HIRE PURCHASE AND LEASING

HIRE PURCHASE

INDEX
INTRODUCTION FEATURES OF HIRE PURCHASE AGREEMENT DIFFERENCE BETWEEN
(1) (2) (3) HIRE PURCHASE AND CREDIT SALE HIRE PURCHASE AND INSTALLMENT SALE HIRE PURCHASE AND LEASING

THE HIRERS RIGHTS THE HIRERS OBLIGATIONS THE OWNERS RIGHTS ORIGIN AND DEVELOPMENT BANKS AND HIRE PURCAHSE BUSINESS

 BANK CREDIT FOR HIRE PURCAHSE BUSINESS

INTRODUCTION
Hire Purchase is a method of selling goods. In Hire Purchase transaction the goods are let out on hire by a finance company (creditor) to the hire purchase customer (hirer). The buyer is required to pay an agreed amount in periodical installments during the given period. The ownership of the property remains with the creditor and passes on to hirer on the payment of last installment. Hire purchase (abbreviated HP) is the legal term for a contract, in these persons usually agrees to pay for goods in parts or a percentage at a time. It was developed in the nited !ingdom and can now found in "hina, #apan, $alaysia, India, %ustralia, and &ew 'ealand. It is also called closed( end leasing. In cases where a buyer cannot afford to pay the as)ed price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire(purchase contract allows the buyer to hire the goods for a monthly rent. *hen a sum equal to the original full price plus interest has

been paid in equal installments, the buyer may then e+ercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In "anada and the nited ,tates, a hire purchase is termed an installment plan- other analogous practices are described as closed(end leasing or rent to own. Hire purchase differs from a mortgage and similar forms of lien( secured credit in that the so(called buyer who has the use of the goods is not the legal owner during the term of the hire(purchase contract. If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor protection not available with unsecured(consumer(credit systems. HP is frequently advantageous to consumers because it spreads the cost of e+pensive items over an e+tended time period. .usiness consumers may find the different balance sheet and ta+ation treatment of hire(purchase goods beneficial to their ta+able income. The need for HP is reduced when consumers have collateral or other forms of credit readily available.

FEATURES OF HIRE PURCHASE AGREEMENT

/. nder hire purchase system, the buyer ta)es the possession of goods immediately and agrees to pay the total hire purchase price in installments.

0. 1ach installment is treated as hire charges.

2. The ownership of the goods passes from the seller to the buyer on payment of the installment.

3. In case the buyer ma)es default in the payment of any installment the seller has right to repose the goods from the buyer and forfeit the amount already received treating it as hire charge.

4. The hirer has the right to terminate the agreement any time before the property passes. The is, he has the option to return the goods in which case he need not pay installments falling due thereafter. However, he cannot recover the sums already paid as such sums legally represent hire charge on the goods in question.

LEGAL POSITION
The Hire Purchase %ct, /560 defines a hire purchase agreement as, 7an 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 agreement under which8 /. Payment is to be made in installments over a specified period.

0. The possession is delivered to the purchaser at the time of entering into a contract.

2. The property in the goods passes to the purchaser on payment of the last installment.

3. 1ach installment is treated as hire charge so that if default is made in payment of any one installment, the seller is entitled to ta)e away the goods.

4. The hire9purchaser is free to return the goods without being required to pay any further installments falling due after the return.

HIRE PURCHASE AGREEMENT

There is no prescribed form for a hire purchase agreement, but it has to be in writing and signed by both parties to the agreement. % hire purchase agreement must contain the following particulars8 i. The description of goods in a manner to identify them.

ii.

The hire purchase price of the goods.

iii.

The date of commencement to the agreement.

iv.

The number of installments in which hire purchase price is to be paid, the amount, and due date.

(1) HIRE PURCHASE AND CREDIT SALE

Hire Purchase transaction is different from credit sale. In case of actual sale, the title in the property i.e., ownership and possession is transferred to the purchase simultaneously. In hire purchase, the ownership remains with the seller until last installment paid.

(2) HIRE PURCHASE AND INSTALMENT SALE

Hire purchase transaction is different from installment system. In case of installment system it is not only the possession but also the ownership of goods which is transferred to the buyer immediately at the time of agreement. :urther, when the buyer stops payment of dues, the seller has no right to right the repossess the goods. He has the only right to sue the buyer for the nonpayment by returning the goods but has the right of disposing of the goods in any manner as he li)es. %ny loss of goods should be borne only by the buyer as ris) lies with the ownership .

(3) HIRE PURCHASE AND LEASING

Hire purchase is also different from leasing. 1. Ow !"#$%& In a contract of lease, the ownership rests with the leaser throughout and the lease (hirer) has no option purchase the goods.

2. M!'$() (* *% + ,% ;easing is a method of financing business assets whereas hire purchase is a method of financing both business assets and consumer articles.

3. D!&"!,%+'%( In leasing, depreciation and allowance cannot be claimed by the lessee. In hire purchase, depreciation and investment allowance can be claimed by the hirer.

.. T+/ 0! !*%'# The entire lease rental is ta+ deductible e+pense. <nly the interest component of hire purchase installment is ta+ deductible.

1. S+23+-! V+24! The lessee, not being the owner of the asset, does not en=oy the salvage value of the asset. The hirer, in purchase, being the owner of the asset, en=oys salvage value of the asset.

5. D!&(#%' ;essee is not required to ma)e any deposits whereas 0>? deposit is required in hire purchase.

6. R! '7P4",$+#! *ith lease, we rent and with hire purchase we buy the goods 8. E/'! ' (* F% + ,! ;ease financing is invariably />> percent financing. It requires no immediate down payment or margin by the lessee. In hire purchase, a margin equal to 0>(04 percent of the cost of the asset is to be paid by the hirer.

9. M+% '! + ,! The cost of maintenance of the third asset is to be borne by the hirer himself. In case of finance lease only, the maintenance of the leased asset is the responsibility of the lessee.

1:.

R!&("'% -

The asset on hire purchase is shown in the balance sheet of the hirer. The leased assets are shown by way of foot only.

THE HIRER;S RIGHTS

The hirer usually has the following rights8 /. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate (each =urisdiction has a different formula for calculating the amount of this rebate)

0. To return the goods to the owner @ this is sub=ect to the payment of a penalty to reflect the ownerAs loss of profit but sub=ect to a ma+imum specified in each =urisdictionAs law to stri)e a balance between the need for the buyer to minimiBe liability and the fact that the owner now has possession of an obsolescent asset of reduced value

2. *ith 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

3. *here 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.

BASICALL< HIRER HAS FOLLOWING RIGHTS=

Cights of protection

Cights of notice

Cights of repossession

Cights of ,tatement

Cights of e+cess amount

THE HIRER;S OBLIGATIONS

The hirer usually has the following obligations8 /. To pay the hire installments

0. To ta)e 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)

2. To inform the owner where the goods will be )ept.

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 owner8 /. to forfeit the deposit

0. to retain the installments already paid and recover the balance due

2. to repossess the goods (which may have to be by application to a "ourt depending on the nature of the goods and the percentage of the total price paid)

3. to claim damages for any loss suffered.

ORIGIN AND DEVELOPMENT

The growth and development of hire purchase system can be traced bac) to the advent of industrial development in .!., Henry $oore- a .ishogate piano ma)er introduced the system of hire purchase in /D3E in .!. "owper wait F sons, a furniture dealer introduced the hire purchase system in .,.%. in /D>6. The ,inger $anufacturing "ompany started selling sewing machines under hire purchase agreement. The idea was developed by wagon companies which were formed to finance the purchase of wagons by collieries. The wagon companies bought the wagons and then let them out collieries under the hire purchase agreement.

In India, hire purchase finance started only after *orld *ar I. However it was only after *orld *ar II that its growth assumed visible dimension. The concept of hire purchase was not quite popular in the pre independence period though a few were endeavoring to increase the volume of their business with the provision of e+tending credit to intending buyers. *ith the increase in economic activity, many &on( .an)ing :inancing "ompanies entered the scene in the fifties and si+ties.

The pioneer in the field "ommercial "redit "orporation ;imited, $otor and General :inance ;imited and Investments ,upply ;imited. These companies were setup predominantly to finance road transport sector. The volume of hire purchase business was around Cs. E24 crores in /5D6(DD, out of which automobiles accounted for 44?. Today about 04? of sale of

commercial vehicles is accounted by hire purchase. It is estimated by the :ederation Hire Purchase %ssociation that the stoc) on hire of hire purchase companies comprising corporate and non corporate entities would be appro+imately Cs. 2>>> crores.

In addition to commercial vehicles, purchase of consumer articles li)e household appliance, air conditioners, refrigerators, office furniture and equipment is financed through hire purchase. In recent years, the consumer durable goods mar)ets e+periencing an unprecedented boom. The growing Indian middle class />> to /4> million, growing at a rate of 0>? per annum and their willingness to mortgage the future for todayHs en=oyment have led to spectacular growth in hire purchase business.

The institutions engaged in the hire purchase business in organiBed sector include commercial ban)s, co(operative ban)s, ,tate :inance "orporations, &ational ,mall Industries "orporations and in the unorganiBed sector they comprise a large number of partnership firms and individuals.

&ational ,mall Industries "orporation supplies machinery small scale industry under hire purchase. The Industrial Ievelopment .an) <f India indirectly participates in financing hire purchase business by way of rediscounting usance bills9promotes arising out of sale of indigenous machinery on hire purchase basis. The Industrial "redit and Investment

"orporation also have a discounting scheme of usance bills under hire purchase scheme.

BANKS AND HIRE PURCHASE BUSINESS

Through a recent notification issued on 6.5./55> under clause(>) of ,ub ,ection (/) of section E of the .an)ing Cegulation %ct, /535 the Government <f India has permitted ban)s to engage in 7hire(purchaseH

business. Though the statutory framewor) now enables the ban)s to carry on hire purchase business, and to set u subsidiaries for underta)ing such business The Ceserve .an) <f India is of the view that in the public interest and in the interest of the ban)ing policy, the following guidelines should be made applicable to ban)s so far as hire( purchase business is concerned. i. :or the present, ban)s shall not themselves underta)e directly (i.e. departmentally) the business of hire(purchase.

ii.

.an)s which have set up subsidiaries (i.e. a company in which it holds not less than 4/? of the shares) for the business of equipment leasing, merchant ban)ing etc., may underta)e the hire( purchase business either through a separate subsidiary. <ther ban)s may set up subsidiaries to transact hire(purchase business either e+clusively or together with business of equipment leasing. .an)s desirous of underta)ing hire(purchase business through an e+isting or new subsidiary as above will require prior approval of the Ceserve .an) of India.

iii.

%n e+isting ban) subsidiary that may hereafter transact hire(purchase business or a new subsidiary set up to transact such business, as provided in clause(ii) above, shall engage itself in financing of other companies or concerns engaged in hire(purchase business.

iv.

Investment of a ban) in the shares of its subsidiary set up for underta)ing equipment leasing and9or hire(purchase business together with investment of the ban) in shares of other companies carrying on equipment leasing and9or hire(purchase business, shall

not in the aggregate e+ceed /> ? of the paid(up capital and reserves of the ban).

v.

*hile ban)s may invest in shares of other hire(purchase companies within the limits specifies in ,ection /5(0) of the .an)ing Cegulation %ct, /535 with the Ceserve .an). Prior approval they shall not act as promoters of such companies.

vi.

%ny application to be made to the "ontroller of "apital Issues in connection with the setting up of a new subsidiary or for subsequent issue of capital shall need prior clearance from the Ceserve .an) <f India.

vii.

.an)s setting up a subsidiary for the purpose of carrying hire( purchase business through the e+isting subsidiaries should furnish such information in such form and at such at such time as the Ceserve .an) may required from time to time.

BANK CREDIT FOR HIRE PURCHASE BUSINESS

The subsidiary of commercial ban)s lends to the dealer or to finance intermediary who has already financed articles sold by the dealer to the hirer under hire(purchase contract. *hile considering proposals from dealers or hire(purchase financing companies, the ban) subsidiary has to ta)e e+tra precautions, loo)ing to the particular nature of transaction under hire purchase contract. *hen offered this type of business, the ban) subsidiary would ma)e an assessment of the standing and financial position of the dealer or o hire( purchase company, and ta)e into consideration the principles of good lending and carry out the procedure below8

1. C4#'(>!"

*hen approached for hire purchase facility the subsidiary should ta)e care to ma)e the assessment of the standing and financial position of the business customer.

2. P4"&(#!

The type of goods being used to finance in the hire( purchase transaction is of great importance. In the event of default the ban) may reconsider repossessing the goods and selling them to clear the advance. Thus, if the goods can be readily sold elsewhere (e.g. a relatively new car), them these agreements are better security than those for (say) cameras which will have a lower resale value.

3. A>(4 '

.an) subsidiaries ta)ing up hire(purchase business would do well to discourage small individual loans. In order to ensure proper servicing and monitoring, it is also essential to a have floor limit in the amount of individual hire(purchase transactions. *hile it may be about Cs.4>, >>> for automobile sector, it may be about Cs./>, >>> for consumer durables.

.. P!"%()

The facility will normally be e+tended over to three years.

1. R!&+?>! '

Cepayment are spread evenly, or agreed, over the loan period. The repayment should be adaptable to the hirerHs needs. The repayment can usually be tailor made to suit the income generated from the use of asset so that it is self( financing. ,ometimes, repayment holidays can be allowed and repayment is delayed until the asset is operational or producing profit. To ensure timely recovery in case of two(wheeler, and consumer durable financing, it would be preferable to have institutional tie(ups with employers9employeesH co(operative societies for which eligibility criteria can be laid down.

5. S!,4"%'?

Technically hire(purchase advance is against hypothecation of equipment9vehicles and pledge for hundis9promotes and lodgments of hire(purchase agreements. The ban) subsidiary will as) the borrower to complete the ban)Hs form of security to charge the security under an equitable9hypothecation charge. If the borrower is a limited company which is not sufficient strength to allow equitable9hypothecation facility and if suitable security is not available it is normal to obtain a debenture over the assets of the company under which a floating charge is obtained.

If necessary the ban) subsidiary will as) the hirer to furnish a guarantor of means and the ban) would in such a case insist that the guarantor should also accept the hundis. It is a practice with some ban)s to insist for insurance policy to indemnify the ban) against the default of the hirer. The premiums will be charged to the hirer.

In view of the cost and difficulty of the repossession of a fast depreciating asset, the customerHs ability to repay is vital and no reliance is placed on security.

6. M( %'("% - + ) C( '"(2

The ban) needs to e+ercise control over on(going situation. % periodical certificate should be obtained from the finance company at the monthly intervals, stating the total amount of outstanding but e+cluding those hire(purchase agreements which have become in arrears and are, therefore, suspects. <ne or two months in arrears may be acceptable but more than that suggest that the particular hirer is in permanent default. The ban) will )eep a running total of these amounts, returning agreements which have become lapsed to their customers.