased profitability Too for Asset- liability Mgmt. & Risk Mgmt.
  • 18. Causes for Unpopularity of Securitization in India 1. New concept :- 2. Heavy stamp duty and registration fees :- 3. Cumbersome Transfer Procedure :- 4. Difficult in Assignment of Debts :- 5. Absence of Standardized Loan Documentation :- 6. Inadequate Credit Rating Facility :- 7. Absence of Proper Accounting Procedures :- 8. Absence of proper Guidelines :-
  • 19. HOUSING FINANCE Mortgage loan provide against immovable property – Housing and Urban Development Corporation (HUDCO) , Housing Boards , LIC, Commercial Banks and Private housing finance companies. National Housing Bank Establish in 1988 – subsidiary of RBI – Began its operation with total capital of Rs. 170 crore – during 1989-90 issue bonds amounted Rs. 60 crores – guarantee by Central Government with interest rate 11.5% - in 1995- 96 capital of NHB was raised Rs. 300 crore with additional capital contribution of Rs. 50 Crore by RBI.
  • 20. Business of NHB Subject to the provision of NHB Act , NHB is authorized to transact all/any of the following kinds :- 1 Promoting, establishing, supporting of housing financing institutions. 2 Making of loans and advances or rendering any other form of financial assistance, for housing activities. 3 Subscription to purchasing stocks, shares, bonds, debentures and securities of every other description. 4 Undertaking research and survey on construction techniques. 5 Formulating schemes for the economically weaker section of society. 6 Organizing training program/ seminars on matters relating to housing. 7 Providing guidelines to HFI to ensure their growth on sound lines. 8 Providing technical/ administrative assistance to HFI. 9 Acting as agent of the central / state government or any authority under RBI. 10 Any kind of business which the government may on the recommendation of the RBI.
  • 21. Housing Financial System Housing Financial System Central and State government Housing and Urban Development Corporation (HUDCO) Insurance organization / Corporation Commercial Banks Co-operative Banks State Housing Finance Societies (SHFS) Housing Development Finance Corporation Ltd.(HDFC)