Advantages & Disadvantages of 27-31
Legal Aspects of Leasing &
Content of Lease agreement
Types Of Lease
Lease Financing by Banks
Banks & Hire purchase
business & Bank Credit
Introduction, origin &
Difference between Leasing &
Features, Advantages &
Disadvantages of Hire
Comparisons between Buying & 48-52
Leasing is distinguished from most other forms of
finance by the fact that the financier (the lessor) is
the legal owner of the leased asset.
The asset user (the lessee) obtains the right to
use the asset in return for periodic payments
(lease rentals) to the lessor.
Leasing, as a financing concept, is an agreement
between two parties, the leasing company or
lessor and the user or lessee.
The rentals are predetermined and payable at
fixed intervals of time, according to the mutual
convenience of both the parties.
However, the lessor remains the owner of the
equipment over the primary period.
Definition: “A lease is a form of contract
transferring the use or occupancy of land, space,
structure or equipment in consideration of a
payment, usually in form of a rent”
Leasing is an important source of finance for the
lessee. Leasing Co. finance for:
1. Modernization of business
2. Balancing equipment
3. Cars and other vehicles and durables
4. Items entitled to 100% or 50% depreciation.
5. Assets which aren’t being financed by
Hire Purchase is the legal term for a contract, in
which persons usually agree to pay for goods in
parts or a percentage at a time.
When a sun equal to the original full price plus
interest has been paid, the buyer may then
exercise an option to buy the goods or return the
goods to the owner.
History of leasing dates back to 200 BC when
Sumerians leased goods.
Romans had developed a full body law relating to
lease for movable and immovable property.
Modern Leasing appeared first time in 1877 when
Bell Telephone Co. began renting telephones in
Since WW II, the use of leasing has been
greatly expanded and is constantly used for
new products and new industries.
Henry Scholfeld set up US Leasing
Corporation with a capital of $20,000 in May
The concept of financial leasing was
pioneered in India during 1973, First company
was set up by Chidambaram group in 1973.
The origin of hire purchase system can be traced
back to the advent of industrial development in
Cowper wait & sons, a furniture dealer introduced
the system of Hire purchase in USA, in 1807.
Bishogate piano-maker introduced the system of
Hire purchase in 1846, in UK.
In India, Hire purchase finance started only after
However, it was only after WW II that it’s growth
assumed visible dimensions.
With the increase in economic activity, many NonBanking financing companies entered the scene in
the fifties and sixties.
“The delivery of goods by one person to
another, for some purpose, upon a contract
that they shall, when the purpose is
accomplished, be returned or otherwise
disposed of according to the directions of the
person delivering them. The person
delivering the goods is called the ‘bailor’ and
the person to whom they are delivered is
ING IMPLICATIONS FOR THE
LESSER AND LESSE
The lesser has the duty to deliver the asset to the
The lessee has the obligation to pay the lease
rentals as specified in the lease agreement
Description of the lessor, the lessee, and the
Amount, time, and place of lease rental payments.
Time and place of equipment delivery.
Lessee’s responsibility for taking delivery and
possession of the leased equipment.
Lessee’s responsibility for maintenance, repairs,
right to enjoy the benefits of the
warranties provided by the equipment
Insurance to be taken by the lessee on
behalf of the lesser.
Variation in lease rentals.
Option of lease renewal for the lease
Return of equipment on expiry of the lease
• Company-owned fleet that included various
makes & models of cars used by their sales staff
and senior managers
• High, uncontrolled and unpredictable
• Resale of used cars at the time of disposal was a
challenge. Unpredictable resale values!
• Decisions on choice of models not based on total
cost of ownership or usage
• Top and middle management had difference of
opinion on outsourcing of fleet
• Staff who owned company cars
• LeasePlan’s ‘Total Cost of Ownership’ (TCO)
model for vehicle outsourcing made sure only
efficient car models are used by the company;
thereby reducing costs significantly
• LeasePlan’s fixed monthly outflows provided the
immunity from maintenance and damage risks
• Resale risks for these vehicles are completely
managed by LeasePlan
• Existing fleet is outsourced to LeasePlan through
Sale and Lease Back
• All new vehicles are leased through LeasePlan
• All old vehicles (more than 4 years old) were
replaced with new leased vehicles from
• Savings! Company hived off their entire fleet to
LeasePlan. Cost reduction between 20- 25%
• Release of capital from non-core assets sitting
on company’s books
• Better accounting and peace of mind! Outflows
have become predictable and under control
• A definite cultural change in the staff
financial Lease is also known as Capital lease,
Long-term lease, Net lease & Close lease
Under a financial lease, the rate of lease would be
fixed based on the kind of lease, the period of
lease, periodicity of rent payment, & the rate of
depreciation & other tax benefits available.
The high cost of equipments such as office
equipment, diesel generators, machine tools,
textile machinery, containers, locomotives etc., is
leased under financial lease.
operating lease is also known as service lease,
short-term lease or true lease.
The lease is for a limited period may be in a
month, six months, a year or few years.
Normally, the lease rentals will be higher as
compared to other
leases on account of
short period of primary lease.
leverage lease is used for financing those assets
which require huge capital outlay.
The outlay for purchase cost is generally from ` 50
lakhs to ` 2 crore.
Asset has economic life of 10 years or more.
The Lessor acquires the assets as per the terms of
the lease agreement but finances only a part of the
total investment, say 20%-50%
A vendor leasing is one where the retail vendors tie up
with the lease finance companies which give financing
option to the customers of the vendors to purchase a
This type of lease is popular in auto finance.
their conventional lending
business, commercial banks have of late entered
into the business of financing lessor of
equipment or assets.
banker himself will not purchase equipment
or asset meant for leasing out, bank would
provide finance to the party
Lessee selects the equipment from the
manufacturer or distributor and negotiates the
terms of warranties, maintenance etc. Delivery,
installation, the price and terms of payments.
The lessor purchases the equipment either
directly from the vendor or from the lessee
following the delivery.
Lessor retains ownership of equipment while the
lessee enjoys the use.
The lease is for non-cancelable period, lessor
seeks to recover his investment with some profit
during that period.
Unlike in the case of financing lease, in an
operating lease, the lessor leases same asset to
different lessees successively after the
expiration of each contract.
A single contract does not result in recovery of
the capital cost in full.
This lease is usually for the period that is
significantly shorter than the economic life of
This lease is subject to cancellation by both
While various definition attempt to convey the
essential features of the lease, nuances exist.
There are long-term & Short-term leases.
There are leases with purchase option at the
end of the lease period and leases that do not
give the lessee such opportunity
The lessor also relies on the residual value of
the equipment to partly recover his investment.
In an operating lease, the lessor leases the
equipment to many lessees over the equipments
Operating lease, are usually confined to
equipments having an established used or have
an active second market
Permit alternative use of funds
A leasing arrangement provides a firm with the
use and control over asset without incurring huge
Faster and cheaper credit
Acquisition of assets under leasing agreement is
cheaper and faster than any other source of
Leasing arrangements may be tailored to the lessee’s
needs more easily than ordinary financing. The lessee
can utilize more funds for working capital needs.
Facilitates additional borrowings
Leasing may increase long-term ability to acquire
funds. The lessee can utilize more funds for working
Protection against obsolescence
A firm can avoid risk of obsolescence by entering into
operating lease agreement.
No restrictive covenants
The restrictive covenants which are usually
imposed under debenture or loan agreement are
absolutely absent in a lease agreement.
Hundred percent financing
Lease financing enables a firm to acquire the use of
an asset without having to make a down payment.
So, hundred per cent financing is assured to the
Boom to small firm
It is a boon to small firms and technocrats who are
able to make promoters contribution as required by
Lease is not a suitable mode of project finance
Certain tax benefits/incentives such as subsidy
may not be available on leased equipment.
The value of real assets such as land and
building may increase during lease period. In such
a case, the lessee loses the advantage of a
potential capital gain.
The cost of financing is generally higher than that
of debt financing.
A manufacturer who wants to discontinue a
particular line of business will not in a position to
terminate the contract except by paying heavy
In case of lease agreement, it is lessor who has
purchased the asset from the supplier and not the
If the lessee is not able to pay rentals regularly,
the lesser would suffer a loss particularly when the
asset is a sophisticated one and less liquid.
In the absence of exclusive laws dealing with the
lease transaction, several problems crop up
between lesser and lessee resulting in
unnecessary complications and avoidable
Higher Purchase is the hiring of goods at a stated
rental with the option to buy the goods at the end of
the hire purchase term.
The individual availing HP financing is the hirer and
the financier is the owner.
The rental payment is inclusive of the repayment of
principal as well as interest.
The hire purchaser acquires the goods immediately
on signing the hire purchase agreement but the
ownership of the same is transferred only when the
HP transactions are governed by the Hire Purchase Act
The HP Act sets out the forms and contents of HP
agreements, the legal rights, duties, obligations of hirers
The HP Act is administered by the Ministry of Domestic
Trade and Consumer Affairs.
Hire purchase should be distinguished from installment
sale wherein property passes to the purchaser with the
payment of the first installment.
HP agreements must be in writing and signed by both the
They must clearly lay out the following information:
A clear description of the goods
The cash price for the goods
The HP price
The monthly installments
Rights to parties
Possession of goods
Each installment is treated as hire charges.
Default in the payment
Terminate the agreement
Spread the cost of finance
Higher acceptance rates
The Government of India has permitted banks
to engaged in ‘hire purchase’ business on Sep7- 1990.
U/S 6 (1) (0) of the banking
regulation act 1949.
By this notification the banks are unable to carry
on hire purchase business, & to set up
subsidiaries for undertaking such business.
The subsidiary of commercial banks lends to the dealer
or to finance intermediary who has already financed
Articles sold by the dealers to the hire purchase contract.
The bank subsidiary has to take extra precaution,
looking to the nature of transaction under hire purchase
The bank subsidiary would make an assessment of the
standing and financial position of the dealer or of the
hire purchase of company.
The following guidelines should be made
applicable to banks in ‘hire purchase
Banks shall not themselves undertake directly the
business of hire purchase.
Only that banks which have set up subsidiaries for
the business equipment leasing, merchant banking
etc. may undertake hire purchase business.
An existing bank subsidiary that may here after
transact hire purchase business or set up new
subsidiary to transact such business.
Into consideration the principles of good
lending and carry out the procedures below
Monitoring & Control
When approached for hire purchase facility,
the subsidiary should take care to make the
assessment of the standing and financial
position of the business.
The type of goods being used to finance in
the hire purchase transaction is of great
Bank subsidiaries taking up hire purchase
business would be well to discourage small
The facility will normally be extended over to
Repayment is spread evenly or agreed over
the loan period. Its should be adoptable to
the hirer’s needs
Hire purchase advance is against
hypothecation of equipment / vehicles &
pledge of hundis / pronotes & lodgment of
hire purchase agreements.
The bank needs to control over the ongoing
The bank will keep a running total of these
amounts, returning agreements which have
become lapsed to their customers.
are many distinct differences between
buying and leasing, regardless if such a
transaction or agreement applies to property,
machinery, equipment or other assets.
The differences lies in that a lease is
conceptually very similar to the principles of
“borrowing”. The owner of the leased property is
not transferred under the terms of the lease
Purchasing , on the other hand, involves an
agreement that outlines the terms under which
the purchaser acquires ownership of the desired
item, property or asset. The purchase
Responsibility is a key factor.
In a purchase, the responsibility for the equipment falls
solely on the shoulders of the business owner.
The ultimate responsibility for the life of the equipment ,
after a purchase is complete, falls on the buyer.
In case of a purchase, the full value of the asset is
transferred to the purchaser, as the new owner.
In a lease, the lessor has no claim to the asset upon the
conclusion of a lease cannot be, in part or in whole be
recouped through a resale of the asset.
is a major consideration for
individuals deciding between buying and
In business, there exists a basic rule of thumb : “
If it appreciates, buy it. If it depreciates, lease it”.
instance of a lease the ultimate ownership
is retained by the lessor, it is in the lessor’s best
interest to maintain the asset in its best working
the event of a purchase, the full value of the
asset must be paid to the seller.
the event of a lease, however, only a portion
of the full value is assessed, typically around
50% however the figure varies based on the
duration and type of lease.
a corollary, a lessor could be granted the use
of an asset that could otherwise be cost
in hire purchase, the hirer
In lease, ownership
lies with the lesser.
has the option to
The lessee has the
purchase. The hirer
right to use the
becomes the owner of
equipment and does
not have an option to
immediately after the last
installment is paid.
METHOD OF FINANCING
Leasing is a method of
Hire Purchase is a
method of financing both
business assets and
In Leasing, depreciation
allowance cannot be
claimed by the Lesser.
In Hire Purchase
investment allowance can
be claimed by the Hirer.
The entire lease rental is
tax deductible expense.
Only the interest
components of the Hire
Purchase installment are
The hirer, in purchase
The lessee, not being the
being the owner of assets
owner of the assets and
and enjoy the salvage
does not enjoy the
value of the assets.
salvage value of the
In Leasing the Lessee is
not required to make any
In Hire Purchase, the
Hirer is required to
deposit 20% of the cost.
In Leasing, the Lessee
take the asset on a rent
In Hire Purchase the
asset is purchased by the
EXTENT OF FINANCE
Lease financing is
financing. It does not
required any immediate
down payment or margin
money by the Lessee.
In Hire Purchase, a
margin equal to 20-25%
of the cost of the assets
to be paid the Hirer.
In Leasing, the
maintenance of leased
asset is the responsibility
of the Lessee.
In Hire Purchase, the
cost of maintenance of
hired assets is to be
borne by the Hirer
The leased assets are
shown by way of footnote
The assets on hire
purchase is shown in the
balance sheet of the Hire.
Leasing today accounts for 6% of total capital
investment in India.
The 8th plan envisages capital formation of `8000
billion, 50% of which is to take place in the private
Leasing will play a significant role to account for at
least 15% of gross capital formation
The infrastructure financing is very crucial for
economic development and it can’t be accelerated
without leasing industry.
A Lease is a contract whereby the owner of the
assets transfers the right to use the assets against
payment of fixed rent which are called lease
The Lessor is the owner of the lease and Lessee
is the user of the asset.
Hire Purchase is a contract of owner & hirer and
after the contract, ownership is passed on the
hirer on payment of full amount.