Вы находитесь на странице: 1из 35

Report On

Leasing

PURVA
07/CM/723

1
What is Lease?
A lease is a legally enforceable contract which defines the relationship between an owner,
the lessor, and a renter, the lessee. A typical lease spells out all of the terms involved in a
land or merchandise rental agreement, including the length of time a lessee may use it and
what condition it must be in upon return to the lessor. The amount of payments and any
financial penalties for late payments may also be included in a lease contract.

Most consumers encounter a lease when renting housing or leasing a car. A lease can be
very short-term (a few weeks or months), or it can be extended for a number of years.
Many small businesses and retail stores have lease agreements for 10 years or more, and
renewal of the lease may just be a formality. Apartment renters, however, rarely sign a
lease extending past one year of occupancy. Those who lease vehicles usually sign two-
year agreements as opposed to five-year financing plans for buyers.

A lease agreement protects both the lessor and the lessee. The lessor knows that a legally
binding contract obligates the renter to make regular payments throughout the life of the
lease. The lessee knows that he or she has full rights to the property without fear of
sudden seizure or eviction. A lease also guarantees that the original rental terms will not
change until the lease has expired.

A lease arrangement does not always guarantee smooth sailing


between landlord and tenant, however. Unlike a mortgage between a bank and
homeowner, the lease between landlord and tenant can contain a number of restrictions.
Renters and leasers are not owners, therefore the property is always subject to scrutiny by
the landlord and/or titled owner. If certain conditions of the lease are violated, such as an
unauthorized pet or a sanitation problem, the lessor can decide to terminate the lease.

Another consideration is the length of the lease itself. Some renters sign longer leases in
order to reduce monthly payments, only to encounter a more appealing housing situation
long before the end of the lease. A lease may allow lessees to legally break the terms if a
new job is located 50 miles away or more, but in general the renter may have to honor the
entire lease. Some lessees may find someone willing to continue the rental obligation
without a lease--a practice called 'subletting'. Some landlords allow tenants under a lease
to sublet, but it's not always a viable option.

The important thing to understand about a lease is that it is a binding legal agreement and
you should be aware of ALL the conditions before signing.

2
What is leasing?

Asset finance or leasing is a way of purchasing equipment,


machinery or other assets without having to pay the full
amount upfront.

There are various different structures that can be used and the attraction of each one will
vary according to your requirements and, perhaps, according to tax changes made by the
government.

In essence, a lease is an agreement between you (the lessee) and the finance company (the
lessor). You will pay a periodic fee, usually monthly, for the use and possibly ownership
of equipment.

The range of equipment that can be bought under a lease is expanding rapidly – from the
most basic purchase, such as office computers or company cars, to more specialised
equipment, such as a forklift truck or a safe.

This is partly due to the fact that the number of companies providing this service has
expanded rapidly. Not only do most banks and a number of specialised finance houses
offer this service, but there have also been a growing number of equipment manufacturers
entering the market. It is now possible to lease your office computer direct from Dell,
Compaq and IBM among others.

"The range of equipment that can be bought under a lease is expanding rapidly. "

In fact, the Finance and Leasing Association (FLA) estimates that some 15% of office
equipment is financed through a lease. The FLA also expects the market to continue
growing gradually but notes that the business is always dependent upon the latest tax and
accounting changes.

EVOLUTION OF LEASING IN INDIA

Leasing activity was initiated in India in 1973. The first leasing company of India, named
First Leasing Company of India Ltd. was set up in that year by Farouk Irani, with
industrialist A C Muthia. For several years, this company remained the only company in
the country until 20th Century Finance Corporation was set up - this was around 1980.

3
By 1981, the trickle started and Shetty Investment and Finance, Jaybharat Credit and
Investment, Motor and General Finance, and Sundaram Finance etc. joined the leasing
game. The last three names, already involved with hire-purchase of commercial vehicles,
were looking for a tax break and leasing seemed to be the ideal choice.

The industry entered the third stage in the growth phase in late 1982, when numerous
financial institutions and commercial banks either started leasing or announced plans to
do so. ICICI, prominent among financial institutions, entered the industry in 1983 giving
a boost to the concept of leasing. Thereafter, the trickle soon developed into flood, and
leasing became the new gold mine. This was also the time when the profit-performance of
the two doyen companies, First Leasing and 20th Century had been made public, which
contained all the fascination for many more companies to join the industry. In the
meantime, International Finance Corporation announced its decision to open four leasing
joint ventures in India. To add to the leasing boom, the Finance Ministry announced strict
measures for enlistment of investment companies on stock-exchanges, which made many
investment companies to turn overnight into leasing companies.

As per RBI's records by 31st March, 1986, there were 339 equipment leasing companies
in India whose assets leased totaled Rs. 2395.5 million. One can notice the surge in
number - from merely 2 in 1980 to 339 in 6 years.

Subsequent swings in the leasing cycle have always been associated with the capital
market - whenever the capital markets were more permissive, leasing companies have
flocked the market. There has been appreciable entry of first generation entrepreneurs
into leasing, and in retrospect it is possible to say that specialized leasing firms have done
better than diversified industrial groups opening a leasing division.

Another significant phase in the development of Indian leasing was the Dahotre
Committee's recommendations based on which the RBI formed guidelines on commercial
bank funding to leasing companies. The growth of leasing in India has distinctively been
assisted by funding from banks and financial institutions.

4
Banks themselves were allowed to offer leasing facilities much later - in 1994. However,
even to date, commercial banking machinery has not been able to gear up to make any
remarkable difference to the leasing scenario. The post-liberalization era has been
witnessing the slow but sure increase in foreign investment into Indian leasing. Starting
with GE Capital's entry, an increasing number of foreign-owned financial firms and
banks are currently engaged or interested in leasing in India.

LEASING IN INDIA: CURRENT SCENARIO


India at the 14th largest place in World leasing sounds incredible! But it is true, and true
contrary to the internationally available statistics published by the London Financial
Group. The Group's data, published every year in the World Leasing Yearbook would
place India at some 36th place! When it comes to size, India has the obvious advantage of
being such a vast nation.

Center for Monitoring of Indian Economy compiles data about Indian leasing volumes,
which is carried as a part of India Leasing Yearbook published by the Association of
Leasing and Financial Services Cos. The data compiled by the Center shows aggregate
balance sheet value of leased and hired assets (though for balance sheet purposes, lease
and hire-purchase transactions are distinguished, there is no material difference between
the two - hence the volumes have been clubbed here) at about Rs. 261 billion (End March
1997). This is based on reporting by 226 companies, whereas the business, particularly
hire-purchase, is spread amongst some 3000 large and small companies. Estimated
outstanding business done by these firms is about Rs. 15 billion (at Rs. 5 million per such
firm).

That apart, the data also excludes the massive annual volume of business by the Indian
Railway Finance Corporation (IRFC). IRFC is a hundred percent subsidiary of Indian
Railways, and its leases are dedicated to the parent Railways only. Of late, almost entire
floating stock acquisition by Railways is being acquired on lease from IRFC. The
outstanding value of leases done by IRFC adds to about Rs. 120 billion.Thus, the
aggregate volume comes to about Rs. 396 billion, which is about USD 11 billion as per
then-prevailing exchange rates.
5
USD 11 billion of outstanding volume cannot by itself give India a ranking in the London
Financial Group data, since these rankings are based on incremental volume. However, a
rough estimate of new business can be made from the above data (unfortunately, the
Centre for Monitoring of Indian Economy data do not give any idea of new leasing and
hire-purchase volume). Supposing 30% of the outstanding business of last year was paid,
and there was a 20% growth in net business (as can be seen from the Chart above), there
was a 50% new business, over the volume outstanding at the beginning of the
year. Relative to the business at the end of the year, the incremental volume should have
been about 33% (50/150).Therefore the annual leasing volume in India is estimated at
about USD 3.67 billion, on a rough and conservative estimate.

In London Financial Group data, this should put India at 12-13 th place, close to Hong
Kong. This would also be the third largest market in Asia, next only to Japan and
Korea.

The only infirmity in the above ranking is that the London Financial Group data are not
as of March 1997 - that, however, should not seriously disrupt the ranking of India,
because other Asian markets in 1996-7 period have generally registered a negative
growth.

FACTORS RESPONSIBLE FOR GROWTH OF


INDIAN LEASING
With the exception of 1996-97 and 1997-98, the 1990s have generally been a good
decade for Indian leasing. The average rate of growth on compounding basis works out to
24% from 1991-92 to 1996-97. Broadly, the following factors have been responsible for
the growth of Indian leasing, in no particular order:

6
• No entry barriers - any one could float a leasing entity, and even an existing
company not in leasing business can write a lease purely for tax shelters.
• Buoyant growth in capital expenditure by companies - The post -liberalization
era saw a spate of new ventures and fresh investments by existing venturers.
Though primarily funded by the capital markets, these ventures relied upon
leasing as a source of additional or stand-by funding. Most leasing companies,
who were also merchant bankers, would have funded their clients who hired them
for issue management services.
• Fast growth in car market: Needless to state with facts, the growth in car leasing
volume has been the highest over these years - the spurt in car sales with the entry
of several new models was funded largely by leasing plans.
• Tax motivations: India continues to have unclear distinction between a lease that
will qualify for tax purposes, and one which would not. In retrospect, this is being
realized as an unfortunate legislative mistake, but the absence of any clear rules to
distinguish between true leases and financing transactions, and no bars placed on
deduction of lease tax breaks against non-leasing income, propelled tax-motivated
lease transactions. There was a growing market in sale and leaseback transactions,
which, if tested on principles of technical perfection or financial prudence, would
appear to be a shame on everyone's face.
• Optimistic capital markets: Data would establish a clear connection between
bullish stock markets and the growth in both number of leasing entities and lease
volumes. Year 1994-1995 saw the peak of primary market activity where a
company, even if a new entrant in business, could price itself on unexplainable
premium and walk out with pride.
• Access to public deposits: Most leasing companies in India have relied, some
heavily, on retail public funds in the form of deposits. Most of these deposits were
raised for a 1 year tenure, and on promise of high rates of interest, at times even
more than the regulated rate (which was lifted in 1996 to be reintroduced in 1998).
• A generally go-go business environment: At the backdrop of all this was a
general euphoria created by liberalization and the economic policies of Dr.
Manmohan Singh.

7
CURRENT PROBLEMS OF INDIAN LEASING
In 1996-97, the profits of Indian leasing came down a bit -this was the year of the
minimum alternative tax: so everyone thought, there was nothing serious to be concerned
about.

However, 1997-98 proved to be a year of debacle. Several things combined to make this
year one of worst years in history so far, including the sudden and serious breach in
public confidence caused by the collapse of CRB Capital Markets (if this could be
attributed to an organized fraud, how about ITC Classic, a company promoted and
supervised by the tobacco giant ITC), generally bad economic environment due to
political uncertainty, hesitation on part of banks to continue to finance leasing ventures,
and closer to the end of the fiscal year, the Reserve Bank of India (RBI) came out with
one of the least thought-about, most casually-drafted regulations on Non-banking finance
companies (NBFCs). The RBI is still not sure of what it wants to regulate and how, and
has changed in the regulations 3 times in 5 months, and there are still Committees and
Task Forces on the reconstruction job. There could not have been a worse way of
handling a sensitive sector of the economy, already in a crisis of public confidence!

The current problems of Indian leasing could be listed as follows, again without any order
of listing:

• Asset-liability mismatch: Most non-banking finance companies in India had


relied extensively on public deposits -this was not a new development, as the RBI
itself was constantly encouraging and supporting the deposit-raising activities of
NBFCs. If the resulting asset-liability mismatch, to everybody's agreement, is the
surest culprit of all NBFC woes today, it must have been a sudden realization,
because over all these years, each Governor of the RBI has passed laudatory
remarks on the deposit-mobilization by NBFCs knowing fully well that most of

8
these deposits were 1-year deposits while the deployment of funds was mostly for
longer tenures. It is only the contagion created by the CRB-effect that most
NBFCs have realized that they were sitting on gun-powder all these years. The
sudden brakes put by the RBI have only worsened the mismatch.
• Generally-bad economic environment: Over past couple of years, the economy
itself has done pretty badly. The demand for capital equipment has been at one of
the lowest ebbs. Automobile sales have come down, corporate have found
themselves in a general cash crunch resulting into sticky loans.
• Poor and premature credit decisions in the past: Most NBFCs have learnt a
very hard way to distinguish between a good credit prospect and a bad credit
prospect. When a credit decision goes wrong, it is trite that in retrospect, it
invariably seems to be the silliest mistake that ever could have been made, but
what Indian leasing companies have suffered are certainly problems of infancy.
Credit decisions were based on a pure financial view, with asset quality taking a
back-seat.
• Tax-based credits: In most of the cases of frauds or hopelessly-wrong credit
decisions, there has been a tax motive responsible for the transaction. India has
something which many other countries do not- a 100% first year depreciation on
several assets. Apparently, the list of such assets is limited and the underlying
fiscal rationale quite holy and sound - certain energy saving devices, pollution
control devices etc qualify for such allowance. But that being the law, it is left to
the ingenuity of our extremely competent tax consultants to widen the range with
innovative ideas of exploiting these entries in the depreciation schedule. Thus,
there have been cases where domestic electric meters have been claimed as energy
saving devices, and the captive water softenizer in a hotel has been claimed as
water pollution control device! As leasing companies were trying to exploit these
entries, a series of fraudsters was successful in exploiting, to the hilt, the
propensity of leasing companies to surpass all caution and all lending prudence to
do one such transaction to manage its taxes, and thus, false papers for non-existing
wind mills and never-existing bio-gas plants were fabricated to lure leasing

9
companies into losing the whole of their money, to save the part that would have
gone as government taxes!
• Extraneous problems - frauds, closures and regulation: As they say, it does
not rain, it pours. Several problems joined together for leasing companies - the
public antipathy created by the CRB episode and subsequent failures of some
good and several bad NBFCs, regulation by the RBI requiring massive amount of
provisions to be created for assets that were non-performing, etc. It certainly was
not a good year to face all these problems together.

LEASING Vs HIRE PURCHASE

Essentially, asset-based financing in India particularly by non-banking financial


companies is split in two documentation modes - lease and hire-purchase. These two are
technically different instruments, but in essence, there is not much that differs between
the two, except for the caption.

10
In spite of the substantive similarity, historically, there has been a diametric separation
between these two forms. The assets usually subject matter of hire-purchase have been
different from those generally leased out. Leasing has been used mostly for plant and
machinery, while hire-purchase has commonly been used for vehicles. Even the players
have been different.

The reasons for this diametric distinction are more historical than logical. Hire-purchase,
essentially a British form, entered India during the Colonial era, and thrived as almost the
only form of external finance available for commercial vehicles. For the financiers, as
witnessed World-over, commercial vehicles were the natural choice for several asset-
features he loves: lasting value, ready secondary market, self-paying feature, etc. Hence,
the industry of hire-purchase became synonymous with truck-financing. Besides, the
motor vehicles laws gave the surest legal protection any law could give to a financier: the
financier would not have to carry any of the operational risks of a motor vehicle, and yet,
any transfer of the vehicle would not be possible without the financier's assent.

Leasing, essentially a US-innovation, entered the country significantly in the early 80s,
and was propagated as an alternative to traditional modes of industrial finance. Besides,
the early motivation (which continues with a number of players even now) of leasing was
capital allowances, more significantly the investment allowance, which was not available
for transport vehicles. Hence, the leasing form historically clung to industrial plant and
machinery.

These reasons have vanished over time.

• The Motor Vehicles law now treats leases and hire-purchase at par from the
viewpoint of financier-protection.
• Investment allowance has been abolished, and hence, there are no predominant
tax-preferences to a lease.
• The RBI treats lease and hire-purchase at par and has stopped giving a distinctive
classification to leasing and hire-purchase companies.

11
• The accounting norms lead to the same effect on pre-tax income, as also balance
sheet values, be it a lease or hire-purchase transactions.

Therefore, income-tax and sales-tax treatment apart, there is not much that is different
between lease and hire-purchase. The choice between the two is by and large open,
subject to tax consequences.

About LeasePlan

LeasePlan is the world’s leading fleet and vehicle Management Company operating a
fleet of more than 1.3 million vehicles worldwide. In India and the world over, LeasePlan
offers a range of comprehensive mobility solutions that help companies concentrate on
their core business while the company takes care of their fleets.

With operations in 29 countries and over 40 years of experience, LeasePlan has been
developing innovative and flexible solutions that contribute to the success of their
customers’ business strategy.

LeasePlan Corporation (LPC)


LeasePlan Corporation, owned by a consortium consisting of the Volkswagen Group
(50%), Mubadala Development Company (25%) and the Olayan Group (25%), comprises
a growing international network of companies engaged in automotive services. LeasePlan
Corporation has held a universal bank license since 1993 and is supervised by the Dutch
Central Bank.

12
LeasePlan shows strong organic growth and in each of the countries where it has a
presence, LeasePlan is either a leader or ‘the leader’ in its market.
Number of vehicles- LeasePlan Corporation

LeasePlan is today active in 26 countries, employs more than 6000 staff worldwide and
has more than 33,000 clients. LeasePlan has a consolidated lease portfolio of EUR 11
billion.
LeasePlan India (LPI)
LeasePlan commenced its operations in India in 1999. Headquartered in Gurgaon, they
have branch offices at Mumbai, Bangalore, Chennai, Hyderabad and Kolkata.
The world over, LeasePlan is known for its comprehensive range of services and value-
added facilities derived from proactive relationships with manufacturers and suppliers.
Right from analyzing the current and future transportation requirements, investment
potential and creation of a fleet acquisition program to financing, purchase, insurance
handling, maintenance through the life cycle of the vehicle, damage handling and finally
resale, they take care of all the aspects related to the fleet.
Openness, flexibility and partnership characterize LeasePlan's unique approach to
business.

Company’s Vision, Mission and Values

Vision
To be ‘the’ reference in vehicle management solutions in India.

13
Mission
In anticipating customer needs, it will provide quality vehicle management solutions
through the expertise and vitality of their people.

Values
• Integration
• Expertise
• Vitality
• Flexibility
• Integrity
• Productivity
Products and Services
The company offers tailor made solutions as per the customer’s requirements. It provides
wide range of products and services which are discussed below:

Products
• Comfort Plan
LeasePlan’s Comfort Plan offers a full range of services. Designed to extract the
maximum advantage from the fleet, Comfort Plan includes everything, from
auditing the client’s current fleet to funding and vehicle acquisition, maintenance,
insurance and accident management to other value-added services.
• Owner Plan
This innovative product offers outsourcing of the most labor-intensive part of the
fleet management- maintenance and repair, insurance handling and accident
management for the remaining economic life cycle of the vehicles. This not only
frees up the customer’s resources and administrative time, but also gains
financially from LeasePlan’s expertise and strong relationships with service
providers.
• Share Plan

14
At LeasePlan, customers are treated as partners. This leads to the development of
this product i.e. Share plan which is based on ‘Open Disclosure’ approach to
leasing. Here the open calculation schedules out each cost and customers are
totally in win-win situation whereas all the risks are borne by the LeasePlan.
• Global Solutions
Here LeasePlan provides the support structure to deliver a unique range of
harmonized products and services everywhere. They structure the global solutions
around specific requirements in each country addressing appropriate service
modules.
• Sales and Lease Back
Under this product, the LeasePlan purchases customer’s vehicles and lease them
back at either market value or written down value. So, while Sales and Lease
Back helps get non-core assets off the client’s balance sheet, it also immediately
releases their long held- up capital funds for better use elsewhere, along with
gaining the other manifold benefits of operational leasing.
• Fuel Management
An alliance with the leading fuel company provides the customers with the
Corporate Fuel Cards, which can be used for cashless transactions at outlets
spread across the country. This assists in customizing fuel budgets based on car
model and expected consumption and mileage.

Services
The services include:

15
Clients of LeasePlan India:

16
LeasePlan India is presently having a relationship with over 650 clients. Few of the
clients are:

17
Types of Lease Offered by LeasePlan
Firms often choose to lease long-term assets rather than buy them for a variety of reasons
- the tax benefits are greater to the lessor than the lessees, leases offer more flexibility in
terms of adjusting to changes in technology and capacity needs. Lease payments create
the same kind of obligation that interest payments on debt create, and have to be viewed
in a similar light. If a firm is allowed to lease a significant portion of its assets and keep it
off its financial statements, a perusal of the statements will give a very misleading view
of the company's financial strength. Consequently, accounting rules have been devised to
force firms to reveal the extent of their lease obligations on their books.

There are two ways of accounting for leases. In an operating lease, the lessor (or owner)
transfers only the right to use the property to the lessee. At the end of the lease period, the
lessee returns the property to the lessor. Since the lessee does not assume the risk of
ownership, the lease expense is treated as an operating expense in the income statement
and the lease does not affect the balance sheet. In a capital lease, the lessee assumes some
of the risks of ownership and enjoys some of the benefits. Consequently, the lease, when
signed, is recognized both as an asset and as a liability (for the lease payments) on the
balance sheet. The firm gets to claim depreciation each year on the asset and also deducts
the interest expense component of the lease payment each year. In general, capital leases
recognize expenses sooner than equivalent operating leases.

Types of Lease offered by LeasePlan


Financial Lease
A Financial Lease is mainly an agreement for just financing the asset, through a lease
agreement. The lessor transfers to lessee substantially all the risks and rewards incidental
to the ownership of the assets (except for the title of the asset). In such leases, the lessor is
only a financier and is usually not interested in the assets.

Operating Lease
18
An operating lease is one in which the lessor does not transfer all risks and rewards
incidental to the ownership of the asset and the cost of the asset is not fully amortized
during the primary lease period. The lessor provides services associated with the assets,
and the rental includes charges for these services.

Management Only (Owner Plan)


Also known as the Owner Plan, this offering involves outsourcing of the most labor-
intensive part of the fleet management of the client’s existing fleet. This product takes
care of your fleet’s complete maintenance, insurance handling and accident management
for the remaining economic life cycle of the vehicles while the client continues to own
them. It not only frees up the lessee’s company resources and administrative time, but
also he stands to gain financially from LeasePlan’s expertise and strong relationships with
service providers

19
Business Process

The process of leasing a car can be represented as:

Pricing Model
The pricing for the products offered by LP depends on the type of product offered and the
services provided. Broadly, the pricing constitutes the interest margin charged and the
management fees taken from the client.

20
Interest margin:
LeasePlan provides clients with vehicles, which they purchase on finance. So when LP
offers the vehicle to the clients it also charges an interest rate which is higher than cost of
borrowing. The margin depends on various factors like product offered, management fees
charged, No. of cars, potential of client, relations with the client. The interest margin
approximately amounts to 12-15%.

Management fees:
The management fee is charged for the management services provided by the company to
the client. In finance lease as minimum or no services are provided so the management
fees is not there or is very less. In case, full services are offered the management fees
should be maximum and it ranges from 2-5%.

Profitability Model

LeasePlan has introduced a profitability model to assess the profitability for all the
clients. This model is to be used at the time of appraisal process for analyzing the
commercial terms of the client. It incorporates all the costs and the revenues related with
the number of assets proposed by the client. The model does not differentiate between the
clients and the prospects. According to profitability of the client decision regarding the
interest rate offered and the management fees charged is taken. There is a set benchmark
profitability which is at least required for giving approval to a client (Due to company
policies the same cannot be shared).

21
Sources of funds
The companies like LeasePlan requires huge amount of capital in the beginning whereas
the amount is recovered in the form of cash flows in later years. There major source of
funding is interest bearing liabilities i.e. short term and long term loans. On the other
hand a small portfolio of leased assets is funded by interest free liabilities i.e. company’s
net worth or working capital. So because of this huge dependence on interest bearing
liabilities the company is susceptible to interest rate risk and their cost of funds is usually
high.

22
Revenue Model
Financing:

The vehicles are taken on finance and are leased on finance to the clients. It includes the
interest margin which is charged from the clients on the investment value of vehicles.

Management Fees:

LeasePlan is a fleet management company; along with providing vehicles on lease the
main business of LeasePlan is to manage that fleet. For managing the fleet a fees is
charged from the client. The fee is based on the type of products and services taken by the
client.

Others:

This includes all the revenues other than financing and management fees. This includes
the discounts and commission earned by LeasePlan from its vendor. This is given by
vendors for a very simple reason that LP brings them business and that also in bulk.

23
Credit Approval Process at LeasePlan
1. Initiation: The Sales manager (Assistant Business Development Manager/ Business
development Manager/Customer Support Executive etc.) initiates the credit proposal
for the client in the Global Credit System (GCS). On initiation of proposal following
sheet will be automatically generated for each client in the GCS:

• Credit Proposal - Client name - to be filled in by the account manager


• Available data from external supplier – not to be filled
• Financials – to be filled by the credit manager
• Company Overview – to be filled by the account manager
• Linkage tree - not to be filled

2. Credit proposal: The account manager after initiating the proposal will fill the credit
proposal sheet. The account manger will consider the following points while filling
the sheet :

• DUNS number: If the client is having a DUNS number, it must be mentioned in


the proposal. The correct DUNS number is essential as it is used for the
identification of prospects/clients and for the integration of the local portfolios
into the LeasePlan Group portfolio. The DUNS number is also necessary to
ensure that LeasePlan prospects/clients are credit scored, also in relation to the
Basel2 requirements.
• Type of Contract: Type of contract should be picked form the options available
like financial lease, operating lease- (full service & limited service),
Management only.
• Numbers of objects: The numbers of objects required to be appraised should be
filled in after considering the total potential of the client and the cars expected in
the current financial year.

24
• Make & type: Make of cars may be specified, but it is important to mention the
general category of objects: Standard Fleet or mid and High Segments or mid
and Small Segments.
• Interest rate & cost of borrowed fund: The interest rate agreed upon with the
customer is specified and the COBF which is given by the Finance is specified.
• Sale & Lease back: Under S&LB the existing fleet is purchased from the client
and is leased back.
• Direct Debit: If the mode of payment is secured i.e. either PDC or ISI.
• Residual Value: It is the % value; the object is expected to receive after end of
the contract period.
• Security: If there is any other security like down payment or parental guarantee
etc. that is also mentioned.
• Company Overview: Details regarding Legal Status, Date of establishment,
Ownership/Organization chart, Previous Relationship with client is required to
be mentioned.

3. Financial analysis: Once the account manager completes and saves the proposal, it
automatically reaches the inbox of credit manager. The account manager will provide
the following documents to the credit manager to enable him/her to do the financial
analysis of the client.

a) Annual Reports for the past two years for the company in India and of its
parent company (if applicable).
b) Expected figures for the current financial year.
c) Projections for the next 5 years.
d) Capital structure & Shareholders.
And to meet the requirement of Customer Due Diligence Policy the following also
have to be submitted by the Business Development Manager:
e) Form No. 18 & 32.
f) Mailing address & contact numbers,
g) PAN number,

25
h) Certified true copy of the Certificate of Incorporation, Memorandum &
Articles of Association,
i) Website address if available
The latest financials, number of years for which the company is into existence in India
& special category (whether Government or not) are fed in the database and a Credit
Score known as LP Score is calculated. This Score reflects the Credit Worthiness of
the client.

Parameters for calculating LP Score:


 Tangible Net Worth: Tangible Net Worth is calculated by reducing Intangible
assets from Net Worth (Share Capital + Reserves & Surplus). It indicates the net
amount of shareholders’ funds in the company.

 Net worth Ratio: Net worth Ratio is calculated by dividing Tangible Net worth
by the total liabilities in the company. It shows the ratio of internal liabilities ( i.e.
the shareholders funds) to external liabilities( long term/short term)

 Interest Coverage Ratio: It is calculated by dividing the operating profit (loss)


by interest expenses in the year. It shows the capacity of paying out the interest
expenses with the profit in hand. It is very important as the lease rental is like an
interest payment.

 Repayment Capacity: This takes into account the short term payments to be
made by the client. It is calculated by dividing: Gross operating funds flow /
(short-term loans + current portion long-term loans).

 Current Ratio: It is calculated by dividing the Current assets by the Current


Liabilities. This takes into account the working capital management of the client.
It tells whether the company has sufficient current assets to cover the current
liabilities.

26
 Years in Business: The number of years of existence of the business of the client
is taken as a measure to calculate the score.

All these parameters have a specific weight ages given to them, on which basis the
credit score is calculated. Due to company policy the ratings and weight ages
can’t be shared. The decision of setting credit limits is not only based on the
Credit score a lot other factors like the industry of the client, its business, Parent
company (if any), Group companies (if any), current quarter financials, long term
plans & goals etc. are analyzed. After considering these factors the decision
regarding the credit limit is made by LCC.
Basically ratings describe the credit worthiness of customers. Hereby quantitative
as well as qualitative information is used to evaluate a client. In practice, the
rating procedure is often more based on the judgment and experience of the rating
analyst than on pure mathematical procedures with strictly defined outcomes

Manual Override: If after calculating the credit score the credit manager thinks
that there are other factors which are important and should be used to calculate the
credit score, it can be done with the help of Manual override. It is used for
improvement of the quality and also the quantity of LeasePlan score. However an
override should contain both an upward and downward possibility. Every override
is to be motivated in the credit proposal and evidenced either in the credit
proposal and/or a physical local file. Following are the parameters defined for
manual override.
• Business segment / Industry Type
• Guarantee
• Letter of comfort
• Market Share (Dominant)
• Strategic part of Group (Inter company Financing > 25% of balance sheet total)
• Strategic part of Group (name matched group name)
• Strategic part of Group (turnover > 10% of group turnover)

27
4. Local Credit Committee: After evaluating the financials, the proposal is submitted
to the Local Credit Committee. The LCC, after reviewing the financials and the above
said factors make a decision on these points:
a. Credit limit to be given.
b. No. of Cars approved (it cannot be more than what has been applied for by the
client).
c. The time limit for which approval has been given.
d. The Bank or Parental guarantee imposed (if any).
e. The mode of payment (Normal invoicing/PDC/Standing Instructions).

5. Approval from International Credit committee: If the proposal is approved y LCC


and the number of cars applied is more than 25 or the average amount per car is more
than INR 625,000 the proposal goes to International Credit Committee, as per the
company policy. After Local credit committee approves the credit proposal, at least
two members of the Local credit committee will approve the proposal in the GCS,
which then automatically goes to ICM for final approval.

6. Return of proposal from ICM: The International credit committee (ICM) of


LeasePlan Corporation Credit and Risk department analyzes and reviews the proposal
and approve/disapprove the proposal. In case of any query or clarification ICM can
send the proposal for reconsideration, which appears in the LCC members’ inbox.

7. Reconsideration: If the proposal comes for reconsideration, the same is discussed in


LCC meeting and resubmitted with the answer to the query.

8. Disapproval by ICM – LPC: In case the credit proposal in disapproved/rejected by


ICM, the proposal will be discussed with local credit committee and the local credit
committee will decide on resubmission of the proposal with additional comfort i.e.
guarantee, deposit etc. In case the Internal credit committee decides not to resubmit
the proposal, all the documents will be returned to the customer.

28
9. Filing: The summary sheet of the proposal signed by LCC members is filed by the
Credit Manager. Copy of approved proposal along with all documents received from
client / prospect is handed over by Credit Manager to Customer Support Team. CST
will then file the same in the customer file.

10. Updating of Credit conditions: After the approval to a proposal and all other
requirements are completed (like PDC’s received) the credit conditions of the client is
updated in ELVIS.

Operational Risk Management at LeasePlan


LeasePlan follow many Operational Risk management techniques as per the guidelines
given by the LeasePlan Corporation.

Operation Loss database: The OLD is used to gather data regarding operational losses.
There is a specific limit over which the losses have to be reported by the employees. This
helps in collecting data and also inculcating an environment which makes everyone aware
of the importance of the same. LeasePlan insists exclusive use of OLD for reporting
operating losses.

Top down assessment: It helps in incorporating importance of risk management in the


overall policies and objectives of a business. It shows light towards mitigating risks to
achieve the short term as well as long term objectives.

Risk self assessment: RSA helps in integrating risk management & its importance in
day-to-day activities of the business. This also involves follow ups which strengthens the
risk management process.

Table top test: Under this test the management team sits and discusses on papers the
efficiency of the Operating risk management techniques followed by the organization. It
fulfills the Basel requirement of a periodic verification process and supervisory review.

29
ICT Recovery Test: Under this test, the effectiveness of the ICT department is tested for
its response in case of a disaster.

Business Imapct Analysis & LDRPS: Part of the Business Continuity Management,
these helps in planning for the future business activities and risks by identifying the
important people and process in all the departments. It helps in future mitigation of risks.

Monthly Risk Meeting: This keeps the management update of the current risk related
issues in the organization. A common meeting for both Credit and Operating risk is
scheduled every month which is attended by the Executive committee and Management
Committee members.

Top down Assessment and Risk Self Assessment has been assigned as project and is
included in this report.

Top down Assessment at LeasePlan India:


Every year LeasePlan India conducts a top down assessment to select the two processes
for RSA. The assessment is headed by MD of LPIN and whole management team
participates in it.

Risk Self Assessment at LeasePlan India:


At LeasePlan every year two RSA are performed. Processes are selected on the basis of
the Top down Assessment, experiences of LPIN, audit findings by the external auditors/
Group Audit/ internal audit and the nature of complaints. In year 2006 RSA on (i)
Account Receivables and (ii) Buffer Management were done. The processes decided for
RSA of 2007 are (i) Outgoing Invoices and (ii) Recalculation process. In this report RSA
on Outgoing Invoices has been covered.

30
Billing Cycle
The billing is done one month in advance i.e. the invoices are raised in the month prior to
the month when amount becomes due.
Normal Billing: It is done for the vehicles delivered till the last day of previous month of
invoicing.
Catchup Billing: It is done for the vehicles delivered during the month of invoicing.

Invoicing is done on the 18th of each month for the next month and all the invoices are
dispatched by 20th of the same month. All the cars activated up to the invoice run as per
ELVIS will be included in the process.
The billing cycle or the payment schedule is dependent on the delivery of cars and
corresponding to this we have two cases:
For the cars delivered between 1st and 15th of the month: In this case the payment
schedule starts from the same month but as invoices for that month are dispatched one
month in advance. So, here catch up billing is done against the client and bill is raised on
31st of same month as a catch bill. The client here will receive two invoices one for the
month in which car is delivered (catch up) and other for the EMI of next month (normal).
For the cars delivered between 16th and 30th of the month: In this case the payment
schedule starts from next month. So during the invoicing process in the month in which
car is delivered a normal billing is done against the client and bill (normal) is raised for
the EMI of next month.

Modes of Payment
There are basically three modes through which clients can make payments:

1. MI (Monthly Instruments- Cheques)

2. PDC (Post Dated Cheques)

3. SI (Standing Instructions)

31
The client may opt for any of the above mentioned mode for making the payments.
In case of PDC, the cheques are given in advance by the clients for a specified period or
for the whole contract period. These cheques are taken by the Account Manager from the
clients and after confirming to the number of cheques they are handed over to the A/R
Executive who further keeps it in a vault. When the payment becomes due the cheque for
that particular month is drawn from the vault and deposited to the bank. It is usually done
between 1st and 3rd of the month.
In case of SI the amount is directly deposited to the company’s account as per the
instructions given by the client to its bank. The details regarding the amount deposited are
sent to the company for their records. The status regarding the SI is checked on weekly
basis that whether they are deposited or not and in case deposited they have been properly
knocked off or not.

Conclusion
The following features will discuss the probable future of leasing and NBFCs in India.

1. Reduced number of players: Not too many people will dispute the observation
that India has far too many finance companies that can possibly sustain in time to
come. If we forget about the 37000-odd companies that have registered with the
RBI as NBFCs (that number is a miracle – and the entire credit can be taken by
the draftsman of the RBI legislation), there are, no doubt, about 500 reasonably
large NBFCs in the country. The Association of Leasing and Hire-purchase Cos.
(ALFS) itself has over 500 members. If one ignores the honorary members, and
those who are not into leasing, but including the members of the Equipment
Leasing Association, 500 is a very safe number.

ALFS does not have too many regionally centered smaller players as its members.
They have their membership with local hire-purchase associations. There are
about dozen hire-purchase Associations in the country, and not all players can be
expected to be a member of one of these. The combined membership strength of

32
all of the Associations would be not less than 2000 firms, and an equal number of
firms may be taken as those who are not registered with any Association at all.

The number adds to an astounding 4000 players!

This means that at the current juncture, the number of lessors in India is more than
the total number of players in USA, which is the largest market in the World!

A number of factors will precipitate the consolidation in Indian leasing, and the
process is already on. First, bifurcation of leasing and non-leasing activities, such
as merchant banking, will go a long way in breaking the financial conglomerates,
who may find themselves better focusing on investment banking rather than
dabbling into leasing at the same time. Second, in whichever forms of business,
mass distribution is possible, that is, where the customer is more or less
homogenous, larger firms will eat up the shares of the smaller ones. This is
something everyone can see happening in the car finance market. Three, reduced
rates by the industry leaders will set benchmark rates in the market which will
force many marginal players out. Fourth, regional players will survive but will
find their relevance in a new avatar as "lease brokers", or to use a better word,
"lease originators". These firms will originate small ticket leases, sell their
portfolios to larger players, thereby encashing their wafer-thin spreads and
walking out to originate another transaction. Such activity has flourished in USA,
and we will see much of the same story in India too.

2. Cross-border competition: Cross-border competition will come in two forms:


direct cross-border transactions, and cross-border investments in lease
transactions. A number of global leasing giants have already occupied their
positions in India. Capital account convertibility measures will precipitate the
process. The impact of foreign investments will be greater consolidation activity
at home.
3. Segmentation and positioning: This is a common feature of growth: during the
initial phases of growth of any industry, there is a trend towards diversification:

33
firms try to attain growth in numbers by unfocused diversification, but soon
realize that diversified presence creates organizational pressures which are
difficult to cope with. This leads to a trend towards consolidation and focused
growth. Leasing firms of yesteryears were everything: money market players,
merchant bankers and discount houses. Gradually, both regulators and industry
participants have realized that clearer roles are necessary for stability.

Leasing companies in time to come will not only choose their segment within the
financial services industry but also within the leasing industry. Equipment-type
focus will also be seen in time to come. This change may take some time to be
noticed.

4. End of tax-based leasing: Spate of income-tax problems in the past has made
some leasing companies wiser, but there will be more of such problems when the
disputed questions reach appellate levels. The leasing industry must take the
matter across to the Central Board of Direct Taxes and get a set of guidelines on
true leases. Not having any guidelines leaves too many things to the discretion of
the tax officer which does not provide a safe harbor to the transaction.
5. Emergence of vendor leasing: There are so many merits in vendor-based leasing
that it is surprising that it has not made its debut in India still. For the asset
vendor, a leasing plan is a sales-aid, and for the lessor, it is easy access to a vast
market, with equipment support from the vendor. In 1997-98 and after, many
lessors will be forced to leave general equipment leasing market and line up with
suppliers of equipment. Vendor leasing in time to come will be a very significant
part of the leasing market.
6. Asset-based funding: True asset-based funding is an extension of the vendor
lease market. The two generally go together to develop into operating leasing. Full
scale operating leasing, that is, leases will in-built cancellation options, will take
quite some time to develop in India, but features of operating leases will be
introduced once vendor tie-ups take place.
7. Price-based competition: This factor might as well have been placed as the first
in order of significance, but its impact on the leasing market is subjective. The

34
intensity of price-based competition will be split between the corporate finance
market and the consumer finance market. The latter has always placed emphasis
on service, accessibility, and nonquantifiables of that sort, but the corporate
finance market consists of a professional treasury manager who will have to
justify the cost of money to his boss. So far, leasing has continued to sell itself on
several intangibles as speed, smile, and simplicity, but corporate finance quickly
moves to a dilemma where every one is fast, everyone smiles and every one is
simple enough for the sophisticated audience. It is there the price becomes
decisive. Leasing, with all its cost additives as sales-tax and stamp duties, will
have to sustain as a cost-competitive financing option.

References
Primary Source

• Mr. Subroto Chakravarty, regional Operations Head, Leaseplan

Secondary source
• www.leaseplan.co.in
• www.gtnews.com

35

Вам также может понравиться