Hire purchase: Hire purchase is a type of installment credit under which the hire purchaser, called the hirer,

agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid. Hire Purchase Act, 1972: The hire purchase system is regulated by the Hire Purchase Act 1972. This Act defines a hire purchase as an agreement under which goods are let on hire and under which the hirer has an option to purchase them in accordance with the terms of the agreement and includes an agreement under which: 1) The owner delivers possession of goods thereof to a person on condition that such person pays the agreed amount in periodic installments. 2) The property in the goods is to pass to such person on the payment of the last of such installments, and 3) Such person has a right to terminate the agreement at any time before the property so passes. History of hire purchase finance companies in India: The British concept of hire-purchase has been there in India for more than 6 decades. The first hire-purchase company is believed to be Commercial Credit Corporation, successor to Auto Supply Company. While this company was based in Madras, Motor and General Finance and Installment Supply Company were set up in North India. These companies were set up in the 1920s and 1930s. Development of Hire-purchase took two forms: consumer durables and automobiles. Consumer durables hire-purchase was promoted by the dealers in the respective equipment. Thus, Singer Sewing Machine Company or Murphy radio dealers would provide installment facilities on hire-purchase basis to the customers of their products. The other side developed very fast - hire-purchase of commercial vehicles. The dealers in commercial vehicles as well as pure financing company es sprang up. The value of the asset being good and repossession being easy, this branch of financing activity flourished fast, although until recently, most of automobile financing business was in hands of family-owned businesses. Need of Hire purchase facilities: Hire-purchase facilities are needed mostly by small buyers of equipment, whether engaged in farming, fishing, or manufacturing, small transport operations for purchase of vehicles (new or old) and their spare parts and households for purchase of consumer durables such as bicycles,

cars, electric fans, sewing machines, refrigerators, TV sets etc. In all these cases, purchase of durable goods is involved. The goods themselves serve as security until the loan is fully cleared. Small buyers may find it difficult to buy the durable goods by ready cash. Durable goods give a flow of income or service over a number of years over which the purchasers may like to make payment. Therefore, they are encouraged to buy them if installment credit on reasonable forms is available. For encouraging small entrepreneurs to set up shop and existing small producers (farmers and others) to use modern tools and implements, Hire-purchase credit can play an important role. Hire Purchase facilities Today: At present the Hire-purchase form of credit is provided by private Hire-purchase Financial Institutions, commercial banks and State Finance Corporations (SFCs). The last mentioned two institutions have in this field only recently. In India the facilities for the provision of Hirepurchase credit are limited and undeveloped. Three major types of financial institutions operate in this field: commercial banks, SFCs and national small industries corporations (NSIC) and Hire-purchase finance companies. RBI regulations for Scheduled commercial banks in terms of hire purchase financing: Banks can form subsidiary companies for undertaking hire purchase activities. Such subsidiaries should primarily be engaged in these activities. In other words, they should not engage themselves directly in hire purchase Banks can undertake hire purchase services departmentally. Prior approval of the RBI is not necessary for undertaking these activities departmentally. The banks should, however, report to the RBI about the nature of these activities together with the names of the branches from where these activities are taken up. (Source: Master circular No.DBOD.FSD.BC.7/24.01.001/2008-09 dated July 1, 2008 updated on 1st july 2009)
RBI definition of NBFCs:

In terms of the Section 45-l(f) read with Section 45-i(c) of the RBI Act, 1934, as amended in 1997, their principal business is that of receiving deposits or that of a financial institution, such as lending, investment in securities, hire purchase finance or equipment leasing is called NBFC.

Hire Purchase scheme followed by NSIC:

The bulk of the Hire-purchase credit goes to the road transport industry for the purchase of vehicles (new and old) and their spare-parts. There is considerable demand for Hire-purchase credit and there is good scope both for organized banking system and private Hire-purchase agencies to enter this field. The important features of the Hire-purchase financial institutions in India are: 1. They are better developed and organized in the southern region than in other areas. 2. There are a large number of individuals and partnerships in this field. 3. Many small Hire-purchase agencies indulge in such undesirable practices as changing exorbitant rates of interest, forcible repossession of the vehicles financed, etc. 4. The demand for hire purchase credit exceeds considerably the supply of the funds for the same. Drawbacks of hire purchase companies in India: The private Hire-purchase companies are organizationally weak. A large number of them are too small in size and financially weak. It is necessary to strengthen them by setting up through amalgamations and mergers. Big units will be financially strong, they can be easily controlled and regulated. They will not resort to unfair practices as the small units normally do. Recommendations by Banking Commission: Towards this end, the Banking Commission has made the following recommendations: 1. All hire purchase finance units should compulsorily licensed and the licensing authority should be given the power to revoke the license in case of unsatisfactory functioning and unhealthy practices.

2. The Government should prescribe permissible equity debt ratio and liquidity ratio for hire purchase companies and they should be higher for smaller units and lower for bigger units. 3. The hire purchase finance agencies should be classified in to approved and non-approved categories and the approved agencies should be entitled to refinance facilities from the banking system and their lending operations should be covered under the Credit Guarantee Scheme. 4. The leading commercial banks may form a few hire purchase companies or they may promote subsidiary hire purchase finance companies. The commission particularly favoured the idea of local commercial and urban co-operative banks to take more interest in the field of Hirepurchase.