Financial services Notes for BBM

Chapter 1 Introduction: The principle of management by objectives rightly suits the financial services management. The basic objectives of management in financial services are cost effectiveness, efficiency in service quality and profitability. In this service sector quality counts more than the quantity. Management of financial services requires a combination of talents in marketing & area, finance area and in HRD capital market deals with raising of finance, arranging for loans, creating in capital and securities, etc. But being a service sector market management of a human component is vital for its operation. Capacity to take decisions and right decisions in time is essential part of capital market management. Corporate data and information is available, it is the manager's competency to pick up the correct information, analyse it and draw a correct conclusion market and investment analysis requires an expert financial manager. Meaning of Financial Services: The term "Financial Services" in a broad sense means "mobilizing and allocating savings". Thus, it includes all activities involved in the transformation of saving into investment. The financial service can also be called 'financial intermediation'. Financial intermediation is a process by which funds are mobilised from a large number of savers and make them available to all those who are in need of it and particularly corporate customers. Thus, financial services sector is a key area and it is very vital for industrial developments. Definition The term financial services can be defined as the activities, benefits, satisfaction connected with the sale of money, that offer to users or customers, financial related values. NATURE OR CHARACTERISTICS OF FINANCIAL SERVICES The financial services has the following characteristics: 1. INTANGIBLE: Financial services cannot appeal to a buyers sense of touch, taste, smell, sight or hear. Thus an organization providing financial services is largely dependent on the feedback from the public as to effectiveness, quality and attractiveness of the services rendered. 2. DIRECT SALE: Direct sale is the only possible channel of distribution. There are no middleman in between. In order to ensure that the services are available at the right time and the right place, simultaneous production and distribution of financial services is undertaken by the service organization. 3. HETROGENITY: In order to provide a variety of financial and related needs of different customers in different areas financial service organization has to offer a wide range of products and services. They provide special services to industrial customers and retail services covering insurance money receipt or storage etc. 4. FLUCTUATION IN DEMAND: The demand for certain categories of financial services ex. Life insurance, its demand fluctuate according to the level of general economic activity. This factor puts extra pressure on the role & functions of marketing and insurance organization. 5. PROTECT CUSTOMERS INTEREST: The responsibility of any financial service organization to protect customers interest is important not just in banking and insurance but also in other sectors of the financial services. 6. LABOUR INTENSIVE: Personalized services versus automation is an important issue in financial services. The financial service sector is highly labour intensive. It leads to increase in cost of production and consequently affect the price of financial products. Because of high

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Financial services Notes for BBM

personnel cost involved and to enhance customers convenience increased use of technology is being made. GEOGRAPHICAL DISPERSION: Financial services must have both appeal and wider application. To ensure this the service providing organization must have massive branch network so that benefits of convenience are enjoyed by international, national and local customers. LACK OF SPECIAL IDENTITY: Customers usually approach a nearby branch of a bank or financial institution because it is convenient to them. As the competing product offered by various service organizations are similar the emphasis is more on the package than the product. The package consists of branch location, staff, services, reputation, advertising and new services offered from time to time. Thus, major competitors offering similar services place more emphasis on the promotional aspects rather than on the inherent uniqueness of a particular financial institutions service. INFORMATION BASED: Financial service industry is an information based industry. It involves creation and use of information. Information is an essential component in the production of financial services. Cost of processing information is quite relevant in the profitable production of financial services. REQUIRE QUALITY LABOUR: Financial services require huge amounts of high quality labour to deal with information & communication with the market. The type of labour range from workers performing simple task to those undertaking complex analysis and negotiations require years of training and experience. The importance of labour cost and the role of human inputs in financial service production can be realized from the salaries paid in this industry. Financial services firms have to make extra efforts to attract, motivate, and retain the human resources they require in order to survive, grow and prosper in future.

7.

8.

9.

10.

TYPES OF FINANCIAL SERVICES As we have seen earlier financial services are offered by various financial organization or institutions, commercial banks and merchant bankers. These financial services can be classified into two types basically: 1. Asset based/fund based 2. Fee based/advisory services 1. ASSET BASED / FUND BASED SERVICES These financial services includes all such type of services which involves investment in some kind of physical asset for which the payment is being made either in future or at present in full or partial in the form of interest or dividend. It involve some kind of assets. a) LEASING FINANCE: Leasing is an arrangement that provides a firm with the use and control over assets without buying and owing the same. A lease is a contract between the owner of the asset(lessor) and the user of the asset(lessee), whereby the lessor gives the right to use the asset to the lessee over an agreed period of time for a consideration called the lease rental. The lessee pays the lease rent periodically to the lessor as regular fixed payments over a period of time as mentioned in the terms and conditions of the agreement. At the expiry of the lease period the asset reverts back to the lessor or the lessee may buy the asset. So, leasing is an alternative to purchase of an asset in order to acquire the services of that asset.

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Financial services Notes for BBM

Leasing is a process by which a firm can obtain the use of certain fixed asset for which it must make a no. Of contractual, periodic & tax deductible payments. HIRE PURCHASE: Hire purchase is an alternative to leasing as a source for equipment financing. Hire purchase means a transaction where goods are purchased and sold on the terms that: 1. Payment will be made in installments. 2. The possession of the goods is given to the buyer immediately. 3. The property(ownership) in the goods remains with the vendor till the last installment is paid. 4. The seller can repossess the goods in case of default in any payment of any installments. 5. Each installment is treated as hire charges till the last installment is paid. BILL DISCOUNTING: According to Indian Negotiable Instruments Act 1881, the bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person, to pay a certain sum of money to, or to the order of, a certain person, or to the bearer of that instrument. The bill of exchange is used for financing a transaction in goods which means that it is essentially a trade related instrument. Discounting of B/E is a fund based financial service provided by finance companies. The act of handling over an endorsed B/E for ready money is called discounting of bill. The margin between the ready money paid and the face value of the bill is called the discount rate and is calculated as a rate percentage per annum on the maturity value. The maturity of a bill of exchange is defined as the date on which payment will fall due. Normal maturity periods are 30, 60, 90, 120 days bills maturing within 90 days is most popular. CREATION OF B/E: Suppose a seller sells a good or merchandise to buyer. In most cases, the seller would like to be paid immediately but the buyer would like to pay only after sometime, that is the buyer would wish to purchase on credit. For this problem the seller draws a B/E of a given maturity on the buyer. The seller has now assumed the role of a creditor and is called the drawer of the bill. The buyer who is the debtor is called the drawee. The seller then sends the bill to the buyer who acknowledges his responsibility for the payment of the amount on the terms mentioned on the bill by writing his acceptance on the bill. The acceptor could be the buyer himself or any third party willing to take on the credit risk of the buyer. CONSUMER CREDIT: Consumer credit includes all asset based financing plans offered to individuals to help them acquire durable consumer goods. In a consumer credit transaction the individual/consumer/buyer pays a part of cash purchase price at the time of delivery of the asset and pays the balance with interest over a specified period of time. The main providers of consumer credit are foreign/multinational banks, commercial banks and finance companies & cover items such as cars, scooters, vcrs, tvs, refrigerators, washing machines, home appliances, personal computers, cooking ranges, food processors etc. VENTURE CAPITAL: Venture capital is a form of financing designed for funding high technology, high risk and perceived high risk projects. The term venture capital represents financial investments in a highly risky projects with the objective of earning a high rate of return. A venture capitalist provides funds to entrepreneurs & enterprises pursuing new and unexplored avenues. They helps the promote to actualize the project and attain commercialization. Financial support s extended not only as a conventional loan with fixed repayment schedules, but also in the form of equity or quasi-equity instruments with a conscious intention of sharing the rewards

b)

c)

d)

e)

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as well as the risks with the sponsor of the project. Financier provides management support to establish the venture successfully. Thus V.C. is a medium for translating the entrepreneurial ideas from research laboratory stage to the production line and further on to get the products to the market. There is significant scope for venture capital companies in our country because of increasing emergence of technocrat entrepreneurs who lack capital to be risked. These venture capital companies provide the necessary risk capital to the entrepreneurs so as to meet the promoters contribution as required by the financial institutions. In addition to providing capital, these firms take an active interest in guiding the assisted firms. Some V.C. firms are:1. Venture capital fund of IDBI 2. Technology development & information corporation of India ltd.(ICICI) & (UNIT TRUST) 3. Risk capital & technology corporation ltd (RCTC) 4. Infrastructure leasing and financial services ltd. 5. Stock holding corporation of India ltd. (SHCIL) 6. The credit rating information services of India ltd.(CRISL) f) HOUSING FINANCING: Housing finance has merged as a fund based financial service in the country with the setting up of National Housing Bank (NHB) by RBI in 1988 whose main objective is to provide finance for house building. The main components of the housing finance system are the NHB, the HUDCO Housing and urban development corporation, Insurance organizations, commercial and co-operative banks & specialized Housing finance institution in the public private and joint sector such as HDFC, Citi Home, Dewan Housing Finance and so on. g) INSURANCE SERVICES: Insurance is a contract whereby the insurer that is insurance company agrees/undertakes in, consideration of a sum of money (premium), to make good the loss suffered by the insured (policy holder) against a specified risk such as fire or compensate the beneficiary (insured) on the happening of the specified event such as accident or death. The document containing the terms of contract between the insurer and the insured is called policy. The property which is insured is the subject matter of insurance. The interest which the insured has in the subject matter of insurance is known as insurable interest. Depending on the subject matter, insurance services are divided into:1. Life 2. General Initially there were only two public organization LIC & GIC but with the setting up of IRDA (Insurance regulatory & development authority) new ventures came into existence. h) FACTORING: Factoring may broadly be defined as the relationship created by an agreement, between the seller of goods & services and a financial institution called a factor, whereby the later purchases the receivables of the former and also control and administers the receivables of the former. Factoring as a fund based financial service, provides resources to finance receivables as well as facilitates the collection of receivables. It is another method of raising short term finance through account receivables credit offered by commercial bank and factors. A factor is a financial institution which offers services relating to management and financing of debts arising out of credit sales. At present following companies operate in this field: Canbank Factors Ltd

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Financial services Notes for BBM

SBI factors and commercial services pvt ltd HSBC Foremost factors ltd SIDBI Standard chartered bank Global trade finance

2. FEE BASED / ADVISORY SERVICES In fee based services there is no physical asset only advisory services are given. And for those advisory services payment is given to the service provider as a fees for the services or advice. a) PORTFOLIO MANAGEMENT: These services are offered not only to the companies issuing the securities but also to the investors. They advice their clients, mostly institutional investors, regarding investment decision as the quantum of amount of security and the type of security in which to invest. They renders necessary services to the investors by advising on the optimum investment mix, taking into account factors like: objectives of the investment, tax bracket applicable to the investor, need for maximizing returns, capital appreciation etc. Thus such firms undertake the function of purchase and sale of securities for their clients so as to provide them portfolio management services. Some firms manage mutual funds and offshore funds. b) CORPORATE COUNSELING: This advice is usually provided to corporate unit. Such firms render advice to corporate enterprises from time to time in order to improve performance and build better image/reputation among investors and to increase the market value of its equity shares. Counseling is provided in the form of opinions, suggestions and detailed analysis of corporate law as applicable to the business units. In India Punjab National Bank is one of the examples. c) ISSUE MANAGEMENT: This service is mainly confined to management of new public issues of corporate securities by the newly formed companies, existing companies and foreign companies in dilution of equity. These firms acts as sponsors of the issues. They obtain consent of the controller of capital issues which is SEBI and provide a number of services to ensure success in the marketing of the securities. The services provided are: Preparation of prospectus Preparation of plan and budget of issues Selection of institutional and broker underwriters and underwriting agreements Advertising and arranging publicity agency for post and pre issues Selection of issue house Advising clients regarding a fresh issue, additional issues, bonus and write issues. Take decision as to the size and timing of the public issues d) CORPORATE RESTRUCTURING: The growth of the firm can be achieved internally either by developing new products or externally by acquisitions, mergers, amalgamations, absorption and so on. The activities related to the expansion and contraction of a firms operations or changes in its assets or financial or ownership structure are referred to as corporate restructuring. And the most common forms of corporate restructuring are

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Financial services Notes for BBM

merger/demergers, amalgamations & acquisition/ takeovers, buyouts or financial restructuring. e) CREDIT RATING: Credit rating agencies are the institutions that rate the companies or firms for their creditworthiness. Credit rating is the opinion of the rating agency on the relative ability and the willingness of the issuer of a debt instrument to meet the debt service obligations as and when they arise. It is an indicator expressing the underlying credit quality of a debt issue program. The business firm can raise funds at a cheaper rate with a good rating. The fund ratings are useful to the banks and other financial institutions when they decide on lending and investment strategies. A company with highly rated instruments ahs to make least efforts in raising funds through public. In India, there are three major credit raising agencies namely CRISL-Credit rating information service of India ltd, ICRA-Investment information and credit rating agency of India ltd, CARE- Credit analysis and research. f) STOCK BROKING: Since SEBI was setup stock broking has emerged as a professional advisory service. Stock broking is a member of a recognized stock exchange who buys, sell or deals in shares/securities. There are many stock broking firms in India which gives advisory service to its clients regarding investment in securities. Thus the broker are the intermediary between the investor and the stock market. The brokers invest in the securities on behalf of the investor and charges fees/ commission for those services. These brokers are registered with SEBI and they are abide by its rules, regulations and by-laws. g) LOAN SYNDICATION: Some institutions provides specialized services in preparation of project, loan applications for raising short term as well as long term credit from various banks and financial institutions for financing the project or meeting the working capital requirements. Loan syndication involves following services: Assisting the clients in the estimation of total cost on the project and prepare financial plan to meet that cost. Assisting clients in the preparation of loan application for financial assistance from term lenders/ financial institutions/ banks and monitoring their progress. Follow up of the term loan application with the financial institution and banks and obtaining the satisfaction for their share of participation. Assisting the client for negotiation for the sanction of appropriate facilities. IMPORTANCE OF FINANCIAL SERVICES 1. Economic Growth: The financial service industry mobilizes the savings of the people and channels them into productive investment by providing various services to the people. In fact, the economic development of a nation depends upon these savings and investment. 2. Promotion of Savings: The financial service industry promotes savings in the country by providing transformation services. It provides liability, asset and size transformation service by providing large loans on the basis of numerous small deposits. It also provides maturity transformation services by offering short-term claim to savers on their liquid deposit and providing long-term loans to borrowers. 3. Capital Formation: The financial service industry facilitates capital formation by rendering various capital market intermediary services capital formation in the very basis for economic

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growth. It is the principal mobilizer, of surplus funds to finance productive activities and thus it promotes capital accumulation. Provision of Liquidity: The financial service industry promotes liquidity in the system by allocating and reallocating savings and investment into various avenues of economic activity. It facilitates easy conversion of financial asset into liquid cash at the discretion of the holder of such assets. Financial Intermediation: The financial service industry facilitates the function of intermediation between savers and investors by providing a means and a medium of exchange and by undertaking innumerable services. Contribution to GNP: The contribution of financial services to GNP has been going on increasing year after year in almost all countries in recent times. Creation of Employment Opportunities: The financial service industry creates and provides employment opportunities to millions of people all over the world.

4.

5.

6. 7.

PRESENT SCENARIO OF FINANCIAL SERVICES 1. Conservatism to dynamism: At present, the financial system in India is in a process of rapid transformation, particularly after the introduction of reforms in the financial sector. The main objective of the financial sector reforms is to promote an efficient, competitive and diversified financial system in the country. This is essential to raise the allocative efficiency of available savings and to promote the accelerated growth of the economy as a whole. The emergence of various financial institution and regulatory bodies has transformed the financial services sector from being a conservative industry to a very dynamic one. 2. Emergence of Primary Equity Market: The capital markets have become a popular source of raising finance. The aggregate funds raised by the industries have gone from Rs. 5976 crore in 1991-92 to Rs. 32382 crore in 2006-07. Thus the primary market has emerged as an important vehicle to channelize the savings of the individuals and corporates for productive purposes and thus to promote the industrial & economic growth of our nation. 3. Concept of Credit Rating: The investment decisions of the investors have been based on factors like name recognition of the company, reputation of promoters etc. now, grading from an independent agency would help the investor in his portfolio management and thus, equity grading is going to play a significant role in investment decision making. Now it is mandatory for non-banking financial companies to get credit rating for their debt instruments. The major credit rating agencies functioning in India are: i. Credit Rating Information Services of India Ltd. ii. Credit Analysis and Research Ltd. iii. Investment Information and Credit Rating Agency. iv. Duff Phelps Credit Rating Pvt. Ltd. 4. Process of Globalization: The process of globalization ha paved the way for the entry of innovative financial products into our country. The government is very keen in removing all obstacles that stand in the way of inflow of foreign capital. India is likely to enter the full convertibility era soon. Hence, there is every possibility of introduction of more and more innovative financial services in our country. 5. Process of Liberalization: The government of India has initiated many steps to reform the financial services industry. The Government has already switched over to free pricing of issues from pricing issues by the Controller of capital issues. The interest rates have been deregulated. The private sector has been permitted to participate in banking and mutual funds and the public sector undertakings are being privatized. The financial service industry in India has to play a

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positive and dynamic role in the years5 India has to play a positive and dynamic role in the years to come by offering many innovative products to suit to the varied requirements of the millions of prospective investors spread throughout the country. Causes for Financial Innovation: (1) Economic liberalization: Reform of the financial sector constitutes the most important component of India's programme towards economic liberalisation. The recent economic liberalization measures have opened the door to foreign competitors to enter into (2) Investor awareness: With a growing awareness amongst the investing public, there has been a distinct shift from investing the savings in physical assets like gold, silver, land, etc. to financial assets like shares, debentures, mutual funds etc. (3) Low profitability: The profitability of the major financial intermediary, namely the banks has been very much affected in recent times. There is a decline in the profitability of traditional banking products. (4) Customer service: Now-a-days the customer's expectations are very great. They want newer products at lower cost or at lower credit risk to replace the existing ones. (4) Keen competition: The entry of many financial intermediaries in the financial sector market has led to severe competition among themselves. This keen competition has paved the way for the entry of varied nature of innovative financial products so as to meet the varied requirements of the investors. (5) Improved communication technology: The communication technology has become so advanced that even the world's issuers can be linked with the investors in the global financial market without any difficulty by means of offering so many options and opportunities. (6) Global impact: Many of the providers and users of capital have changed their roles all over the world. Financial intermediaries have come out of their traditional approach and they are ready to assume more credit risks. (7) New Financial Products and Services: Today, the importance of financial services is gaining momentum all over the world. In these days of complex finance, people expect a financial service company to playa very dynamic role not only as a provider of finance but also a departmental store of finance. Sophistication and innovations have appeared in the arena of financial intermediaries.

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Financial services Notes for BBM

Chapter 2 Leasing: Definition: "Lease is a form of contract transferring the use or occupancy of land, space, structure or equipment, in consideration of a payment, usually in the form of a rent." - Dictionary of Business and Management "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. - James C. Van Horne "A contract between lessor and lessee for the hire of a specific asset selected from a manufacturer or vendor of such assets by the lessee. The lessor retains the ownership of the asset. The lessee has possession and use of the asset on payment of specified retain over the period. - Equipment Leasing Association of UK Types of Lease: (1) Financial Lease: A financial lease is also known as capital lease, long term lease, net lease and close lease. In a financial lease, the lessee selects the equipments, settle the rights and terms of sale and. arranges with a leasing company to buy it. He enters into a irrevocable and non-cancellable contractual agreement with the leasing company. The lessee uses the equipment exclusively maintains it, insures and avails of the after sales service and warranty backing it. He also bears the risk of obsolescence as it stands committed to pay the rental for the entire lease period. The financial lease may also contain a noncancellable clause which means that the lessor transfers the title to the lessee at the end of the lease period. The financial lease is very popular in India as in other countries like USA, UK and Japan. On all India basis, at present, approximately a lease worth Rs. 75 to 100 crores is transacted as tax planning device. (2) Operating Lease: An operating lease is also known as service lease, short term lease or true lease. In this lease, the contractual period between lessor and lessee is less than the full expected economic life of equipment. This means that the lease is for a limited period, may be a month, six months, a year or few years. The lease is terminable by giving stipulated notice as per the agreement. The leaser does the services like handling warranty claims, paying taxes, scheduling and performing maintenance and keeping complete record. Lease is suitable for; (a) Computers, copy machines and other office equipments, vehicles, materials handling equipments, etc. which are sensitive to obsolence, and (b) Where the lessee is interested in tiding over temporary problem (3) Sale and Lease Back: Under this type of lease, a firm which has an asset sells it to the leasing company and gets it back on lease. The asset is generally sold at its market value. The firm receives the sale price in cash and gets the right to use the asset during the lease period. The firm makes periodical rental payment to the lessor. The title to the asset vests with the lessor. (4) Leverage Lease: A leverage lease is used for financing those assets which require huge capital outlay. The outlay for purchase cost of the asset generally varies from Rs. 50 lakhs to Rs. 2 crore and has economic life of 10 years or more. The leverage lease agreement involves three parties, the lessee, the lessor and the lender. The lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment, say 20% to 50%. The balance is provided by a person or a group of persons in the form of loan to the lessor. The loan is generally secured by mortgage of the asset besides assignment of the leased rental payments. The position of the lessee under a leverage leasing agreement is the same as is the case of any other type of lease. In leveraged lease, a wide range of equipments such as rail, road, rolling stock, coal mining, electricity generating plants, pipe lines, ships, etc are acquired. (5) Cross Border Lease: Cross border lease is international leasing and is known as transnational leasing. It relates to a lease transaction between a lessor and lessee domiciled in different countries and includes exports leasing. In other words, the lessor may be of one country and the lessee may be of another country. To illustrate, if a leasing company in USA makes available an Air bus on lease to Air India, there would be a cross border lease.

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Advantages of LEASING to LESSEE There are several extolled advantages of acquiring capital assets on lease: (1) Saving of capital: Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin money as there is no down payment. In this way the saving in capital or financial resources can be used for other productive purposes e.g. purchase of inventories. (2) Flexibility And Convenience: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees. (3) Planning Cash Flows: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets. (4) Improvement In Liquidity: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique. (5) Shifting of Risk of Obsolescence: The lessee can shift the risk upon lessor by acquiring the use of asset rather than buying the asset. (6) Maintenance And Specialized Services: In case of special kind of lease arrangement, Lessee can avail specialized services of lessor for maintenance of asset leased. Although lessor charges higher rentals for providing such services, l essees overall administrative and service costs are reduced because of specialized services of the lessor. (7) Off-The-Balance-Sheet-Financing: Leasing provides "off balance sheet" financing for the lessee, in that the lease is recorded neither as an asset nor as a liability. Disadvantages of LEASING to LESSEE (1) Higher Cost: The lease rental include a margin for the lessor as also the cost of risk of obsolescene, it is, thus regarded as a form of financing at higher cost. (2) Risk of being deprived the use of asset in case the leasing company winds up. (3) No Alteration In Asset: Lessee cannot make changes in asset as per his requirement. (4) Penalties On Termination Of Lease: The lessee has to pay penalties in case he has to terminate the lease before expiry o lease period. Advantages of LEASING to LESSOR (1) Higher profits: The lessor can get higher profits by leasing the asset. (2) Tax Benefits: The lessor being owner of asset can claim various tax benefits such as depreciation. (3) Quick Returns: By leasing the asset, the Lessor can get quick returns than investing in other projects of long gestation period. Disadvantages of LEASING to LESSOR (1) High Risk of Obsolescence: The lessor has to bear the risk of obsolescence as there are rapid technology changes. (2) Price Level Changes: In case of inflation, the prices of asset rises but the lease rentals remain fixed. (3) Long term Investment:

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Leasing requires the long term investment in purchase of an asset, and takes long time to cover the cost of that asset PROBLEMS OF LEASING Leasing has great potential in India. However, leasing in India faces serious handicaps which may mar its growth in future. The following are some of the problems. 1. Unhealthy Competition: The market for leasing has not grown with the same pace as the number of lessors. As a result, there is over supply of lessors leading to competitor. With the leasing business becoming more competitive, the margin of profit for lessors has dropped from four to five percent to the present 2.5 to 3 percent. Bank subsidiaries and financial institutions have the competitive edge over the private sector concerns because of cheap source of finance. 2. Lack of Qualified Personnel: Leasing requires qualified and experienced people at the helm of its affairs. Leasing is a specialized business and persons constituting its top management should have expertise in accounting, finance, legal and decision areas. In India, the concept of leasing business is of recent one and hence it is difficult to get right man to deal with leasing business. On account of this, operations of leasing business are bound to suffer. 3. Tax Considerations: Most people believe that lessees prefer leasing because of the tax benefits it offers. In reality, it only transfers; the benefit i.e. the lessees tax shelter is lessors burden. The lease becomes economically viable only when the transfers effective tax rate is low. In addition, taxes like sales tax, wealth tax, additional tax, surcharge etc. add to the cost of leasing. Thus leasing becomes more expensive form of financing than conventional mode of finance such as hire purchase. 4. Stamp Duty: The states treat a leasing transaction as a sale for the purpose of making them eligible to sales tax. On the contrary, for stamp duty, the transaction is treated as a pure lease transaction. Accordingly a heavy stamp duty is levied on lease documents. This adds to the burden of leasing industry. 5. Delayed Payment and Bad Debts: The problem of delayed payment of rents and bad debts add to the costs of lease. The lessor does not take into consideration this aspect while fixing the rentals at the time of lease agreement. These problems would disturb prospects of leasing business. Playerys in the indian leasing industry There is a shake out in the market at the moment-90% of which is complete. Today there are close to 800 leasing companies in the market of these, about 50-60 companies operate on a national level. This figure once stood at 4000. This is an indicator of the enormity of the shakeout in the market. The top ten players in the market account for about 65% of the market.

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Hire Purchase HP is a method of selling goods, goods are let out on hire by a finance company (creditor) to the hirer. The buyer is required to pay an agreed amount in periodical installments during a given period. The ownership of the property remains with creditor and passes on to hirer on the payment of last installment. FEATURES OF HIRE PURCHASE AGREEMENT 1. The buyer takes possession of goods immediately and agrees to pay the total hire purchase price in installments. 2. Each installment is treated as hire charges. 3. The ownership of the goods passes from buyer to seller on the payment of the installment. 4. In case the buyer makes any default in the payment of any installment the seller has right to re posses the goods from the buyer and forfeit the amount already received treating it as hire charge. 5. The hirer has the right to terminate the agreement any time before the property passes, he has the option to return the goods in which case he need not pay installments falling due thereafter. 6. However, he can not recover the sums already paid as such sums legally represent hire charge on the goods in question. 7. The hire Purchase Act, 1972 defines HP agreement as an agreement under which goods are let on hire hirer has an option to purchase them according to the terms of agreement under which: 8. Payment is to be made in installments over a specified period. 9. The possession is delivered to the hirer at the time of entering into a contract. 10. The property passes to the hirer on payment of the last installment. 11. Each installment is treated as hire charge & if default is made in payment of installment, the seller is entitled to take away the goods.

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12. The hirer/purchaser is free to return the goods without being required to pay any further installments falling due after the return. Hire Purchase Agreement Is the agreement in writing and signed by both parties incorporating 1. The description of goods in a manner sufficient to identify them. 2. The hire purchase price of the goods. 3. The date of commencement of the agreement. 4. The number of installments in which hire purchase price is to be paid, the amount, and due date. 5. Higher purchase transaction is different from credit sale. In case of sale ownership and possession is transferred to the purchaser simultaneously, in hire purchase, the ownership remains with the seller until last installment is paid.

Particulars Ownership

Leasing The ownership remains with the lessor throughout and the lessee (hirer) has no option to purchase the goods. Leasing is a method of financing business assets . depreciation and investment allowance can not be claimed by the lessee. The entire lease rental is tax deductible expense The lessee, not being the owner of the asset, does not enjoy the salvage value of the asset. Lessee is not required to make any deposit With lease, we rent It is 100% financing. No immediate down payment or margin money by the lessee is required. In case of finance lease only, the maintenance of leased asset is the responsibility of the lessee. The leased assets are shown by way of foot note only .

Hire Purchase The ownership remains with the buyer & the title is passed on to hirer once he pays last installment. Hire purchase is a method of financing both business assets and consumer articles. deprecation and investment allowance can be claimed by the hirer. Only the interest component of the hire purchase installment is tax deductible. The hirer, in purchase, being the owner of the asset, enjoys salvage value of the asset. 20% deposit is required in hire purchase. with hire purchase we buy the goods. Margin of 20-25 % of the cost of the asset is to be paid by the hirer. The cost of maintenance of the hired asset is to be borne by the hirer himself. The asset on hire purchase is shown in the balance sheet of the hirer.

Method of Financing Depreciation Tax Benefits Salvage Value

Deposit Rent-Purchase Extent of Finance Maintenance

Reporting

MOHAMED SADATH, Faculty member, S.R.S First Grade College, Tumkur

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