Financial management term paper-

1. Term Paper on
Leasing and
Hire purchase
Sub: Financial Management
Presented By
Hareesh.M
2014600120

2. Leasing
DEFINITION OFLEASING
Lease isa contract where bythe ownerof the asset(lesser) grantstoanotherparty(lessee),the
exclusiverighttouse the assetusuallyforan agreedperiodof time inwrittenforthe paymentof rent.
CONCEPTOF LEASING
• Lease finance denotesprocurementof assetsthroughlease.
• In India,the conceptwaspioneeredin1973 whenfirstleasingcompanywassetupinMadras
and the eightieshave seenarapidgrowthof business.
A lease isa contractual agreementinwhich:
 A party owinganasseti.e.lesser
 Providesanassetforuse to anotherparty i.e.lessee
 For an agreedperiodof time i.e.lease period
 For a considerationi.e.lease rentals
MARKETING OFLEASING
Generallythere are twotypesof marketinginleasing:
• B2C
• B2B
Marketingof leasingisdone byfinancingmanykindsof assetstoconsumersaswell asbusinesswhich
includes:
• Plantand machinery
• Businesscars
• Commercial vehicles
• Agricultural equipments
• Hotel equipments
• Medical and dental equipments.
• Computersincludingsoftware packages.

3. • Office equipmentsetc.
LEASE FINANCINGORGANISATIONSIN INDIA
• NBFC
• Private sectormanufacturingcompanies
• Infrastructure leasingandfinancial servicesltd.(IL&FS).
• ICICIbank
• HDFC bank
• LIC
• Industrial reconstructionbank of India(IRBI).
• State industrial investmentcorporations(SIICS).
TYPES OF LEASE
Financial
Lease
Operating
Lease
Leverage
Lease
Cross border
Lease
Wet & Dry
Lease
Vendor
Leasing

4. TYPES OF LEASING
• Financial lease- Longterm noncancellable leasecontract.
Ex: Plant,Machinery,Building
• Operatinglease- Shortterm,cancellable leaseagreements.
Ex: Touristrentinga car, Hotel rooms
• Leverage Lease- A leverage lease isusedforfinancingthose assetswhichrequire huge capital
outlay- 50 lakhsto 2 crore.Assethas economiclife of 10 yearsor more.The Lessoracquiresthe
assetsas perthe termsof the lease agreementbutfinancesonlyapart of the total investment,
say 20%-50%
• Sale and lease back-Special financial agreementinwhichthe usermaysell anassetownedby
himto the lessorandlease itback fromhim.Example:shippingIndustry.
• Cross border lease-A vendorleasingisone where the retail vendorstie upwiththe lease finance
companieswhichgive financingoptiontothe customersof the vendorstopurchase a product.
 Thistype of lease ispopularinautofinance.
1) VendorLeasing
2) Wet lease &dry Lease
MERITS OFLEASING
• Convenience incase of shortterm need.
• No riskof technologyObsolescence.
• Efficientmaintenance services.
• Low administrative andtransactioncost.
• DebtEquityratio remainsunchanged.
• Benefitsof Tax shield.
DEMERITS OF LEASING
• No benefitof residual value.
• Highcost of leasing.
• No benefitof ownership.

5. • Notflexible.
• Chancesof disputes.
HIRE PURCHASE
• Hire purchase is a type of instalmentcreditunderwhichthe hire purchaser,calledthe hirer,
agreesto take the goodson hire at a statedrental,whichisinclusive of the repaymentof
principal aswell asinterest,withanoptiontopurchase.
• Hire purchase is usedtobuy expensiveitemswhichapersoncannotaffordto payoutright:e.g.
a car
• The ownershiportitle of the same istransferredonlywhenthe lastinstalmentispaid.
FEATURES OF HIRE PURCHASE
• Creditpurchase
• Installmentpayment
• Possessionattime of agreement
• Ownershiptill lastinstallment
• Terminationof the agreement
• Ownershipof goodsafterall installmentspayment.
TYPES OF HIRE PURCHASE
• Consumerhire purchase
• Industrial hire purchase
ADVANTAGESOFHIRE PURCHASE
• Spreadthe cost of finance.
• Interestfree credit.
• Higheracceptance rates.
• Sales
• Debtsolutions.
DISADVANTAGESOFHIREPURCHASE
• Personal debt

6. • Final payment
• Bad credit
• Repossessionrights.
DIFFERENCE BETWEEN LEASING & HIRE PURCHASE
LEASING HIRE PURCHASE
OWNERSHIP OF ASSET Ownership lies with
the lesser.
The lessee has the
right to use the
equipmentand does
not havean optionto
purchase.
The hirer has the
optionto purchase.
The hirer becomes the
owner of the
assets/equipments
immediatelyafter the
installmentis paid.
DEPRECIATION The depreciationis
claimed as an expense
in the books of lesser.
Here, the depreciation
claim is allowedto the
hirer.
RENTAL PAYMENTS The rentalscover the
cost of using an asset.
Normally, it is derived
with the cost of an
asset over the asset
life.
The installmentis
inclusiveof the
principalamount and
the interest for the
time period the asset
is utilized.

7. LEASING HIRE PURCHASE
DURATION Lease agreements are
generallydone for
longer durationand
for bigger assets like
land, property etc.
These agreements are
done mostly for
shorter durationand
cheaper assets like
hiring a car,
machinery etc.
TAX IMPACT The totallease rentals
are shown as the
expenditureby the
lessee in the lease
agreement.
In hire purchase, the
hirer claims the
depreciationof asset
as an expense.
REPAIRS AND
MAINTENANCE
Repairsand
maintenanceof the
asset in financiallease
is the responsibilityof
the lessee but in
operatinglease, it is
the resposibilityof the
lesser.
In hire purchase, the
responsibilitylieswith
the hirer.

8. DIFFERENCE BETWEEN HIRE PURCHASE AND INSTALLMENT SYSTEM
HIRE PURCHASE INSTALLMENT
SYSTEM
OWNERSHIP Transfer of ownership
takes place after the
payment of all
installments.
In case on installment
payment system, the
ownership is
transferred
immediatelyat the
time of agreement.
TYPE OF CONTRACT The hire purchase
agreement is like a
contract of hire
though later on it
may become a
purchase after the
payment of last
installment.
In installment
payment system, the
agreement is like a
contract of credit
purchase.
POSSESSION In case of default
payment, in hire
purchase system the
vendorhas a right to
back goods from the
possession of the hire
purchase.
Here, the vendor has
no right to take back
the goods from the
possession of the
purchases; he can
simply sue for the
balancedue.