Presentation On Hire Purchase And Leasing

P R E S E N T A T IO N O N HIRE PURCHASE AND L E A S IN G

BY MANOJ.K JAYAPRAKASH

Hire purchase 

Hire Purchase is an agreement to hire an asset

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

Features

Under hire purchase system, the buyer takes

possession of goods immediately & agrees to pay the total hire purchase price in instalments Each instalments is treated as hire charges The ownership of goods passes from buyer to seller on the payments of the instalments   In case the buyer makes any default in payments of any instalments the seller has right to repossesthe goods   Normally a deposit is requested i.e. 10% Funding Period- periods are normally between 3-7 years.  

Rather than pay for the asset outright using

cash, it can often make sense for businesses to look for ways of spreading the cost of acquiring an asset, to coincide with the timing of the revenue generated by the business.The most common sources of medium term finance for investment in capital assets are Hire Purchase and Leasing. Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. 

Many kinds of business asset are suitable for

financing using hire purchase or leasing, including:

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

BANKS & HIRE PURCHASE BUSINESS

Through a recent notification issued

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

GUIDELINES FOR BANKS AS FAR AS

HIRE PURCHASE BUSINESS IS CONCERNED

I. For the present, banks shall not themselves undertake directly (i.e, departmentally) the business of hire purchase II.Banks which have set up subsidiaries (i.e, a company in which it holds not less than 51% of the shares ) for the business of equipment , leasing ,merchant banking etc, may undertake the hire purchase business either through such a subsidiary or through a

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Banks setting up a subsidiary for the purpose of carrying

hire-purchase

business

or

through

the

existing subsidiaries should furnish such information in such form at such time as the Reserve Bank may require from time to time 

While banks may invest in shares of other hirepurchase companies within the limits specified in section 19(2) of Banking Regulation act ,1949 with the Reserve Banks , prior approval they shall not act as promoters of such companies

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

parties. They must clearly set out the following information in a print that all can read without effort:  a clear description of the goods  the cash price for the goods  the HP price, i.e., the total sum that must be paid to hire and then purchase

the goods  the deposit  the monthly installments and  a reasonably comprehensive statement of the parties' rights (sometimes

including the right to cancel the agreement during a "cooling-off" period).  The right of the hirer to terminate the contract when he feels like doing so

with a valid reason

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The hirer's rights 

To buy the goods at any time by giving notice to

the owner and paying the balance of the Hire purchase price To return the goods to the owner — this is subject to the payment of a penalty to reflect the owner's loss of profit With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.

The hirer's obligations The hirer usually has the following obligations: to pay the hire installments to take reasonable care of the goods (if the

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

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The owner's rights The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner to forfeit the deposit to retain the installments already paid and recover the balance due to repossess the goods (which may have to be by application to a Court depending on the nature of the goods and the percentage of the total price paid) to claim damages for any loss suffered. 

Disadvantage of hire purchasing Purchasing Cash flow: payment by Inflexible: difficult to escape the instalments. outstanding Writing down settlement if say, a allowances apply. vehicle is no longer Hire purchase is an required. alternative funding High deposit compared line to bank overdrafts to contract hire. Attracts fixed rate Business hire purchase interest. appears as a debt on Others same as Outright the balance sheet Purchase. which could inhibit  future borrowing. More expensive than contract hire Burden of controlling and running fleet Advantages of Hire

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LEASING 

INTRODUCTION

 Leasing, as a financing concept, is an

arrangement between two parties, the leasing company or lessor and the user or lessee, whereby the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent. The rentals are predetermined & payable at a fixed interval of time, according to conveniences of the parties.

DEFINATION

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DICTIONARY OF BUSINESS AND MANAGEMENT  ‘lease is a form of contract transferring the use or occupancy of land, space, structure, in consideration of a payment, usually in the form of a rent’ JAMES C. VAN HORNE  ‘lease is a contract whereby the owner of an asset grants to another party the exclusive right to use the asset usually for an agreed period of time for the payment of rent’ 

There are a variety of types of leasing arrangement:  

Finance Leasing  Operating Leasing

Finance Leasing The finance lease or 'full payout lease' is closest to

the hire purchase alternative. The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease. Although the business customer does not own the equipment, they have most of the 'risks and rewards' associated with ownership. They are responsible for maintaining and insuring the asset and must show the leased asset on their balance sheet as a capital item. When the lease period ends, the leasing company will usually agree to a secondary lease period at significantly reduced payments. Alternatively, if the business wishes to stop using the equipment, it may be sold second-hand to an unrelated third party. The business arranges the sale on behalf of the leasing company and obtains the bulk of the sale proceeds 

Operating Leasing

If a business needs a piece of equipment for a

shorter time, then operating leasing may be the answer. The leasing company will lease the equipment, expecting to sell it secondhand at the end of the lease, or to lease it again to someone else. It will, therefore, not need to recover the full cost of the equipment through the lease rentals. This type of leasing is common for equipment where there is a well-established secondhand market (e.g. cars and construction equipment). The lease period will usually be for two to three years, although it may be much longer, but is always less than the working life of the machine. Assets financed under operating leases are not shown as assets on the balance sheet. Instead,

Difference between HP & LEASING 1)ownership in a contract of lease ,the owner ship rests with the lesser throughout & the lessee ( hirer ) has no option to purchase the goods . 2)Method of financing leasing is a method of financing business assets whereas hire purchase is a method of financing both business assets & consumer articles . 3)Depreciation in leasing, depreciation & investment allowance can not be claimed by the lessess, in hire purchase, deprecation & investment allowance can be claimed by the hirer. 4)Tax benefit the entire lease rental is tax deductible expenses .only the interest component of hire purchase instalments is

Salvage value the lessee, not being the owner

of the asset , does not enjoy the salvage value of the asset. The hirer, in purchase, being the owner of the asset, enjoys salvage value of the asset Deposit lessee is not required to make any deposit whereas 10% deposit is required in hire purchase Maintenance the cost of maintenance of the hired asset is to be borne by the hirer himself. in case of finance lease only, the maintenance of leased assets is the responsibility of the lessee.

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M U T U A L B E N E F IT F IN A N C IA L C O M P A N IE S

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

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

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

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

T H E D E P O S IT S T H E Y A C C E P T A R E Fixed deposit Recurring deposits 

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

F U N C T IO N S O F N ID H IS

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

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LO A N S

The loans are usually secured loans, given against the security of tangible assets such as house property , gold jewellery, or against shares of companies, LIC policies, fixed deposits, and so on. The terms on which loans are given are quite moderate. 1. They offer saving schemes which are linked with assurances to make credit available when required by savers. 2. They make credit available to those whom commercial banks may hesitate to give credit or whom commercial banks are not able to reach. 3. They possess characteristics such as their local character, easy approach ability, and absence of cumbersome procedures, which make them suitable institutions for small areas. 4. Interest rates on their deposits and loans are comparable to those of commercial banks, and they work on sound principles of banking. 5. 

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