LEASING

Leasing 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.

Definitions
Acc to ICAI A lease is an agreement whereby the lessor conveys to the lessee, in return for rent, the right to use an asset for an agreed period of time Acc to James C. Van Horne: Lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive right to use the asset usually for an agreed period of time in return for the payment of rent

Steps in leasing
1.First, the lessee has to decide the asset required

and select the supplier. He has to decide about the design specifications, the price, warranties, terms of delivery etc. 2. The lessee, then enters into a lease agreement with the lessor. The lease agreement contains
A. The basic lease period during which the lease is irrecoverable. B. The timing and amount of periodical rental payments during the lease period.

C. Details of any option to renew the lease or to purchase the asset at the end of the period. D. Details regarding payment of cost of maintenance and repairs, taxes, insurance and other expenses.
3. After the lease agreement is signed the lessor contacts the manufacturer and requests him to supply the asset to the lessee. The lessor makes payment to the manufacturer after the asset has been delivered.

Types of Leasing
1. Financial Lease - textile machinery,locomotive,machine tools. 2. Operating lease computers, vehicles 3. Leverage lease coal mining, ships. 4. Sale and lease back Retail Stores, Shopping centre 5. Cross border lease

Process of Leasing

.
VENDOR Lessor

.
Agreement-1

Lessee

The Lessee approaches the Lessor with the request for financing and enters into a promise to lease agreement.
The Lessor purchases the item required for leasing and receives title of ownership from the vendor The Lessor makes payment to the vendor

.
VENDOR Lessor
Agreement-2

Lessee

The Lessor leases the asset to the Lessee after execution of lease agreement. The Lessee makes periodic payments as per the contract.

Financial Lease Vs. Operating Lease

1. The asset leased out is used-specific for the lessee 2. The lessee bears the risks of obsolescence 3. The lessee bears the risks and rewards associated with the use of the asset leased The asset leased out may be used by a number of users The lessor bears the risks of obsolescence. The lessor bears the risk and rewards associated with the use of the asset leased.

4. The lease cannot be cancelled by either of the parties. 5. The lease period usually coincides with the lease of the asset. 6. The cost of repairs and maintenance are borne by the lessee; 7. It is a full pay-out lease, where a single lease repays the cost of the asset, together with the interest.

The lease can be cancelled at the option of either lessee or lessor. Lease period is generally small.

The cost of repairs and maintenance are borne by the lessor It is usually a non-pay out lease.

Structure of Leasing Industry

In India consists of 1. Private Sector Leasing 2. Public Sector Leasing

Private Sector Leasing

1. Pure leasing Companies Eg. First Leasing Company of India. 2. Hire Purchase and Finance Companies Eg. Sundaram Finance Limited 3. Subsidiaries of Manufacturing Group Companies a. In House Leasing b. Vendor Leasing

Public Sector Leasing

(i). Financial Institutions. (II). Subsidiaries of Banks.

Merits
1. 2. 3. 4. 5. 6. 7. Permits Alternative use of Funds Faster and Cheaper Credit Flexibility Facilitates Additional Borrowings Protection against obsolescence. Hundred percent financing Boon to small firms

Demerits
1. Not suitable mode of project finance. 2. Certain tax/benefits may not be available 3. No ownership 4. Risk of Default

Hire Purchase
Hire purchase is a method of selling goods. In this the goods are let out on hire by a finance company (creditor) to the hire purchase customer (hirer).

FEATURES
Under HP system, the buyer takes possession of goods immediately and agress to pay the total hire purchase price in installments. Each installment is treated as hire charges The ownership of the goods passes from seller to buyer on the payment of the installment.

The hirer has the right to terminate the agreement any time before the property passes.

Difference between Leasing/ Hire purchase

Ownership Method of Financing Depreciation Tax Benefits Deposit Rent purchases Extent of Finance Maintenance Reporting (B/S)