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
 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 hire-

purchase 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


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.



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.
 Advantages of Hire  Disadvantage of hire
Purchasing purchasing
Cash flow: payment by Inflexible: difficult to
instalments. escape the
Writing down outstanding
allowances apply. settlement if say, a
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
 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


 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.
 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.


Most of them issue shares of denomination of Re one and



no one except promoters and directors can hold more

than one share.


They have a large membership varying from 1,000 to



2,00,000. yet their share capital is very small.



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.

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.
 





THANK U