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LEASING SERVICES IN

INDIA

Evolution and Development of Leasing in Indi


Indian Leasing volumes touched an
astonishing figure of $41 Billion by 2011-12.
Indian Leasing has reached 4%-5% of global
leasing volume.
India at the 14th largest place in world leasing.
Sectors include:
consumer finance,
small industry,
heavy industry to automobiles,
railways to
electricity boards

Roughly, annual leasing volume in India is


estimated at about
USD 3.67 billion
Source : Kothari Consultants
Survey)

(White Clarke Groups India Asset and Auto Finance Country

Leasing in India - Scope

Indian, though being the 10th largest global economy, leasing


industry is small in terms of the size of the economy.
India ranks outside Top 50 while its BRICS peers are well within
Top 20 ranking.
Ample of scope to tap potential markets with an estimate growth
level of 25%-30%.
Largest planned outlays for Infrastructure a capital intensive
sector.
Entry of leading international brands Siemens, Volkswagen, IBM,
Hewlett- Packard to name few.

Leasing in India Business Models


Third
Party
Financiers
Companies (NBFCs)

or

Non

Banking Finance

Asset Life Cycle Management (ALCM) Companies


Captive Leasing and
manufacturers
Rental Operators

Financing

Arms

of

leading

Major Lease Types in India

Financial
Lease
193,914
Fig in Lacs

Operating
Lease
294,510

Lease is an agreement whereby the lessor conveys to the


lessee the right to use an asset for an agreed period of
time in return for a payment or a series of payments

Important Features
The Lease finance is a contract.
The parties to contract are Lessor and Lessee.
Equipment (s) are brought by Lessor at the request of
Lessee.
The Lease - contract specifies the period of contract.
The Lessee uses these equipment.
The Lessee in consideration pays the lease rentals to the
Lessor.
The Lessor is the owner of the assets and is entitled to
the benefit of depreciation and other allied benefits
The Lessee claims the rentals as expenses chargeable to
his income.

A 'Financial Lease' is a non-cancelable contractual commitment on the part of the


lessee (the user) to make a series of payments to the lessor for the use of an asset.
In this type of leases, lessee will use and have control over the asset without
holding the title to it. The lessee acquires most of the economic values associated
with the outright ownership of the asset.

This is also known by the name 'Capital lease'. The essential point of this type of
lease agreernent is that it contains a condition whereby the lessor agrees to
transfer the title for the asset at the end of the lease period at a nominal cost.

Under this lease usually 90 per cent of the fair value of the asset is recovered by
the lessor as lease rentals and the lease period is 75 per cent of the economic life
of the asset.

The lease agreement is irrevocable. Practically all the risks incidental to the asset
ownership and all the benefits arising therefrom is transferred to the lessee who
bears the cost of maintenance, insurance and repairs. Only the title deeds remain
with the lessor.
.

An operating lease stands in contrast to the financial where lease


agreement gives to the lessee only a limited right to use the
asset.
The main characteristics of operating lease is as follows:

The lease can be cancelled by the lessee prior to its expiration at a short notice.
The lessor is responsible for up _Keep and maintenance of the asset.
The lease is for a smaller period.
The sum of all the lease payments by the lessee does not necessarily fully provide
for the recovery of cost of the asset.
The lessor has the option to lease out the asset again to another party.

This is the popular type of lease in most of the advanced


countries; under this it is easy to lease an asset on an
experimental basis to know its exact profitability. The lessee is
protected against the technical obsolescence. For the use of
costly equipment, for a limited period, it is the best method.


Under

this the lessee first purchases the equipment of his choice


and then sells it to the lessor. The lessor in turn leases out the asset
to the same lessee.
The advantage of this method is that the lessee can satisfy himself
completely regarding the quality of the asset and after possession of
the asset convert the sale into a lease arrangement. This option he
can exercise even in the case of old asset used by him for sometime
to get the release of a lump sum cash which he can put into
alternative use.
The lessor gets the tax credit for depreciation.

In this form of lease agreement the lessor undertakes to finance


only a part of the money required to purchase the asset.
The major part of the finance is arranged with a financier to whom
the title deeds for the asset as well as the lease retails are
assigned. There are usually three parties involved the lessor, the
lessee and the financier.
The lease agreement is between the lessee and lessor as in any
other case. But it is supplemented by another separate agreement
between the lessor and the financier who agrees to provide a
major part (say 75 per cent) of the money required. This is a type
of lease agreement which will enable the lessor to undertake an
expanded volume of lease business with a limited amount of
capital and hence it is named leveraged leasing

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Effects

on Profit and Loss Account: Accounting profit has


tended to be higher under lease finance rather loan financing,
only the lease payments were charged in the profit and loss
account, whereas when a company borrows and buys both the
interest payments and depreciation charges on_ asset acquired
are charged as an expense. Particularly in the early years of loan,
accounting profit tended to be higher under the lease
agreement.

Effects on Balance Sheet: The level of total assets appearing


in the balance sheet has generally been lower under a lease
arrangement than a loan arrangement. All loans appear in the
balance sheet as sources of finance and all purchased assets
appear as part of the total assets employed. However with
leased assets no lease obligation usually appeared in the balance
sheet.

Gupta Leasing Ltd. is proposing to acquire


special purpose machinery. The initial cost of
machine Rs. 4,00,000. Depreciation allowance
is given @ 20% p.a. on reducing balance
method. To finance the entire cost, the company
intend to get a loan of Rs. 4,00,000 on interest
@ 18% p.a.
Another proposal has come for review to take
the same machinery on lease basis on annual
lease rentals of Rs. 1,20,000 for a period of 5
years. How would the acquisition of assets
under the above two alternatives effect the
profit and loss account and Balance Sheet

Profit and Loss Account (without acquisition of machinery)

Particulars

Rs.

To Administrative and
9,00,000
other expenses

Particulars

Rs.

By Gross Profit

14,00,000

To Net Profit

5,00,000

14,00,000

14,00,000

Profit and Loss Account (outright purchase of machinery)


IParticulars

Rs.

T0 Administrative and other


9,00,000
expenses

Particulars

Rs.

By Gross Profit

14,00,000

To Interest on Loans
(@ 18% on 4,00,000)

72,000

To Depreciation on

Machinery

80,000

(@ 20% on 4,00,000)
I
To Net Profit

I
I

3,48,000

14,00,000

14,00,000

Profit and Loss Account (Machinery acquired On lease)

Particulars

Rs.

Particulars

Rs.

9,00,000

By Gross Profit

14,00,000

To lease rent

1,20,000

To Net Profit

3,80,000

14,00,000

14,00,000

To Administrative and
other expenses

Balance Sheet (without acquisition of Machinery)


Liabilities
Equity
Current liabilities

Rs.
7,00,000
3,00,000
10,00,000

Assets
Fixed assets
Current assets

Rs,
6,00,000
4,00,000
10,00,000

Balance Sheet (out right purchase of Machinery)


Liabilities
Equity
Debt
Current liabilities

Rs.
7,00,000
4,00,00
3,00,000
14,00,000

Assets
Fixed assets

Current assets

Rs,
10,00,000

4,00,000
14,00,000

Balance Sheet (Machinery acquired On lease)


Liabilities
Equity
Current liabilities

Rs.
7,00,000
3,00,000
10,00,000

Assets
Fixed assets
Current assets

Rs,
6,00,000
4,00,000
10,00,000

The Tax effects that arise from the lease transaction is studied from Lessee and Lessor
point of view is given below:

From the View Point of Lessee: The full amount of the 'annual lease payment is a
deductible expense for computing taxable income.

From the View Point of lessor: The Lessor is entitled to claim the depreciation
allowance and the lease rentals will be taken into consideration in computation of
taxable income.

In the Leasing situation, the lessor claims whatever capital allowances are available
and may pass on some of the benefits via lower leasing charges to the lessee. The
amount, if any, which is passed on will depend upon competition within the market and
also on how close the lease is to the lessor's year end. A potential, lessee should
ideally seek a lessor just before the lessor's year-end. If the lessor buys an asset just
before a year-end, then the benefit of the tax allowance is received at the earliest
possible opportunity, which will be an inducement to the lessor to arrange the deal.

It

is an easy method of financing capital asset having a heavy cost


because

It

no margin money is required as in the case of other methods,

spreads capital cost over a reasonable period and sufficiently flexible as the
lease rentals can be structured according to the needs of the lessee
(borrower).

helps to conserve funds which can be used for other urgent


needs.
The procedure is simple for both the lender and the borrower.
Lease rentals are deductible expense for the purpose of tax.
It is an 'off Balance Sheet' method of financing and thus helps in
window dressing.
Lessee is protected from technological obsolescence particularly
under operating lease agreement.

It is a safe asset based financing for a


productive purpose.
Lessor enjoys tax benefit by way of
depreciation on the asset owned
Lease rentals provide regular cash income
maintaining liquidity of the concern


Lease

financing, compared to other


methods, is costly for the lessee.
The financial lease has all the rigidities of
other methods of financing.
As the lessee is not the owner of the asset
technically, he cannot enforce the warrantees
or guarantees enforceable against the
vendor.

Hire purchase is a type of instalment credit under


which the hire-purchaser agrees to take goods on
hire at a stated rental with an option to purchase
the goods

Compulsory Option is provided to the hirer (user).

Only interest element included in the HP


instalments is revenue expenditure by nature

HP installments comprise of 3 elements (1) normal


trading profit (2) finance charge and (3) recovery of
cost of goods/assets.

Ownership of the Asset:In lease, ownership lies with the lessor. The lessee has the right to
use the equipment and does not have an option to purchase. Whereas in hire purchase, the
hirer has the option to purchase. The hirer becomes the owner of the asset/equipment
immediately after the last installment is paid.
Depreciation:In lease financing, the depreciation is claimed as an expense in the books of
lessor. On the other hand, the depreciation claim is allowed to the hirer in case of hire
purchase transaction.
Rental Payments:The lease rentals cover the cost of using an asset. Normally, it is derived
with the cost of an asset over the asset life. In case of hire purchase, installment is inclusive of
the principal amount and the interest for the time period the asset is utilized.
Duration:Generally lease agreements are done for longer duration and for bigger assets like
land, property etc. Hire Purchase agreements are done mostly for shorter duration and
cheaper assets like hiring a car, machinery etc.
Tax Impact:In lease agreement, the total lease rentals are shown as expenditure by the
lessee. In hire purchase, the hirer claims the depreciation of asset as an expense.
Repairs and Maintenance:Repairs and maintenance of the asset in financial lease is the
responsibility of the lessee but in operating lease, it is the responsibility of the lessor. In hire
purchase, the responsibility lies with the hirer.
Extent of Finance:Lease financing can be called the complete financing option in which no
down payments are required but in case of hire purchase, the normally 20 to 25 % margin
money is required to be paid upfront by the hirer. Therefore, we call it a partial finance like
loans etc.

Beta Limited is considering the acquisition of a personal computer


costing Rs. 50,000. The effective life of the computer is expected to
be five years. The company plans to acquire the same either by
borrowing Rs. 50,000 from its bankers at 15% interest per annum or
by lease. The company wishes to' know the lease rentals to be paid
annually which match the loan option. The following further
information is provided to you:
a) The principal amount of the loan will be paid in five annual equal
installments. Interest, lease rentals, principal repayment are to be
paid on the last day of each year.
b) The full cost of the computer will be written off over the effective
life of computer on a straight-line basis and the same will be allowed
for tax purposes.
c) The company's effective tax rate is 40% and the after tax cost of
capital is 9%.The computer will be sold for Rs. 1,700 at the end of the
5ih year. The commission on such sales is 9% on the sale value and
the same will be paid.
You are required to compute the annual lease rentals payable by Beta
Limited which will result in indifference to the loan option

ABC Ltd. is considering to buy a machine costings.


1,10,000 payable Rs. 10,000 down and balance is payable
in 10 annual equal installments inclusive of interest
chargeable at 15%. Another option before it is to acquire
the assets on a lease rental of Rs. 15,000 per annum for
10 years. As a financial manager, decide between these
two options that:
i) Scrap value of Rs. 20,000 is realizable if the asset is
purchased.
ii) The firm provides 10% depreciation on straight line
method on the original cost. iii) The tax rate is 50% and
after tax cost of capital in 15%.

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