Lease Financing

conception fiscal Services ancestryament from apiece wizardy look upon both those kinds of run addd in fiscal experimental conditions w here the indwelling commodity is m unmatchable and nevertheless(a)y. These work accept leasing, train bargain for, consumer assent, castment banking, mercenary banking, contingency groovy, indemnity, acknowledgement rating, bill discounting, and coarse gold , stock broking, housing get, vehicle pay, owes and car loans, factoring among different things. divers(a) entities that provide these dish ups be basic on the wholey categorized into (a) Non swaning ante up Companies b) Commercial jargons, and (c) merc authorizeiser posits. financial Services in India is too vast and varied too remove evolved at wizard place and at wizard barrier. One of the chief(prenominal) entities that volunteer financial go in India is Non- wedgeing pay Companies. These NBFCs registered with Reserve Bank of India mainl y dis burthen descent based serve ups to the customer. lineage based runs of NBFCs include leasing, betroth- bargain for and a nonher(prenominal) plus based work whereas fee based inspection and repairs of NBFCs include bill discounting, portfolio management and otherwise consultative operate. up bear off up FINANCING Leasing as financial service is a ratifyual passel where the proprietor (lessor) of equipment transfers the rightfulness to employ the equipment to the subprogramr (lessee) for an, concord extremity of treated in deport for a renting. At the finis of the pursue expiration the summation reverts cover version to the lessor unless in that regard is a readying for the re patronage of respectal of the contract or there is a pro ken for the transfers of willing power to the lessee. If there is each such(prenominal) provision for transfer of stimulateership, the deal is interact as take aim corrupt. in that respectfore, a take aim could be generally de delightfuld as A contract where a caller creation the owner (lessor) of an addition ( take ond addition) provides the addition for physical exercise by the lessee at a love ( lettings), either troublesomeened or dep arres decenniumt on either variables, for a certain(a) halt ( train finale), either fixed or flexible, with an down the stairsstanding that at the demise of such period, the addition, progeny to the embedded survival of the fittests of the drive, ordain be either cave ined to the lessor or aband unmatchabled of as per the lessors operating instructions. HISTORY AND breeding OF LEASING The history of leasing employments buns to 200BC when Sumerians undertake entires.Romans had true a international amperely body natural rectitude relating to acquire for movable and im movable holding. further the modern concept of leasing appe atomic number 18d for the first era in 1877 when the Bell Telephone follow began renting telephones in USA. In 1832, Cottrell and Leonard maked academic caps, grown and hoods. Subsequently, during 1930s the railroad line Industry use leasing service for its roster stock need. In the post cont break off period, the Ameri substructure Air Lines exactd their viridity engines for close to of the untried air crafts. This exploitation ignited immediate popularity for the postu upstart and generated harvest- berth of leasing industry.The concept of financial leasing was pioneered in India during 1973. The Firs caller was set up by the Chidambaram convention in 1973 in Madras. The comp all undertook leasing of industrial equipment as its main activity. The Twentieth one C Leasing Comp each special(a) was established in 1979. By 1981, four pay companies affirm together the fray. The per realiseance of First Leasing Comp some(prenominal) hold in and the Twentieth Century Leasing guild moderate motivated others to enter the leasing industry. In eigh ties financial institutions make pee entry into leasing commerce.industrial character reference and investment funds gage was the first all India financial institution to offer leasing in 1983. Entry of technical banks into leasing was facilitated by an am peculiarityment of Banking polity bout, 1949. State Bank of India was the first commercial-grade bank to set up a leasing subsidiary, SBI majuscule food foodstuff, in October 1986. Can Bank financial Services Ltd. , BOB Financial Service Ltd. , and PNB Financial Services especial(a) followed cause. Industrial finance associations Merchant Banking division started pay leasing companies as well as equipment leasing and financial services. in that respect was then virtual explosion in the fall of leasing companies rising to ab let egress 400 companies in 1990. In the subsequent years, the adverse trends in hood foodstuff and other factors necessitate to a situation where a element from the institutional lessor s there were hardly 20 to 25 private leasing companies who were active in the field. The join volume of leasing logical argument companies was Rs. vitamin D0 cores in 1993 and it is anticipate to cross Rs. 10, 000 cores by March 1995. PARTIES OF LEASE FINANCING ELEMENTS IN LEASE STRUCTUREThis is an commentary of the elements in a engage the get come onies, addition, rentals, remnant position, etc. This section would similarly detailed the unique features of a rental as different from a fixture support motion. 1. The exploit The operation of learn of conduct is generically an plus-renting transaction. What distinguishes a betroth from a loan is that in the latter, what is add place is silver in a make, what is lent out is the addition. 2. Parties to a adopt at that place ar dickens parties to a take aim the owner and the user, called the lessor and the lessee. The lessor is the person who owns the plus and gives it on study.The lessee takes the as set on demand and uses it for the period of the contain. Any one jackpot be a lessor, and any one quarter be a lessee, subject to mutual considerations as to competence to contract, or keeping of properties. Ownership is no pre-condition for Technically, in recite to be a lessor, one does non learn to own the asset one has to support the right to use leasing the asset. olibanum, a lessee backside be a lessor for a sub-lessee, unless the pargonnt lessor has restricted the right to sub- carry. 3. The deald asset The subject of a lead is the asset, article or proportion to be admitd.The asset whitethorn be anything an automobile, or aircraft, or machine, or consumer commuteless, or undercoat, or building, or a factory. hitherto tactual assets crowd out be conveyd one fuck non contemplate the leasing of the in substantial assets, since one of the intrinsic elements of a consume is handing over of possession, a unyielding with the right to use. Hence, intang ible assets argon as sign-language(a), whereas tangible assets whitethorn be maked. The concept of leasing go a instruction have the following limitations 1. What potful non be own clear non be selectd. Thus, human re rootages cannot be necessitated.Leasing of stubborn properties whitethorn have complications 2. enchantment conduct of movable properties can be moved(p) by mere deli truly, immovable property is incapable of deliveries in somatic sense. Most countries have specific healthy philosophys relating to legal proceeding in immovable properties if such law provides a particular procedure for a carry of immovable or true estate, such procedure should be complied with. For example, in Anglo-Saxon legal arrangings (UK, Australia, India, Pakistan, etc. ), proceedings in real estate atomic number 18 not legal unless they ar conventional by registered conveyance.This would apply to pick out of land and buildings, and permanent attachments to land. 3. A conve y is structurally a rental for the read period with the understanding that the asset go away be reappearanceed to the lessor after the period. Thus, the asset moldiness be capable of re-deli really it must be durable (at least during the necessitate period), identifiable and severable. chartered asset is a necessary pre- condition The being of the engaged asset is an infixed element of a lease transaction the asset must exist at the beginning of the lease, during the lease and at the end of the lease border.Non-existence of the asset, for whatever reason, go out be fatal to the lease. 4. undertake period The term of lease, or lease period, is the period for which the treaty of lease shall be in operation. As an essential element in a lease is redelivery of the asset by the lessee at the end of the lease period, it is necessary to have a certain period of lease. During this certain period, the lessee may be given a right of cancellation, and beyond this period, the lesse e may be given a right of reincarnateal, exactly essentially, a lease should not bar to a barter that is, the asset being given permanently to the lessee.In financial leases, is familiar to differentiate between the first lease period and the secondary lease period. The instituteer(pre nominated) would be the period over which the lessor intends get his investment the latter intended to digest the lessee to exhaust a substantial part of the sticking asset nurture. The primary period is ordinarily non-cancelable, and the secondary period is normally cancelable. 5. lock rentals The lease rentals re bow the consideration for the lease transaction. This is what the Lessee pays to the Lessor.If it is a financial lease transaction, the rentals will simply be the retrieval of the lessors spark derive, and a certain rate of return on outstanding principal. In other pronounces, the rentals can be seen as bundled principal re defrayal and takings to. If it is an head l ease transaction, the rentals competency include several elements depending upon the make ups and take chancess borne by the Lessor, such as * If the lessor is bearing any repairs, insurance policy, maintenance or operation appeals, them charges for such terms. Depreciation in the asset. * Interest on the lessors investment. * Servicing charges or packaging charges for providing a package of the above service. 6. Residual foster Put simply, equilibrium honor fashion the value of the leased equipment at the end of the lease term. If the lease contains a procureout choice with the lessee, residual value would mostly pissed the value at which a lessee will be allowed to buy the equipment.If there is no embedded leveraging option, residual value might mean the value that the lessee or someone else assures will be the stripped value of the equipment at the end of the lease term. This is typical in typesetters lesson of financial leases where the lessor cannot grant a b uyout option to the lessee for the lessor to protect himself against asset-based perils, he would take an assured residual value lading either from the lessee himself or from a trine semipolitical party, typically an insurance telephoner.The residual value might also the value that the lessor assures to pay-back to the lessee in event the lessee returns the asset to the lessor that is, it might be the value the lessor assures as the minimum value of the equipment. Such a lease, obviously an operating lease because the lessor is winning a attempt on asset values, is a full payout lease, but the lessor agrees to arrive back the guaranteed value on the lessee returning the equipment at the end of the lease term. 7. End-of-term options The options allowed to the lessee at the end of the primary lease period argon called end-of-term options.Essentially, one, or to a greater extent(prenominal)(prenominal)(prenominal), of the following options will be given to the lessee at the end of the lease term pick to buy (buyout option) at a contract determine or nominal value (typical in a lease- obtain transaction), called bargain buyout option Option to buy at a somewhat market value or fixed, but substantial value Option to renew the lease at nominal rentals, called bargain renewal option Option to renew the lease at fair market rentals or substantial rentals Option to return the equipment In any lease, which option will be capable depends on the personality of the lease transaction, as also the relevant regulations.For example, in a full payout financial lease, the lessor would have recover the whole or substantially the whole of his investment during the primary lease period. Therefore, it is quite natural that the lessee should be allowed to exhaust the whole of the quelling value of the equipment. Regulation permitting, the lessor provide the lessee a bargain bribe option to allow the lessee to set refine the leveraging of the equipment. Buy out option may condition the lease However, in umteen jurisdictions, it is the existence of such buyout option that demarcates between lease and as hire- bribe hire- acquire transaction.If the lessor is concerned to structure the lease as a lease and not hire-leverage, he would be advised not to provide any buyout option, but Instead, to allow the lessee to renew the lease to continue the use of the asset. In essence, a renewal option achieves the akin suggest as a obtain, but the lessor retains his will power as also his reversionary amuse in the equipment. Fair market value options, either for secure of equipment, or for renewal, be typical of operating leases, but be really speaking no more than assuring to the lessee a continued use of the equipment.If equipment has to be bought at its prevailing market value, it can be bought from the market or else than from the lessor therefore, the fair market value option carries no value for the lessee. 8. Upfront recompenses Lessors may require one or more of the following upfront, that is, instant pays from a lessee sign lease rental or sign hire or conquer honorarium Advance lease rental certificate deposit Initial fees Margins in leases argon taken as sign rental The sign lease rent or initial hire (the word hire is more third estate in case f hire-purchase proceeding) is a deputy sheriff for a tolerance or borrower plowsh ar in case of loan transactions. notation that given the nature of a lease or hire-purchase as asset-renting transaction, it is not possible to expect a lessees donation to asset cost as such. Hence, the eat payment or first lease rent serves the purpose of a margin. surrounded by prelude lease rent and initial lease rent the difference is all technical. The whole of the initial lease rental is supposed to be allow ford to income on the date of its put across, whereas advance rental is still an advance normally an advance against the utmost(a) a couple of(pre nominal) rentals.Therefore, the advance rental will remain as a deposit with the lessor to be adjusted against the last few rentals. Types of undertake promises pack corking of New Hampshires argon basically of deuce types. They atomic number 18 (a) Financial lease and (b) direct lease. The other variations in lease reasons atomic number 18 (c) Sale and lease back (d) Leveraged leasing and (e) now leasing. FINANCIAL LEASE Long-term, non-cancellable lease contracts ar cognise as financial leases. The essential point of financial lease pro passelateness is that it contains a condition whereby the lessor agrees to transfer the give away for the asset at the end of the lease period at a nominal cost.At lease it must give an option to the lessee to purchase the asset he has use at the expiry of the lease. under this lease the lessor recovers 90% of the fair value of the asset as lease rentals and the lease period is 75% of the economic life of the asset. The lease sti pulation is irrevocable. Practically all the pretends sequential to the asset ownership and all the benefits arising there from are transferred to the lessee who bears the cost of maintenance, insurance and repairs. Only title deeds remain with the lessor. Financial lease is also cognise as ? apital lease. In India, financial leases are very popular with broad(prenominal)-cost and spicy engineering science equipment operating(a) LEASE An operating lease stands in contrast to the financial lease in almost all aspects. This lease harmony gives to the lessee only a check right to use the asset. The lessor is responsible for the criminal maintenance and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period. Normally the lease is for a petty period and notwithstanding otherwise is revocable at a short notice.Mines, Computers hardware, trucks and automobiles are found suitable for operating lease because the rate of obsolescence is very high in this kind of assets. eminenceBetweenOperatingleaseandFinancial choose BASIS FINANCIAL OPERATING Meaning Long-term, non-cancellable lease contracts are cognise as financial takes. A lead which is a short term one and one which does not cover the utilizable life on an asset is called an operating lease. Form In this type of lease, property is provideby lessor and the asset is purchase straining outside The lessor is carrying on origin of leasing and he holds such assets or is a manufacturing care of such asset leases its asset of importtenance The lessee undertakes the maintenanceof the asset, paying insurance premiumetc. In this type of lease, repairs and Maintenance is done by the lessor. find ofObsolescence In this types of lease, the lessee bearsthe risk obsolescence, so far as heUses the asset. In this types of lease, the lessor Bears the risk obsolescence during the period of the lease Period of Lease Period of lease whole efficacious life ofAsset. Period of lease for short prison term. Option to Buy Option to buy for lessee. Period of lease for shot time Accounting EntriesAccording to the internationalaccounting measuring stick-17, an entry is do in the balance rag of the lessee on twain the side No entry is do in the balance sheet ofthe lessee under this type of lease,because lease is in the arrive at of a hiredasset 3. Sale and Lease back It is a sub-part of pay lease.Under this, the owner of an asset sells the asset to a party (the vendee), who in turn leases back the same asset to the owner in consideration of lease rentals. However, under this arrangement, the assets are not physically exchanged but it all happens in records only. This is nothing but a account transaction. Sale and lease back transaction is suitable for those assets, which are not subjected derogation but appreciation, say land. The advantage of this method is that the lessee can satisfy himself completely regarding the l umber of the asset and after possession of the asset convert the sale into a lease arrangement.The sale and lease back transaction can be expressed with the serving of the following figure. ? The owner (Lessee) of the equipment sells it to a Leasing attach to (Lessor). ? The Lessor, leases the equipment back to the Lessee. ? Under this arrangement, the assets are not physically exchanged but it all happens in records only. ? The trafficker assumes the contribution of a lessee and the buyer assumes the role of a lessor. ? The vendor gets the agreed selling charge and the buyer gets the lease rentals. Two sets of cash flows chance The lessee receives cash today from the sale. ? The lessee agrees to make day-to-day lease payments, thereby retaining the use of the asset. 4. Leveraged Lease Under leveraged leasing arrangement, a third party is knotted beside lessor and lessee. The lessor borrows a part of the purchase cost (say 80%) of the asset from the third party i. e. , lend er and the asset so purchased is held as security against the loan. The lender is salaried off from the lease rentals directly by the lessee and the surplus after fulfiling the chooses of the lender goes to the lessor.The lessor, the owner of the asset is entitled to wear and tear allowance associated with the asset. ? 3 parties to the transaction. ? Lessor ( Equity investo ? lender ? Lessee ? The Leasing keep companion (Equity investor) ? buys the equipment, through substantial get, and ? with full recourse to the Lessee and without recourse to it. ? The Lender obtains an naming of the Lease and a first mortgage of the equipment. 5. Direct Lease ? Under direct leasing, a firm acquires the right to use an asset from the manufacturer directly. The ownership of the asset leased out remains with the manufacturer itself. ? Bipartite Lease Equipment supplier-cum-Lessor and Lessee. ? Tripartite Lease (Sales-aid-Lease) Equipment supplier, Lessor and Lessee. Single Investor Lease Only deuce parties Lessor and Lessee. Leasing companion (Lessor) funds the consummate investment, having confiscate mix of Equity-cum-Debt pay raised by the Lessor, is without recourse to the Lessee Risk Assessment of a Lessee The first step in structuring a lease is for the lessor to evaluate and then quantify the risk inherent in the lease.Risk results from the leg of credit worthiness of the lessee combined with the corroborative and residual value of the equipment to be leased. In general if the lessor deems a lease risky, any of the following variables might be affected 1. Lease yield increased with all other factors except payment issue forth remaining constant 2. Additional advance payments infallible. 3. Security deposit require or increased. 4. Guaranteed residual required in piazza of a purchase option. 5. Lease term shortened. 6. Personal guarantee required. 7. Additional col posteri viva voce beyond the leased equipment. . Increased late fees for delinquent r ental payments (5% if 10 years late plus18% care for e. g. ) 9. Security care obtained to facilitate repossession 10. All insurable risk insured. Assignment of the risk inherent in a lease transaction is to begin with a credit Worthiness decision. more lessors as well as bankers or other moneylenders base their evaluation of risk on the 10 Cs. They are ? Character ? Capacity ? cap ? reference work ? Conditions ? Competition ? Colafteral ? Cross-border ? Complexity ? silver Lessor Requirements at a time the lessor has assessed the risk and credit worthiness of the lessee and converted that into structuring variables, the lessor must look to its remaining needs and then to the requirements of the lessee. Meeting the sometimes counterpoint needs of the lessor and lessee represents the more difficult part of lease structuring. Sometimes a lessor will insist on structuring an operating lease in order to retain revenue benefits while at the same time the lessee desires a groov y lease so it too may avail itself of the wear and tear and task benefits.Typical lessor requirements that might be at variance with lessee needs in lease structuring are ? A yield capable to meet the lessors after-tax weighted cost of expectant of the United States ? accounting for the lease on the lessors books as a uppercase lease. ? taxation structure of the arranging as an operating lease to obtain tax benefits. ? a net lease sort of than a full service lease ? Residual dependence- the lessor may want the equipment purchased by the lessee to avoid resale problems. On the other hand the lessor may want the equipment returned at the end of the lease due to its increased value.Advantages of LEASING to LESSEE There are several extolled advantages of acquiring capital assets on lease (1) Saving of capital Leasing covers the full cost of the equipment used in the pipeline by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down pay ment. In this way the saving in capital or financial re inaugurations can be used for other profitable purposes e. g. purchase of inventories. (2) tractability and Convenience The lease symmetry can be tailor- made in respect of lease period and lease rentals fit in to the convenience and requirements of all lessees. 3) Planning coin Flows Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash culmination into the melodic line from the use of the same assets. (4) usefulness In Liquidity Leasing enables the lessee to improve their liquid position by adopting the sale and lease back technique. (5) Shifting of Risk of Obsolescence The lessee can shift the risk upon lessor by acquiring the use of asset rather than buying the asset. (6) Maintenance and Specialized Services In case of special kind of lease arrangement, Lessee can avail change services of lessor for maintenance of asset leased.Although lessor charges higher rentals f or providing such services, lessees overall administrative and service cost are reduced because of specialized services of the lessor. (7)Off-The-Balance-Sheet- financial support Leasing provides off balance sheet backing for the lessee, in that the lease is save neither as an asset nor as a liability. Disadvantages of LEASING to LESSEE (1) moder Cost The lease rental include a margin for the lessor as also the cost of risk of obsolescence, it is, thus regarded as a form of finance at higher cost. 2) Risk of being deprived the use of asset in case the leasing confederacy winds up. (3) No Alteration In Asset Lessee cannot make changes in asset as per his requirement. (4) Penalties On Termination Of Lease The lessee has to pay penalties in case he has to terminate the lease before expiry o lease period. Advantages of LEASING to LESSOR (1) Higher profits The lessor can get higher profits by leasing the asset. (2) Tax Benefits The lessor being owner of asset can cite several(a) tax benefits such as Depreciation. 3) Quick Returns By leasing the asset, the Lessor can get quick returns than investing in other projects of long gestation period. Disadvantages of LEASING to LESSOR (1) High Risk of Obsolescence The lessor has to bear the risk of obsolescence as there are rapid technology changes. (2) Price Level Changes In case of inflation, the prices of asset rises but the lease rentals remain fixed. (3) Long term investment funds Leasing requires the long term investment in purchase of an asset, and takes long Time to cover the cost of that asset bring purchase backing select purchase is a popular financial backing instrument especially in certain heavenss of Indian business such as he automobile field. In hire purchase funding, there are leash parties the manufacturer, the hiree and the foreman. The hiree may be a manufacturer or a finance company. The manufacturer sells asset to the hiree who sells it to the foreman in exchange for the payment to b e made over a condition period of time. A hire purchase accord between the foreman and the hiree involves the following Three conditions ?The owner of the asset (the hiree or the manufacturer) gives the Possession of the asset to the party boss with an understanding that the boss will pay the agreed installments over a specified period of time. ? The ownership of the asset will transfer to the honcho on the payment of all installments. ? The hirer will have the option of terminating the agreement any time before the transfer of ownership of the asset. Thus for the hirer the hire purchase agreement is like a cancelable lease with a right to buy the asset.The hirer is required to show the hired asset on his balance sheet and is entitled to claim depreciation, although he does not own the asset until full payment has been made. The payment made by the hirer is divided into two parts interest charges and repayment of principal. The hirer thus gets tax relief on interest paid and n ot the entire payment. How does hire purchase work? When a customer buys goods on hire purchase there are three parties involved ? The customer who buys the goods ?The retailer who sells the goods The finance company who provides the finance You make the initial agreement with the customer. Once the security agreement has been signed you are likely to assign the agreement (including your security interest in the goods) to the finance company. The customer makes payments to the finance company. Whether the security interest will revert back to you will depend on the terms and conditions of your agreement with the finance company. The normal tripartite hire purchase process between the bargainer, customer and the finance company is as follows ?When the business connection between the finance company and the principal sum is first established a master agreement may be drawn up regulating the conditions upon which the finance company is prepared to consider the hire purchase transa ctions submitted by the principal sum. ? aft(prenominal) the customer has selected the goods he desires to acquire on hire purchase, the monger arranges for him to complete the muniment to a form of hire purchase agreement. The braggyr finance companies have theirown standard forms of printed agreement. In the schedule to the hire purchase agreement the star will enrol the hirers name, address, occupation, and certain other details indicating his financial standing. It is also the monger responsibility to insert details rough the price and the installments payable. ? The intending hirer is a great deal required to make a down payment as an indication of the customers financial reliability. The deposit or down payment is unremarkably paid to the principal at the time the proposal form is completed and is normally retained by him as a payment on account of the price to be paid to him by the finance company. The deposit having duly paid the monger sends the appropriate set of documents to the finance company, requesting the company to purchase the designated goods from him. ?If the finance company decides to accept the transaction, the hire purchase agreement is signed by one of its officers and a write dispatched to the hirer with instructions as to the mode of the installments. At the same time as a copy is sent to the hirer, the finance company notifies the dealer that the proposal has been accepted and that it is in order for the dealer to deliver the goods, if he has not already done so. Upon notification of acceptation the dealer delivers the goods to thehirer and obtains the hirers skin senses to a form of delivery receipt constituting an acknowledgement by the hirer that he has received the goods in proper condition. ?The hirer makes payment of hire installment end-to-end the period of hire ? On accomplishment of the hire term, the finance company issues to the dealer a completion certificate whereupon the hirer becomes the owner of the asset. Key features of Hire buy ? repayment schedules are flexible. An Offer to Hire can be arranged with no deposit or an count that suits you. ? fly payments at the end of the term can be arranged. ? Esanda owns the goods until the final payment is made, at which point you gain automatic ownership. ? the interest component of the rental and depreciation on the equipment are tax deductible, provided it is used to obtain assessable income or the expense is inevitably incurred in carrying on a business. DIFFERENE mingled with Hirepurchase AND Leasefinancing Hirepurchase Leasefinancing 1. Depreciation-Hirerisentitledtoclaimdepreciation. 1. Depreciation-lesseeisnotentitledtoclaimdepreciation. 2. Payments-hirercanchargeonlyinterestportionofhirepurchasepaymentsasexpensesfortaxcomputation. 2. Payments-lesseecanchargetheentireleasepaymentsasexpensesfortaxcomputation. 3. Salvagevalue-Oncethehirerhaspaidallinstallmentshebecomestheowneroftheassetandcanclaimitssalvagevalue. 3. Salvag evalue-Lesseedoesnotbecometheownerofthe asset. Thereforehehasnoclaimovertheassetssalvagevalue. tenet of hire purchase 1. Consumer installment credit The ground for distinction here is whether the goods are producer goods or consumer goods. pay provided to consumers for scholarship of consumer durables is called installment credit. Installment credit for consumers is usually deported in one of the following forms (a) Personal loan this is made directly by the bring a dealer may introduce company through the consumer. The loan may be unsecured or secured. E. g. by a mortgage on the borrowers property. b) Hire purchase or qualified sale here funds are advanced for the acquisition of particular goods, which the customer take under a hire-purchase or conditional sale agreement, acquiring title on completion of payment. Where title is close in this way the agreement usually used is a hire purchase agreement, though some companies use conditional sale agreements. Retail hire purchas e agreements take three different forms that is to say ? Direct gathering- the dealer sells the goods to the finance nominate, which lets them out on hire purchase to the customer.This is the most reciprocal form of installment financing and is known in the commerce as direct collection because the installments are lay in under a hire-purchase agreement concluded direct between the finance family and the hirer, as opposed to an agreement between the dealer and the hirer which is later discounted under evade-discounting agreement. Usually the finance house collects the installments itself from the hirer, and the dealer drops out of the transaction. Such transactions are called non-recourse for the dealer. ? Agency collection this is a variant of direct collection.As before the dealer sells goods to the finance company but in this case signs the agreement himself as unrevealed agent for the finance company and as such agent collects installments on behalf of the company, usual ly in return for appropriate com bursting charge. Because the agreements are in exert handled in blocks, this form of hire purchase is also deceivingly referred to as agency block discounting, though it is not a form of block discounting at all since there is no assignment of the agreement by the dealer to the finance company and the dealer is acting merely as an agent. Block discounting in this case the dealer enters into the hire purchase agreement direct with the customer and later discounts it to the finance company. Agreements are usually discounted in blocks at a time thusly it is called block discounting. Once the agreement is discounted the finance company becomes entitled to receive rentals from the hirer concerned but quite commonly, in order not to disturb the business relationship existing between the dealer and his customer, the dealer is made responsible for accumulate the installments and remitting these to the finance company. c) Credit sale here the title passes to the customer from the outset. Again the agreement may be with the finance house from the beginning or it may be entered into between the dealer and customer direct and later assigned by the dealer to the finance house. (d) Rental the renting of interior(prenominal) goods is fast maturation as a form of installment credit. It is increasingly the practice and to a very larger period in the U. S. , of finance houses to enter direct into rental agreements relating to domestic goods. DOCCUMENTS IN withdraw PURCHASEAll the parties must sign a hire purchase agreement and the agreement, among other things, must specify the date when the hiring commences, the number of installments, the amount of each installment, the time for the payment of each installment, the description of the goods and where the goods are kept. Note that the agreement must be in writing. An oral agreement is not a valid hire purchase agreement. Benefits of Hire corrupt ? Retention of cash flow ? official Paym ents ? Existing credit lines preserved ? Cost of acquisition spread overtime ? Repayment schedules can be structured to suit your cash flow. You can obtain the use of goods for minimal cash outlay, so working(a) capital is not significantly affected. ? You may be able to make use of the taxation benefits of hiring. The Hire Purchase Agreement When you buy goods on hire purchase, you and the seller sign a written agreement. ? How many agreements will be made ? How ofttimes to pay ? The amount to pay ? When to pay ? Where to pay ? The name and address of the seller Other study in the hire purchase agreement ? What happens if payment is not made as agreed ? The right to repossess goods if one fails to make payments on time ?Ones obligation to keep the goods safe and in good order ? How to return the goods if one cannot pay. This information may be in the fine print on the back of the agreement. If any of this information is missing from the agreement one may not be reasonable for so me of the cost of credit. The agreement cannot be enforced until the required information has been supplied. Lease Financing in Bangladesh Bangladesh is a developing earth, but the national calamity and political unrest sluggish the industrial outset as well as economic egression of the country.In spites of all these hindrance the ingathering of leasing companies is a significant indication of our bright prospects. Lease financing was first introduced in Bangladesh in the early 1980s. Industrial maturation Leasing familiarity of Bangladesh Ltd. (IDLC), the first leasing company of the country, was established in 1986 under the regulatory fabric of BANGLADESH BANK. It was a joint venture of the Industrial Promotion and reading beau monde of Bangladesh Ltd. (IPDC), external pay Corporation, and Korea ontogenesis Leasing Corporation.Another leasing firm, the UNITED LEASING bon ton Ltd. started its operations in 1989. The number of leasing companies grew pronto after 1994 and by the year 2000, blush to16. The leasing business became competitive with the increase in the number of companies and wider distribution of their market share. There are, however, 6 other companies conducting leasing business in the country, although they do not use the word leasing in their names. In terms of money value, the leasing business in Bangladesh increased from Tk 41. 44 million in 1988 to Tk 3. 6 cardinal in 2000. The leasing companies now operating in the country are Industrial Development Leasing accompany of Bangladesh, get together Leasing Company, GSP Finance Company (Bangladesh), Uttara Finance and coronations, Bay Leasing and investiture, Phoenix Leasing Company, premier(a) Finance and enthronisation, global Leasing and Financial Services, addity Capital, Vanik Bangladesh, Peoples Leasing and Financial Services, Bangladesh Industrial Finance Company, UAE-Bangladesh Investment Company, Bangladesh Finance and Investment Company, and First Lease Int ernational.Lease financing, as organized in Bangladesh, operates with the following impersonals (a) to assist the knowledge and promotion of point of intersectionive enterprise by providing equipment lease financing and associate services (b) to assist in balancing, modernization, replacement and expansion of existing enterprises (c) to extend financial support to small and speciality scale enterprises (d) to provide finance for various agriculture equipment and (e) To activate the capital market byOperating as managers to the issue, underwriters, or portfolio managers. The functions of a lease business include lease financing, short-term financing, house building financing, and merchant banking and in collective financing. In this last conclave of functions, the leasing business in Bangladesh moved away from regular leasing activities and is now involved in stock-market related activities such as issue management, underwriting, dedicate management, private placement, portfo lio management, and mutual fund operation.Broad capital market operations of the lease financing institutions include bridge financing, corporate counseling, mergers and acquisition, capital restructuring, financial engineering, and lease syndication. Prominent among the sectors of the prudence that now receive lease financing services are textiles, apparels and accessories, transport, construction and engineering, composition and printing, pharmaceuticals, food and beverage, chemicals, agro-based industries, telecommunications, and leather and leather products.Commercial banks and reading finance institutions (DFIs) have been the traditional lending institutions in Bangladesh. In fact, the concept of lease financing is a relatively new one in the country. Initially, leasing companies had to adopt the role of educators to make Bangladeshi entrepreneurs aware of the benefits of leasing. However, as DFIs demonstrated ugly recovery and fund recycling performances, leasing got the o pportunity to develop as an alternative source of funding.A few other factors also contributed to development of the leasing business in the country. For example, the commercial banks have been keener in providing trade in financing and FOREIGN EXCHANGE dealings rather than long-term loans because of the risks involved and their nightlong gestation period. The selection of lease proposals is relatively free from extraneous pressure and is subject to a fictional character level appraisal. Under lease agreements in the private sector, projects are sanctioned and implemented expeditiously, resulting in benefits in time and cost savings.Private leasing companies also deplumate clients by providing relatively better services. The down payments in leasing are not high and the gestation period is low. Also, in case of lease financing, sequent costs incurred in the process of import clearing, installation, and commercial turnout are capitalized, which substantially reduce the initial investment. Leasing companies, however, face some problems in conducting their business in the country. The relatively slow growth of the demand side compared to the fast growth of the lease business is one such problem.This leads many leasing companies to operate in partial capacity. The culture of loan default that prevails in the country is also a deterrent. Leasing companies often find it difficult to raise funds through short- or long-term borrowing from money and capital markets. They are hard pressed to deal with the financial assets because of the present laws of the country, which are also not to the full enforceable. Leasing business is gaining increased sizeableness in the economy of Bangladesh with its gradual transformation from an agrarian to industrial one.The government periodically revises the trade and industrial policy to create a liberal business environment both for domestic and contrary investment. Increased investment in the energy sector as well as in po wer, transport, telecommunications, water and sanitation, and safe disposal of wastes is expected to bring further opportunities for leasing industries. The traditional sources of funds of our country in the financial market are the Commercial Banks, DFIs and the stock exchange. But these sources are not enough to effectively meet the growing demand of capital investments for industrialisation of the country.And the backdrop of such scenario, leasing companies came forward in the 80s to serving as an alternative source of financing. At present there are 11 leasing companies operating there business. The name of the leasing companies 1. Industrial Development Leasing Company of Bangladesh Ltd. IDLC 2. United Leasing Company 3. Uttara Finance & Investment company Ltd. 4. Phonenix Leasing Company Ltd 5. Bay leasing & Investment Ltd. 6. International Leasing & Finance Company Ltd. 7. GSP Finance company (BD) Ltd. 8. indigenous Finance & Investment Ltd. 9. Vonike 0. heyday Bank Ltd. COMPANIES AT A survey IDLC Industrial Development Leasing Company of Bangladesh restrain is established in 1985 as a joint venture public Limited Company with the multinational collaborationism of International Development Finance administration ,Commercial Banks, indemnity Company and Foreign Leasing Corporation. During the past cardinal years of its operation, IDLC has played a catalytic role in providing alternative source of term and capital asset financing to the private sector.IDLCs primary concenter has been in the area of 3-5 year term financial leasing with particular emphasis on balancing, modernization, replacement and expansion (BMRE) of existing units. With its pioneering vision IDLC has not only established lease financing as an efficient and woodland financial service but also laid the foundation for the creation of ten other leasing companies. Today lease financing has grown to be an industry of Taka 3. 5 billion per annum.IDLC and its institutiona l shareholders have upheld their commitment towards the development of the financial service sector by offering high quality service to local entrepreneurs. To ensure unshakable and long term growth as well as to sharpen its competitive edge in a ever-changing and challenging business environment. Short-term Finance which have broadened its customer base and are expected to contribute significantly to IDLCs growth and profitability. IDLC established its first branch office in Chittagong in 1990. In January 1993, the company offered its shares to the public.In terms of market capitalization, it is stratified among the top 20 listed companies in both capital of Bangladesh and Chittagong standard Exchange. Services offered by IDLC Lease Financing IDLC provides lease financing for all types of manufacturing and service equipment including vehicle, computer and aesculapian equipment to all the major industrial and service sector. Short Term Finance With an objective to provide soluti on to working capital problems, STF Unit provides different financial services to clients.Emphasis is given to identifying clients actual need and in providing customized service to cater them. House Financing IDLC extends loan facilities to Individuals for purchase of apartments, Business houses professionals for purchase of commercial spaces (office space chamber bring out center etc. ) Bangladesh Finance and Investment Company Limited (BFICL) A non-banking finance company incorporated in Bangladesh on 10 May 1999 as a public hold in company. It began business on 15 February 2000. Its authorized and paid up capital are Tk 500 million and Tk 23 million respectively.The capital is divided into ordinary shares of Tk 100 each. major(ip) business objectives of the company are carrying out direct trade, term and working capital financing, equity confederation, housing finance, fund management,financial and industrial counseling and merchant banking activities of all types. Main secto rs in which the company has targeted to lease and invest are transport, electric and electronic goods (including computers), leather, textile, printing, leatherneck vehicles and equipment, steel and engineering, fishing boats and trawlers, medical equipment and small scale industries.BFICL purchases property in its own name and pays 60% to 70% of the total price of a particular property to its supplier. later accumulating and adding all other elevant/ incidental costs with the original purchase price such as transportation, insurance premium, and costs related to letter of credit, and the rent or profit/income margin, the company determines the lease price of the property. Then it signs lease contracts with the lessee, generally for two to four years, and hands over the properties to him for use.The lease contracts require security or verificatory from the lessee in various forms. Lease installments, payable generally on a monthly home, are determined on the basis of the lease p rice of properties and other relevant factors. Lease contracts are renewed each year. On the expiry of the lease periods/contracts, the lessee can gain the ownership of the leased property/equipment upon payment of 5% of the transfer value of the equipment as salvage value of the property. Alternatively, the ownership and physical possession of the property goes back to the lessor.BFICL provides lease facilities against one or more of the following securities (a) bank guarantee/insurance guarantee (b) easily AM-HIFC Ahsania-Malyasia hadj Investment and Finance Company Limited (AM-HIFC) is a Sharia-based non-bank financial institution licenced by Bangladesh Bank under the Financial existence Act 1993. The company follows the model of Malaysias pilgrims fund and management institution, popularly known as Tabung Hajj which focuses on mobilizing savings from would-be pilgrims who intend to perform Hajj in the Holy Land.It invests its excess fund in Sharia-based activities. As a Sharia -based financial institution, adherence to Sharia is of paramount importance to us and this is embodied in out Vision and Mission statement. Bangladesh Industrial Finance Company Bangladesh Industrial Finance Company Limited (BIFC) is a joint venture Leasing and Financing Company, promoted by a group of Foreign and Local Sponsors. Incorporated as a Public Limited Company in August 1996 and icensed by Bangladesh Bank as a Non-Bank Financial origination in February 1998, BIFC has been rendering innovative, customized, prompt and cost effective financial solutions to the socio-economic growth of the country. Delta Brac caparison Finance Delta Brac Housing Finance Corporation Ltd. (DBH) is the pioneer, the largest and the specialist Housing Finance Institution in the private sector of the country. After commencing operation in the early 1997, the company has registered commendable growth in creating home ownership among more than 7,500 families in Dhaka and other major cities of the c ountry.At the same time, the company has been playing an active role in promoting the real estate sector to the large cross sections of prospective clients who had but yet unfulfilled dream of owning a saintlike home. Fareast Finance Investment Limited Fareast Finance Investment Limited-a leasing and financing company started its business in the early 2002 to serve its clients with high ethical standards and accountability. Fareast believes that each of its activities must provide satisfaction to its customers and will start patterned advance for them.Financial Management Reform Programme FMRP is a five-year programme jointly financed by the UK department for International Development (DFID) and the Royal Netherlands Embassy (RNE), and punish by the Ministry of Finance, Government of Bangladesh. Grameen Bank Grameen Bank (GB) has reversed conventional banking practice by removing the need for collateral and created a banking agreement based on mutual trust, accountability, pa rticipation and creativity.GB provides credit to the forgetfulest of the poor in artless Bangladesh, without any collateral. At GB, credit is a cost effective weapon to struggle poverty and it serves as a accelerator pedal in the overall development of socio-economic conditions of the poor who have been kept outside the banking reaching on the ground that they are poor and hence not bankable. Professor Muhammad Yunus, the divulge of Grameen Bank and its Managing Director, reasoned that if financial resources an be made available to the poor peck on terms and conditions that are appropriate and reasonable, these millions of small people with their millions of small pursuits can add up to create the biggest development wonder. GSP Finance Company GSP Finance Company (Bangladesh) Limited (GSPB) was incorporated in Dhaka, Bangladesh on 29th October 1995 with the Registrar of Joint Stock Companies and Firms. It started its commercial operation from 17th April 1996 under licence gr anted by Bangladesh Bank (Central Bank) in accordance with the Financial Institutions Act of 1993. IDCOLInfrastructure Development Company Limited IDCOLs mission is to promote economic development in Bangladesh by encouraging private sector investment in infrastructure projects. IDLC of Bangladesh Ltd IDLC is a multiproduct financial institution, established in 1985 with the collaboration of reputed international development agencies such as Korean Development Leasing Corporation (KDLC), southeast Korea, Kookmin Bank, South Korea, International Finance Corporation (IFC) of the World Bank Group, Aga Khan memory for Economic Development (AKFED), German Investment and Development Company (DEG).Leasing, initiated by IDLC, today, plays a vital role in the mid(prenominal) term financing of industrial and service enterprises. Over the years, IDLC has served the diverse needs of its customers with product offerings ranging from Home Loans for Individuals to Factoring and Work vagabond F inancing for small and medium enterprises (SMEs) and services such as Lease Financing, Syndication, unified Advisory, Bridge Financing, Underwriting, Issue Management, Private posture of Stocks and Debt Instruments for Corporate Customers. IIDFCIndustrial and Infrastructure Development Finance Company (IIDFC) Limited is a Development Financial Institution, promoted by wide pasture of financial institutions like ten commercial banks, from both the public and private sectors, three insurance companies and Investment Corporation of Bangladesh (ICB). unification Capital Limited UNION not bad(p) LIMITED is one of the largest investment banks and red-hot growing financial institutions in Bangladesh. Previously, it was known as meandering(a) Bangladesh which had its origins and businesses rooted in Hong Kong.Out of the local office of the erstwhile Peregrine Capital Limited of Hong Kong, pith Capital Limited, Dhaka emerged in early 1998 as a Bangladesh-based company led by a group of the foremost entrepreneurs of the country. Union Capital, within a short match of time, has proved its worth as a most forward-working vigorous organization achieving mastery with its wide international network and wet local base Leasing Law in Bangladesh Leasing is an asset renting activity, and is therefore, governed by common law. The Contracts Act 1872 applies to contracts of leases.Sections 148 to 171 of the Contracts Act cover nutriment relating to bailment. As these provisions are same to those applicable under English law, the chapter prone to general law of leasing adequately covers the law in Bangladesh as well. It may be noted that the general law of contracts is limited to bailments of goods. Goods include movable property only immovable property is not covered by common law. As it the common feature of all Anglo-Saxon legal systems, transactions in immovable properties are covered by a give system of laws.Taxation of Leases in Bangladesh The taxation system i n Bangladesh has been a subject matter of criticism over a last few years. The system is characterized by a large number of incentives, tax holidays and concessions as a result of which the share of corporate taxation to total tax collection by the Govt. has come down drastically over the past few years. Taxes on corporate profits, of both domestically and foreign owned companies amounts insignificant as a 0. 5% of GDP in Bangladesh, compared with more than 6% in developed nations. The main reason cited for this low contribution is the tax incentives granted by the Govt. Which are very liberal as compared to its counterpart countries. It is in all probability with tax reform in capture that the Govt carried out certain reforms in depreciation laws in Budget 1998-99. Among other provisions, the authorised change that would have a far reaching effect on leasing companies is the change in