1. LEASE FINANCING
Prepared By-:
A.M.KADARI

2. Definition:
Definition:
 Leasing is a contractual arrangement , where
 The owner (Lessor) of the Asset(Equipment)
 Transfers the possession / right to use the Asset(Equipment)
to another(Lessee)
 For an agreed period of time in return for rental.

3. Essential Elements of Leasing
Parties to a Lease Contract: Essentially two parties
 Lessor – is the owner of the asset that is being Leased.
 Lessee – is the receiver of the services of the asset under a
Lease contract.
 Lessor and Lessee can be Individual or legally recognised
party.
 The lessor is either the asset’s manufacturer or an
independent leasing company
 Lease broker – big ticket Leases use him.
 Major Players in Lease Market:
 Banks- Indian & Foreign /FIs
 subsidiaries of Banks/FIs,
 NBFCs

4. Essential Elements of Leasing
 Asset – Subject matter of Leasing contract; Automobiles,
Plant & Machinery, Equipments, Land & building, Factory,
a running business, aircraft, Ships, etc.
 Ownership – remains with the Lessor
 Use - of the asset is allowed to the Lessee.
 Lease Term – Primary /secondary Lease Term.
 Lease Rentals – is the consideration for the lease
transaction. So structured to recover the investment cost,
during agreed period.

5. TYPES OF LEASING
 Finance Lease and Operating Lease
 Sale & Lease back and Direct Lease
 Single Investor Lease and Leveraged Lease
 Domestic Lease and International Lease

7. Finance Lease
 Long-term, non-cancellable lease contracts are known
as financial leases.
 To record a lease as a capital lease, the lease must be
noncancelable.
 One or more of four criteria must be met:
1. Transfers ownership to the lessee.
2. Contains a bargain-purchase option.
3. Lease term is equal to or greater than 75 percent of the estimated
economic life of the leased property.
4. The present value of the minimum lease payments (excluding
executor costs) equals or exceeds 90 percent of the fair value of the
leased property.

9. Features of Financial Service
A Financial Lease is structured to include:
 The Lessee selects the equipment meeting his requirement
 The Lessee negotiates the price, delivery schedule,
installation, warranties, maintenance, etc.
 The Lessee informs the above details and Lessor makes the
payment directly to the Seller(manufacturer /distributor).
 The equipment is directly delivered to the Lessee by seller.
 The Lessee enjoys exclusive and peaceful possession and
use of the equipment.
 Enters in to the Lease agreement with Lessor.
 The Lessor pays the amount directly to
Seller(Manufacturer/supplier).

10. Operating Lease
 Characteristics of an Operating Lease:
 The Lease term is significantly less than the economic
life of the equipment.
 The Lessee enjoys the right to terminate the Lease at
short notice without any significant penalty.
 The Lessor usually provides the operating know-how,
suppliers related service, and undertakes the
responsibility of insuring and maintaining (repair and
technical service) the equipment

11. Differentiation Between Operating
lease and Financial lease
BASIS Financial Lease Operating leas
Meaning Long-term, non-cancellable lease A Lease which is a short term one
contracts are known as financial and one which does not cover the
leases. useful life on an asset is called an
operating lease.
Form In this type of lease, money is The lessor is carrying on business
provide by lessor and the asset is of leasing and he holds such
purchase form outside assets or is a manufacturer of such
asset leases its asset
Maintenance The lessee undertakes the In this type of lease, repairs and
maintenance of the asset, paying maintenance is done by the lessor.
insurance premium ect.
Risk of In this types of lease, the lessee In this types of lease, the lessor
Obsolescence bears the risk obsolescence, so far bears the risk obsolescence
as he uses the asset. during the period of the lease.

12. BASIS Financial Lease Operating leas
Period of Period of lease – whole useful Period of lease – for shot time.
Lease life of asset.
Option to Buy Option to buy for lessee. Period of lease – for shot time.
Accounting According to the international No entry is made in the balance
Entries accounting standard-17, an sheet of the lassee under this type
entery iis made in the balance of lease, because lease is in the
sheet of the lessee on both the form of a hired asset
side

13. Sale and Lease back
Sale and Lease back:
 The owner(Lessee) of the equipment sells it to a Leasing
company (Lessor).
 The Lessor, leases the equipment back to the Lessee.
 Under this arrangement, the assets are not physically
exchanged but it all happens in records only.
 The seller assumes the role of a lessee and the buyer
assumes the role of a lessor.
 The seller gets the agreed selling price and the buyer gets
the lease rentals.
Two sets of cash flows occur:
 The lessee receives cash today from the sale.
 The lessee agrees to make periodic lease payments,
thereby retaining the use of the asset.

15. Direct Lease
 Under direct leasing, a firm acquires the right to use an
asset from the manufacturer directly.
 The ownership of the asset leased out remains with the
manufacturer itself.
 Bipartite Lease – Equipment supplier-cum-Lessor and
Lessee.
 Tripartite Lease (Sales-aid-Lease) – Equipment supplier,
Lessor and Lessee.

16. Single Investor Lease
• Only two parties – Lessor and Lessee.
• Leasing company (Lessor) funds the entire investment,
having appropriate mix of Equity-cum-Debt.
• Finance raised by the Lessor, is without recourse to the
Lessee.

17. Leveraged Lease
Leveraged Lease:
 3 parties to the transaction.
 Lessor ( Equity investor)
 Lender
 Lessee.
 The Leasing company (Equity investor)
 buys the equipment, through substantial borrowing, and
 with full recourse to the Lessee and without recourse to it.
 The Lender obtains an assignment of the Lease and a first
mortgage of the equipment.

19. Domestic Lease and
International Lease
 When a lease agreement is made between citizen of same
countries, it is called Domestic lease
 When a lease agreement is made between citizen of
different countries, it is called International lease

20. Advantages of Leasing
 Provides full Finance
 Flexible
 Saves from Recurring cost of finance
 Absence of restrictions
 Tax Benefits
 Increases the capacity to borrow
 Useful in case of fast changing technology
 Faster and Cheaper credit

21. Limitations of Leasing
 No Benefit of Residual Value
 High cost of leaseing
 No benefit of ownership
 Not Flexible
 Disputes

22. Factors affecting Leasing
Decisions
 Availability of cash
 Effect on Borrowing Capacity
 Shifting the Risk of Obsolescence
 Convenient Arrangement
 Less Restrictions on Firm
 Salvage Value
 Tax Benefits
 Leas Expenses

23. Institutions In the field of
Leaseing
 All India Financial Institutions
 Leasing Companies
 Banks
 Financial Companies
 Industrial Groups having Leasing Companies

24. Difficulties Faced by Leasing
Companies in India
 Competition
 Lack of Trained Employees
 Proportion of Debt-Equity not maintained
 Lack of Provision for Depreciation
 Low Investment of Promoters
 Shortage of Funds
 Inefficiency of Management
 Government Attitude

25. LEASING IN INDIA
 Leasing has grown by leaps and bounds in the eighties but
it is estimated that hardly 1% of the industrial investment in
India is covered by the lease finance, as against 40% in
USA and 30% in UK and 10% in Japan.

26. DIFFERENCE BETWEEN LEASE FINANCING
AND HIRE PURCHASE
BASIS LEASE FINANCING HIRE PURCHASE
Meaning A lease transaction is a Hire purchase is a type of
commercial arrangement, instalment credit under which
whereby an equipment the hire purchaser agrees to
owner or manufacturer conveys take the goods on hire at a
to the equipment user the right stated rental, which is inclusive
to use the of the repayment of principal as
equipment in return for a rental. well as interest, with an option to
purchase.
Option to No option is provided to the Option is provided to the hirer
user lessee (user) to purchase the (user).
goods.
Nature of Lease rentals paid by the Only interest element included
expenditur lessee are entirely revenue in the HP instalments is revenue
e expenditure of the lessee. expenditure by nature.
Componen Lease rentals comprise of 2 HP instalments comprise of 3
ts elements (1) finance charge elements (1) normal trading
and (2) capital profit (2) finance

27. Any
?

28. THANK YOU