Leasing, Hire Purchase & Consumer Credit

UNIT-2

By: Dr. Feeroj Pathan

TYPES/CLASSIFICATION OF FINANCIAL
SERVICES
The financial intermediaries in India can be
classified as follows
• Capital market Services – It consists of term
lending institutions which mainly provide long
term funds.
• Money market Services – It consists of
commercial banks, financial institutions, co-
operative banks which providing short term
funds agencies
 FUND BASED SERVICES
It refers to services that are used to acquire assets
or funds for a customer. It consists of –
• Primary market activities- Underwriting or
investment in shares, debentures, bonds, etc. of
new issues (Primary Market Activities)
• Secondary market activities
• Foreign exchange activities
• Specialized financial Services- Participating by
Involved in equipment leasing, hire purchase,
venture capitals money market instruments etc.
Important fund based services include –
• Leasing
• Hire purchase
• Factoring
• Forfeiting
• Mutual funds
• Bill discounting
• Credit Financing
• Housing Finance
• Venture capital
 Leasing
• A lease is an agreement whereby the lessor
conveys to the lessee , in return for rent, the right
to use an asset for an agreed period of time.
• A financing arrangement that provides a firm
with an advantage of using an asset, without
owning it, may be termed as “leasing”.
• The term leasing refers to a contract under which
the owner of an asset allows another person or
party to use the asset in return for some rent.
• Lessor is the owner of the asset and the lessee is
the person getting the benefit of asset taken on
lease.
Steps involved in Leasing:
a) At the first instance the lessee has to take a decision
regarding the required asset. Then he has to select
a supplier before selecting the type of machine.
b) The lessee then enters into a lease agreement with
lessor. The lease agreement contains the terms and
conditions of the lease such as, lease period, rental
payments, details regarding renewal of lease
period, cost of repair and maintenance, insurance
and any other expenses.
c) After the lease agreement is signed the lessor
consents the manufacturer and requests him to
supply the asset to lessee.
 Types of leasing
• Financial lease: It is also known as Capital lease
or Long-term lease. Here the lease period is
longer, more nearly covering the useful life of the
equipment. Rentals tend to be lower because of
the longer term and less residual value risk.
• Operating lease: Here the lease period is shorter
than the expected useful life of the equipment.
Rental payments do not cover the equipment
cost of the lessor during the initial lease term.
This type of lease is popular for high-tech
equipment, because shorter term leases help
equipment users stay ahead of equipment
obsolescence. Lessor will bear the maintenance
expenses and taxes.
• 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
firms receive the sale price in cash and get the
right to use the asset during the lease period.
• Cross border lease: This is also known as
international leasing or transnational leasing.
This is referred to a lease transaction between
the persons of two countries.
• Leveraged lease: Under this lease, bigger acquisitions are made, such as
acquiring an airplane. This may include several customized provisions and
options that would not appear in a typical lease for a smaller amount.
• Short Term Lease: These leases are typically for assets that have high
depreciation eligibility like computers, windmills etc. They are for a period
of 2-3 years
• Sub – Lease: A transaction in which the leased property is re-leased by the
original lessee to a third party and the lease agreement between the two
original parties remains the same.