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Taxation alone should not be the reason opt for a lease plan. One could
use an approach similar to the way one decides whether to buy or rent an
office space, said Rao. Make sure that you do the math and weigh the
financial benefits versus an outright purchase, he added.
As in the examples taken above, it is indeed more expensive to lease
especially on a monthly basis.
Typically, the lease rentals are lower than the EMIs paid for the loan servicing. These
savings can be utilised by individuals to invest for their other goals or simply
increase their spending budget. Many individuals have a passion for cars and look
to change their cars more often. The leasing option, as described above, is an
excellent means to fulfil this passion.
The table highlights the comparative advantage of the leasing option over a
financing and ownership models. The data used for the illustration is a luxury car,
where the total cost, including insurance and registration paid upfront is Rs
29,51,448. The tenure of the loan is 36 months with 90 per cent funding and the
lease period selected is also of 36 months.
The lease option has the potential to yield better benefits for the following reasons:
No down payment required; which means the individual's capital can be utilised for other
productive purposes like providing for business capital, family responsibilities like children's
education, own retirement and so on.
A lease is far easier to obtain than a finance option.
Although the ownership model (both under financing and outright) provides depreciation benefits
for the business individual, the tax-savings is not equivalent to savings provided under the lease
option.
For self-employed individuals or businessmen the entire lease rental paid is eligible for deduction
under the tax provisions. At 33.99 per cent tax rates for individuals in the highest tax-brackets for
the current fiscal, the tax-savings provided by lease rentals is the highest.
More importantly, the car itself being a depreciating asset, the resale value will always be lower
than the purchase value, thereby, making the lease option more lucrative. When you buy a car,
the depreciation is your burden as the car owner, the same gets reflected in the price that one
fetches for the car later. Whereas in a lease, the company is the one who accepts the
depreciation, since they will be taking the car back.
Maintenance costs are pretty low, since most warranties for new cars extend up to three years,
which is a typical average lease period.
The individual does not have to worry about the resale of the car and can thus plan his upgrades
easily.
Service costs - not a deterrent
For many car owners and car buyers, intrinsic costs of owning a car, namely service and
maintenance costs, is a big deterrent in making the buy decision. Typically, various costs of
maintaining the car like servicing, registration, insurance and so on can all be bundled and made
a part of the monthly rental. Thus, the cost of maintaining and driving the car is reduced to just
one figure, namely the rental. Based on one's budget, the individual can zero down on the rental
and accordingly choose their car.
Although leasing offers so many benefits, it is not popular option.
The choice between buying a car versus leasing can also be a lifestyle choice. People who
prefer driving a new car every few years find the lease option more appealing. Since the monthly
payments are less expensive than purchasing a car, they are able to drive better cars than could
afford to buy.
There is every chance that 9 out of 10 of prospective new car buyers have not ever considered the
option of car lease in India. Frankly, car lease plans essentially exploit loopholes in our existing tax
structure that makes owning a car affordable. For a buyer, car leasing may enable lower monthly
payments, while the leasing company receives the depreciation benefits! But how does leasing a car
in India weigh against buying a car using car finance? For starters , you have to understand that
taking a car on lease lets you own the same car for a lower annual cost or a better car for the same
annual cost. Once the lease term attains maturity, you have the option of buying the car.
Sample this. Let's just say you are in the market for a typical 5 lakh rupee Indian sedan. Now, a 90%
loan for a tenure of 36 months would entail roughly an INR 1,00,000 down payment (10% of exshowroom price + Insurance + Registration + 1 EMI) and an EMI of INR 16,800. Leasing the same
car, first, you'd have to pay NO down payment and, later, a monthly installment of INR 17,400. In fact,
you can have the car's ownership transferred in your name after 36 months, i.e. the completion of the
lease term, for Rs. 50,000 (10% residual value). A quick calculation would actuate that while the total
payments while buying the 5 lakh rupee sedan came out to be Rs. 6,88,000; when the same car was
leased, the cumulative payment made totalled Rs. 6,76,400.
Now, take into account the opportunity cost you saved by not paying the Rs. 1,00,000 down payment.
Plus, factor in that the entire car lease EMI is tax deductible, as against only the interest part of the
EMI you pay on your loan. It is clear enough why leasing a car seems to be a more viable proposition.
Case Study
Let's just say you join a new company which offers a car lease policy wherein you're eligible for a car
allowance of 15K PM. You can either ask your company to lease a car for you, that can be availed
within this amount or take this amount (-Income Tax) as part of the salary. You're now left with 2
options -
Option 1 : You can buy a new car, pay the monthly lease rental and ask your company to lease a car
according the rental your company affords.
Option 2 : You can also buy a used car at a small premium and claim car allowance from your
company. But, unless you have hard cash ready to make a single, consolidated downpayment for the
vehicle, procuring finance for a used car would become tedious and unprofitable. At the same time,
you stand to gain substantially if you buy a used car with your own funds and then seek
monthly/yearly compensation from your company.
Lease Advantages
Huge overall Tax benefits. The entire lease rental can be earmarked as an operating expense in
the Ledger books, entitling you to Tax benefits of up to 33.67%, significantly higher than accounted
depreciation, calculated @ 15%. However, this provision is applicable only if you enter into an
Operating Lease agreement.
Zero down-payment. Consider the savings you accrue, due to available lease amount, as freed up
capital which you could otherwise invest elsewhere.
Transfer of ownership. Most car leasing companies provide you the option of transferring the
ownership of the car (new/used) in your name, once the lease term expires. The car's existing value is
calculated on the basis of the car's then market rate or a pre-decided rate mutually agreed upon, at
the beginning of the lease agreement.
Ease of Maintenance, Although Conditional. In case your employer maintains its own fleet of
vehicles, most lease companies will offer all-round maintenance solutions - covering timely services,
engine/body maintenance, insurance management and accidental repairs.
Lease Disadvantages
You CANNOT carry out any modifications to the vehicle. However, some leasing organizations may
allow you to add accessories, only at the start of the lease.
If it's an operating lease, annual mileage is limited, mostly at 20,000 km/year. Beyond this, a high
premium is charged on the extra kilometers clocked.
Until you buy the car after the maturity of the lease period, you are NOT the car owner and it is NOT
registered in your name.
Car lease terms in India are very strict and dictate religious adherence to limitations on distances
covered, periodic maintenance at dealerships and insurance policies.
In a nutshell, leasing a car in India is a good option for only those who are looking to buy new cars
after every 3-4 years and prefer being the first users of the car.
even allows users to pay for their rides with cash, in a nod to the
importance it attaches to the market.
Ola Cabs will also strike partnerships with car manufacturers in the
country to accelerate its lease program. In a pilot, Ola Cabs leased
1,000 vehicles in six cities, getting most of the cars from the
country's top automaker, Maruti Suzuki India Ltd.
By December 2015, at least 10,000 cars are expected to be plying
under the leasing model, according to the release. Ola is also in
advance talks with other leading car manufacturers and financial
institutions to help the model scale up to over 100,000 drivers by
the end of 2016. Ola currently operates some 250,000 cabs and
65,000 auto rickshaws on its network in 65 cities.
The Indian ride-hailing service provider has also recruited Rahul
Maroli, formerly a senior executive at LeasePlan, a large vehicle
leasing and fleet management operator, to head the new subsidiary,
which will also independently raise funds, the company said, in the
release.
Competitors : http://www.avislease.in/about-us.html
http://www.tranzlease.com/
http://www.leaseplan.co.in/public/en_IN_New/index.jsp?id=menu6370003
http://articles.economictimes.indiatimes.com/2013-10-23/news/43326413_1_corporateleasing-operating-lease-carzonrent
http://www.indiacarrentalservices.com/profile.html#contact
http://expatride.com/india/
http://www.aldautomotive.in/about-ald-automotive-group/who-are-we/ald-india.aspx
https://magma.co.in/loans/auto-lease/interest-rate-charges/
ASCI
Journal of Management
Volume 21, 1992
Select Articles
A Lease is a contract whereby the owner of an asset (the lessor) gives to another party (the lessor)
gives to another party ( the lessee) the right to use the asset, usually for an agreed period of time in
return for the consideration of rent. The objective of this paper is to deal with the problems faced by
leasing companies in India; and to assess the prospects of the Indian Leasing Companies in India; and
to assess the prospects of the Indian leasing industry. The conclusions are based on 28 lessors'
questionnaire-response and the outcome of the indepth interviews of the executives of leasing
companies. The paper is presented in three sections. The first section provides an introduction of the
growth and structure of the leasing industry; the second deals with the problem-areas of leasing, and
the last section dwells on the prospects of leasing business in India.
The equipment leasing has significantly grown all over the world. Even in India, the
growth of equipment leasing has been phenomenal. During the last five years, literally
600 leasing companies have been floated in India, of which around 100 are active. It
has also been observed that a large number of industrial organisations, both in the
private and public sectors are considering leasing as one of the alternatives for
financing the equipment acquisition. Presently, leases have come in all modes, sizes,
and varieties. A large number of companies are using or have plans to use leasing as
a source of finance in one way or the other. It is interesting to note the rising share of
leased assets to the total investments on assets. For instance, the share of leased
assets to total investments ranged from 5 per cent to 33 per cent in 1988 in the EEC
countries, and the US, respectively. These developments have touched India also. In
India, today equipment from satellites and aircrafts to autos are obtained through
leasing.
Leasing companies have grown from a few lessors in 1980, to more than 600 (public
and private limited) by 1988. In India, the equipment leasing boom began in 1985,
rapidly covering plant and machinery, furniture and fixture, vehicles, computers, and
household durables. However, it is to be noted that though the number of leasing
companies increased phenomenally, the size of business in terms of leased assets did
not increase accordingly. Table 1 presents an estimate of the assets leased from 1984
through 1990. The growth is noticeable but not very pronounced. However, In India,
the share of the leased assets formed less than 1 per cent, in spite of over 600
companies coming into existence by 1988.
It is observed from the leasing market that leasing companies started quoting different
lease rentals for the same transaction. A majority of the companies declared dividends
ranging from 15 to 25 per cent from the first year of operations itself.
Current Scenario
The year 1989 saw stabilised leasing industry, which is trying to consolidate its position
in the market. The RBI implemented the norms for bank finance to leasing companies
and issued guidelines on public deposits. On the one hand, the public sector
companies showed interest in acquiring assets through lease financing, and on the
other, financial institutions, such as IFCI, IDBI, LIC, UTI, etc., and banks have come
forward to lend to the leasing companies. Other commercial banks also floated their
own subsidiaries to undertake leasing and other Merchant banking activities. The
Credit Rating Information Services of India's (CRISIL) rating has also helped a few
leasing companies to establish their market for public deposits. The 1990-91 budget
has once again created a conducive climate for the growth of the leasing business by
abolishing Section 115J of Income Tax Act 1961. Thus, the demand for leasing
business is expected to grow further. It is expected that the importance of leasing
industry in India is bound to increase with the passage of time and growth in
industrialisation.
Table 1:
Assets Leased by Industry (Rs in crores)
Year
Assets Leased
during the year
1984
Cumulative
assets leased
50
170
1985
80
250
1986
180
430
1987
220
650
1988
365
1015
517
1532
870
2402
1989
1990
Finance Ltd (SFL), Mercantile Commercial and Credit Corporation ltd. (MCCL), and
Motor and General Finance Ltd. (MGF).
Subsidiaries of Manufacturing Group Companies:
These companies consist of two categories: (I) subsidiaries of manufacturing
companies, known as vendor leasing companies; and (ii) in-house leasing (captive
leasing) companies. The objective of the former is to boost and promote the sales of
its parent companies' products through offering leasing facilities. On the other hand,
the captive leasing companies are floated to meet the group companies' fund
requirements. Some of the in-house leasing companies are also set up to avoid the
income-tax by the group companies. Another objective of this type is to raise funds to
a large extent from outside sources, by using the group's name; since leasing
companies are allowed high debt-equity ration of 10:1 tax avoidance is suspected to
be the major objective of the in-house leasing companies. For example, the needs of
the loss-incurring company by extending leasing facility at a very low rentals (which
even are not sufficient to recoup the cost of equipment ) and by simultaneously leasing
to a profit-making company within the group at an extremely high rentals (to
compensate for the loss incurred in other transactions) and reduce the tax burden of a
profit-making company. The leasing company earns sufficient profit to compensate for
the losses in leasing transactions with loss-incurring companies within the group. The
profit-making company is benefited because of the tax deductability of high lease
rentals. Thus, the taxes which ought to have bolstered government revenues are
channellised into loss incurring company of the group.
Because of these advantages, big industrial houses jumped into the fray by setting up
in-house and vendor subsidiary companies. Perhaps, this has led to a proliferation of
in-house set-ups. For example, Swadeshi Leasing Ltd was floated by the Hindustan
Motors Ltd., the key Leasing Ltd. by JK Synthetics Ltd., the Classic Leasing by ITC
Ltd., Nagarjuna Finance Ltd., by the Empire Industries, Eligi Equipment Finance by
the Eligi Group, and DCL Finance by DCL Group. A few examples of subsidiaries of
manufacturing companies are Ashok Leyland Finance Ltd. of Ashok Leyland Ltd., Krest
Development and Leasing Ltd. of Best and Crompton Ltd., Bajaj Auto Finance of Bajaj
Auto Ltd., and Enfield Finance of Enfield India Ltd. Besides, a few leasing companies
are subsidiaries of finance and leasing companies - Cholamandlam Finance Ltd is a
subsidiary of cholamandlam Investment and Finance Ltd., Response Hire Purchase
and Credit Ltd. of First Leasing and Empire Credit Ltd. belongs to Empire Leasing.
Further, four leasing companies were floated jointly by banks, the International Finance
Corporation (IFC), and private leasing companies. Most leasing companies are
engaged in the business of leasing, and hire purchase financing. In leasing, they are
primarily concerned with equipment financing, ranging from machine tools to big earth
moving and chemical plants. A few companies also engage in real estate business
and property development, and one or two companies are also involved in leasing of
safe deposit lockers in almost all major cities in the country.
Public Sector Leasing
The public sector leasing organisation are divided into (a) leasing divisions of financial
institutions; (b) subsidiaries of nationalised commercial banks; and (c) other public
The phenomenal growth of leasing companies, their lease business, and the
acceptance of leasing as a method of acquiring assets, however, have raised some
problems. Increasing attention, therefore needs to be given to the following problems
of leasing companies of India. The main problems are: resource crunch; inadequate
tax benefits and sales tax burden; rigid procedure for import/cross-order leasing; lack
of proper and integrated accounting standards; lack of proper and integrated
accounting standards; lack of legislation; existence of cut-throat competition; and lack
of expertise in the management.
Resource Crunch
The sources of finance available to leasing companies are: (a) equity share capital; (b)
reserves and surplus; (c) debentures; (d) long-term loans; (e) public deposits; (f) bank
loans; and (g) inter-corporate deposits and other sources. Of late, looking at the
performance and prospects, investors seem to have lost confidence in leasing
companies. This is reflected in the fact that the shares of most leasing companies are
quoted at an extremely lower price, compared to the book-value and per value.
Therefore, it is becoming difficult for the leasing companies to raise equity share
capital in the existing conditions. It is also not possible for them to issue either fully or
partly convertible debentures because these are closely linked with the networth and
trading of equity shares in the market.
The nature and amount of bank finance made available to leasing companies were not
subject to any restrictions until recently. The Reserve Bank of India appointed a
committee under the chairmanship of GS Dahotre to structure the norms regarding
bank finance to leasing companies. Based on the recommendations of the committee,
the following guidelines have since been issued by RBI with regard to bank finance.
The bank borrowings of a leasing company cannot exceed three times its Net Owned
Fund (NOF). NOF = Paid-up capital + Free Reserves - Accumulated Balance of Loss
- Balance of Deferred Revenue Expenditure - Intangible Assets - Investment/ Deposits
with subsidiary companies/affiliates - Loans and advances due from subsidiary
companies/affiliates).
Banks can extend credit only in the form of a cash credit facility since financing is done
primarily against lease rentals receivable.
For each lease transaction, the borrowing limit will be arrived at with the help of the
following formula:
Lease rentals receivable for the next 5 years X 75% of the cost of the leased asset
Total lease rentals receivable for the Entire period
The overall during limit for leasing company will be aggregate of the limits calculated
as above for the individual transactions. The cash credit facility offered will be on a
revolving basis. That is, as the liability/drawing limit for the earlier leasing transactions
are liquidated or reduced, the drawing limit for other new lease transactions can be
availed.
Bank finance will be available for only finance leases of new equipment. Hence,
operating leases are not eligible for bank finance. Also, sale and lease back
arrangement and leases of second-hand assets are not eligible for bank finance.For
smaller and medium companies, it will be difficult to raise funds by way of bank loans.
The public deposits are the significant source of the leasing companies. The RBI has
amended the earlier Non-Banking Financial Companies Directives, 1977, effective
from 28 March 1989. Two important provisions of these directives are: (1) minimum
period for acceptance of deposits by equipment leasing companies has been
increased to 24 months from six months; and (2) the maximum period extended from
36 months to 60 months. However, the rate of interest cannot exceed 14 per cent per
annum. It is observed from the examination of the annual reports of the companies for
the year 1987-88 that in terms of size of the public deposits, there were nine
companies (29 per cent) in the range of more than Rs.10 crores, - Lakshmi General
Finance Ltd. with Rs.45 crores, Sakthi Finance Ltd. Rs. 42 crores, the First Leasing Co
of India Ltd. Rs.21 crores, the Investment Trust and Finance Ltd. Rs. 19 and the
Industrial Credit and Syndicate Ltd with Rs.14 crores, followed by Nagarjuna Finance
Ltd. Rs.13 crores. All these are south-based, especially Madras-based. One
company is north-based - The Motor and General Finance Ltd. (MGF) having public
deposits of Rs.35 crores. It is evident from this that Madras-based companies have
mobilised deposits to the maximum extent as they have branches all over the country.
A look at the branch network of the selected companies reveals that most of the southbased companies have more branches than other leasing companies. Thus,
Sundaram Finance Ltd. has 39 branches, followed by Sakthi Finance Ltd. with 27
branches Mercantile Credit Corporation Ltd. 23 branches, the Industrial Credit and
Development Syndicate Ltd. 22 branches, the Investment Trust of India Ltd. 19
branches, and Lakshmi General Finance Ltd. 13 branches. Only one of the northbased companies, Grower Leasing Ltd., has ten branches. The major concern of
these branches appears to be mobilising deposits from the public directly or indirectly
through fixed deposits brokers rather than doing leasing business. The leasing
companies used the branches as an instrument to mop up fixed deposits. In addition
to the branch network, a few leasing companies had used CRISIL's rating as a weapon
to boost their fixed deposits. Sundaram Finance Ltd., Cholamandalam Investment and
Finance Co Ltd. (CIFIL), from Madras, and the 20th Century Finance Corporation
(TCFC), Bombay, had approached CRISIL, for rating and were awarded, FAAA (Triple
A) which stands for highest safety. Another company from Bombay, the Empire
Finance Co Ltd., was awarded FA + which stands between FAA (high safety) and FA
(adequate safety).
Presently, leasing companies are facing problems in raising fixed deposits since the
minimum period of deposits is two years. Only good and big companies may be able
to borrow by way of deposits. Thus, it is indicated that there is going to be an acute
shortage of money - the raw materials of leasing companies.
According to Ramakrishna Rao, Managing director, Magnificent Leasing, while the
demand for leasing increased, raw material supply (resources) became a severe
constraint. A few companies also had management problems, this being a specialised
business. Ranina, an expert in taxation and chairman, Mazada Leasing has said: All
leasing companies are facing the problem of resource crunch. Most of the companies
have not been able to raise any funds since 1986-87". Similarly, our analysis of the
responses to the questionnaire showed that, four companies (14 per cent of the
respondents) faced problem in raising share capital and long-term debt, and eight
respondents (29 per cent) in getting bank finance, whereas 15 respondents (58 per
cent) had problem in mobilising public deposits.
Inadequate Tax Benefits
Unfortunately, the tax benefits which leasing companies enjoy in the developed
countries are not available to the Indian leasing companies. Tax benefits arising out of
depreciation, investment allowance of deposit scheme, etc., are not conducive to the
growth and promotion of leasing companies. Investment allowance (u/s 32A) was
abolished from 1 April 1987, and in its place an investment deposit scheme (u/s 32 AB)
has been introduced. Under this scheme, the amount of deduction is limited to 20 per
cent of the profit of eligible business or profession as per the audited accounts.
However, this scheme exclude certain categories of leasing. The latest position is that
even this has been abolished as announced in the budget of 1990-91
In addition to the above, the Finance Act 1987, had introduced Section 115J of Income
Tax Act, 1961 which provided for a minimum tax of 30 per cent on the book profits of a
company. The leasing companies brought within the orbit of this new tax provision
faced uneasiness; now this has been abolished, as announced in the budget 1990-91.
Sales Tax Problems
Leasing companies are also facing the problems of sales tax. The 46th Amendment to
the Indian Constitution, which came into force from February 1983, has empowered
the State governments to levy sales tax on the transfer of rights or to the use of any
goods for valuable consideration. As a result, the legal position of finance lease is a
"deemed sale" under the State Sales Tax Act. The governments of Andhra Pradesh,
Bihar, Gurjarat, Haryana, Karnataka, Kerala, Maharashtra, Madhya Pradesh, Orissa,
Tamil Nadu, and West Bengal have already amended their sales tax Acts in
accordance with the 46th amendment to the Constitution. Hence, leasing companies
are required to pay sales tax at higher rates on a lease transaction as they are not
being allowed to use 'G' forms. This makes leasing more expensive, as the cost of the
asset acquired under lease finance gets enhanced to the extent of sales tax paid by
the leasing companies. This is bound to cripple the leasing industry, which is still in the
nascent stage. In view of the burden created by sales tax, the Central Government
should take immediate steps and formulate guidelines, ensuring uniform legislation
among various States. It should ensure uniformity in the scope and contents of the
sales tax. The facility of using 'G' should also be extended to leasing companies.
Prabhu, Chairman, Canara Bank in his chairman's speech in June 1989 remarked that
there were certain avoidable constraints restraining the lease finance from becoming a
major source of corporate finance. The levy of sales tax on rentals by many State
governments makes leasing unattractive. The benefits of lease finance, in terms of
accelerated modernisation and industrial growth, are to that extent adversely affected.
Yet another problem is in obtaining approval for issue of 'C' Forms by lessors under
not be any income through the asset. Hence, in such a case, the basic accounting
concept of matching the cost with revenue is totally ignored.
The second flaw lies in showing the leased assets in the balance-sheet. Different
leasing companies have adopted a variety of methods and there is no consistency in
the presentation of accounts. It is interesting to note that the method of providing
depreciation is also different from that of owned assets. Leasing companies are
following written down value methods of depreciation for owned assets and straight
line method for leased assets.
In the light of these practices, the Institute of Chartered Accountants of India (ICAI) has
issued a "Guidance Note on Accounting a Leases". The following are some of the
important requirements.
a) The assets leased out should be shown under "Fixed Assets" separately as "Assets
on Lease" and classified in the same manner as other fixed assets.
b) A matching annual charge representing the difference from the lease and finance
income is to be debited to the profit and loss account. This annual charge will consist
of the minimum statutory depreciation as per the Companies Act, and lease
equalisation charge where the lease charge is in excess of the said depreciation.
The recent amendment to the Companies Act, 1956, ensures that all the companies
including leasing companies, should follow accrual system of accounting. This will
cause unnecessary hardship to the leasing companies. However, there is
disagreement in the treatment of depreciation allowances, possessions of assets
under the Income-tax Act, 1961, and the Indian Companies Act 1956. There is thus a
strong discontentment among leasing companies regarding the accounting treatment
in their financial statements. The leasing Industry feels that the ICAI did not provide
adequate transition period for the implementation of the guidance note. In this .
connection, the Equipment Leasing Association (ELA), India, made representation to
the Institute of Chartered Accountants of India indicating the need for providing a
reasonable transition period till the requirements are in agreement with that of tax,
monetary, and corporate policies and practices. In fact, a group of leasing companies
obtained a stay order in Madras High Court, preventing ICAI from implementing the
provisions of the guidance note. ELA, continuing its constructive approach with ICAI,
has suggested an alternative method of providing depreciation.
Lack of Proper Legislation
In fact, the only legal reference available to lessors and lessees in the Hire Purchase
Act, 1972. Another act, the Transfer of Property Act ( Sections 105 to 117), deals with
only immovable properties. Even today, the leasing industry is following these acts in
addition to the section 126 to 180 of the Indian Contract Act, 1872. Hence, it is
obvious that there is neither a comprehensive leasing law nor government policy to
guide the leasing business. Now, it is the right time, for the Central Government to
make efforts to pass an act know as "Indian Lease Act," to cover leasing business.
The private sector leasing companies are facing cut-throat competition from the public
sector leasing organisations, such as ICICI, IFCI, SBI Cap, and Canbank, Compared
to the small private sector companies; these are at a privileged position in that they get
funds at cheaper cost. Therefore, these public sector leasing organisations have
good tie-ups with blue-chip and big companies and public sector manufacturing
companies. These have better terms and conditions than the private sector
companies. Besides, keen and unequal competition exist even among the private
sector leasing companies because of the oligopolistic nature of the leasing industry.
Sometimes, highly profitable and high tax companies may also create competition by
offering lease finance in order to avoid the income-tax through leasing as a tax
planning device.
Management Problem
Without knowing the lease business, a large number of entrepreneurs had entered the
leasing fray with others money. Management of leasing fray with others' money.
Management of leasing companies thus requires a different orientation compared to
the management of manufacturing and trading companies. The leasing companies
need people with specialised knowledge and skill to evaluate and appraise the credit
worthiness and soundness of the potential as well as existing lessees from time to
time. The leasing companies need to evaluate the structure of innovative lease
packages and options in order to cater to the needs and requirements of different
segments of the market.
The second issue relates to the composition of the board of directors of leasing
companies. A scrutiny of the board of directors of leasing companies reveals that
almost all the leasing companies' board are dominated by the retired
chairmen/managing directors or chief managers of banks or financial institutions.
Moreover, the same person is associated with many such companies. What is
interesting is that most such directors do not have any financial stake in the leasing
companies! The objective of the promoters in including such popular figures is to
attract instantaneous response to public issues, whereas, the retired executives are
finding these offers as retirement benefits. What is worse, most of these directors do
not have either the time or willingness to devote attention to the regular and routine
business. If these directors provide efficient and effective guidance and supervision,
how come some of the leasing companies have diversified into unrelated areas and a
sizable number disappeared from the scene?
According to Vinay Sawhney, Chairman of the Worldlink Finance Ltd.(chairman's)
speech, Third AGM, 28 March 1989), the leasing industry in India has failed to make
any significant contribution to the process of capital asset formation in the past few
years due to (a) limited resource mobilisation capabilities, (b) restrictive bank support,
and (c) lack of trained manpower. He suggested that careful planning, systematic
institution building, innovative approach, and well thoughout staff training programmes
are the key to the ultimate success in leasing business. According to Santhanam,
Chairman, Sundaram Finance Ltd. (Speech in 34th AGM 24 Sept 1987), there has
been a keen competition in leasing business from the financial institutions and
subsidiaries of commercial banks.
An analysis of responses on problem areas of leasing indicates that almost all the
companies faced one or the other problem in the leasing market. They have referred
to a number of factors affecting the financial performance of their companies (Table 2).
Table 2 shows that about 90 per cent of respondents stated that sales tax on lease
rentals and Section 115J of the Income Tax Act, 1961, have affected the financial
performance of the companies, and half the respondents felt that competition is keen
and intense. Only a few cited other problems. It is also noted that about one-third of
the respondents indicated that they have marketing problems, such as underquoting of
lease rentals (rate war) by competitors, and special and innovative schemes of leasing
divisions of financial institutions and subsidiaries of banks. About one-third of the
respondents expressed that there is a need for the lease broker services to facilitate
marketing functions of lease, while the rest of them (three-fourths) felt otherwise - no
need for broker services.
Table 2:
Description of Problems by respondents
Description of problems
No.of companies
Percentage
12
46
12
12
26
93
25
90
19
15
As regards policy issues, 20 respondents (70 per cent) suggested that the Central
Government should take immediate steps to abolish the sales tax on lease rentals and
Section 115J of the Income Tax Act, 1961 to give a boost to the industry. (Section 115J
has been abolished in the budget 1990-91). More than half the companies suggested
that leasing companies should also be allowed to avail the investment allowance and
investment deposit scheme. (However, these two were abolished in the budget 199091). One-fifth of the respondent wanted the minimum period of public deposits to be
reduced to six months, against the current period of 24 months, while a few also stated
that bank finance to leasing companies should be increased to five to six times their
net-owned funds. A few respondents felt that there is room for simplifying the
procedure for import leasing. From the foregoing, it can be concluded that the major
problems of the leasing companies are: the high incidence of sales tax on lease
rentals; cut-throat and keen competition; inability to raise resource on a continuous
basis, in case of both new and old companies due to varied reasons; no legislation to
guide, direct, and control leasing companies and leasing business; and lack of a
trained and experience manpower.
Prospects
Despite these problems, the leasing business in India has its own growth potential and
prospects. Equipment leasing has come to stay as a new device in providing the
necessary resources for maintaining the tempo of industrial growth. Leasing has
acquired a special importance in the economics of the developing countries,
particularly for financing the small-and medium-scale industries. Capital formulation
through leasing can help growth with minimum investment. It is estimated that by the
end of March 1991, the Indian leasing industry raised capital from various sources
approximately to the tune of Rs.4,000 crores.
Leasing has great potential in India in view of the fact that barely less than 1 per cent
of the total industrial investment is so far financed through leasing, compared to 30-40
per cent capital investment through leasing in the developed countries, such as the
US, the UK, and 10 to 20 per cent in Australia, Canada, Japan, etc. The well managed
and large resourceful leasing companies are going to see better days with good
profitability during the next few years. The leasing business continues to grow and
flourish, and the consumers - lessees (different segments of market) are growing in
number and size. Demand for leasing business continues to grow at a faster rate, and
there is adequate space for all. In the coming years, perhaps, the fastest and largest
growth industry would be leasing since the public sector organisations are actively
involved in the industry not only as lessors but also as lessess.
Financial institutions are armed with much inexpensive and comparatively vast funds in
their hands for deployment in leasing. These bodies can, therefore, function as
catalysts for market growth for leasing rates and, therefore, influences the profitability
levels. Several financial bodies, notably subsidiaries of banks or financial institutions,
are taking substantial amount of leasing from the public sector units, such as ONGC,
Air-India, Indian Airlines, Shipping Corporation, HMT, SAIL, BHEL,BEL, Vayudoot, Coal
India Ltd., and service-oriented sectors like transportation and communication
departments, and professions, such as medical, consultancy, engineering, etc.
The financial institutions and subsidiaries of commercial banks on the one hand, and
the private sector leasing companies, on the other, may have to play an important role
in the development of the leasing business. Recently, there was a proposal from the
Asian Development Bank (ADB) to set up a 100 crore Indian Leasing Industry fund
which has been approved by the Central Government. The fund is to be jointly
promoted by ICICI, UTI, and ADB. The Indian public is likely to have a stake in the
fund. The main objective of the fund is to provide long-term loans to the private sector
finance companies. Another notable development is that the Equipment Leasing
Association of India (ELA) at Madras, and the Association of Leasing, Finance and
Housing Development Companies (LFH), at Bombay, were formed with a (view) to
promoting, aiding, helping, encouraging the leasing business, and protecting the
interests of the leasing companies. Besides, a few of the finance, accounting, tax and
management consultants are working as lease brokers, who also will contribute to the
growth of leasing business.
Leasing companies are not only useful to big and medium industries but also opened
a new window for financing professionals, and consumers; they are also contributing to
the growth of the consumer goods industries. Leasing companies will get an additional
inflow of relatively inexpensive funds from IDBI, IFCI, UTI, since they offer mediumterm loan at 15 per cent interest. Their branch networks are working in full swing in
exploring new markets for public deposits. A few leasing companies have even set up
mobile offices to mobilise more fixed deposits from investors at their offices and
residences.
Presently, leases in India are generally small-ticket leases. The equipment ordinarily
leased are plants and machinery; however, the important potential markets are heavy
plant and machinery, ships aircraft, satellites, data processing equipment, trucks,
chemical plants, high-tech equipment by means of import leasing, leaveraged leasing,
and vendor leasing. Leasing has also plenty of scope in the service sectors, such as
developing the transportation and communication industries. Recently, the Motor
Vehicles Act has been amended for incorporating the interest of the lessor in the
registration certificate. This was a long awaited demand of the industry, and the
government has done well in recognising the importance of the leasing industry in
developing the transport sector. This will help increase the vehicle leasing for transport
and non-transport industry. The electronic and technological revolution sweeping the
office automation and data processing would create ample scope for leasing.
Leasing is a service industry as it provides funds and also taps the capital market. It
supplements the governments developmental plan by supplying equipment to the
industry. The Eight plan's projections, coupled with the flexible government policies
towards industry, modernisation and expansion of capabilities and the emphasis on
technological upgradation augurs well for the prospects of leasing. The Central
Government has reacted fairly as far as monetary, fiscal, and regulatory policy issues
were concerned. The manner and direction of growth will be, to some extent, affected
by fiscal, monetary and economic policies, although leasing industry is not dependent
upon them. Leasing will thrive whatever be the fiscal and monetary system adopted,
provided only that it does not treat leasing disadvantageously.
Leasing is growing industry. It is seen that leasing has grown in the latter 80s, and is
still growing. It is, however, worth nothing that despite good prospects for leasing,
many existing private sector leasing companies do not find a place in the market; only
a few leaders from the private sector, besides the public sector, remain in the fray.
This shows that the leasing industry needs the full support, co-operation, and
encouragement of the government. At the same time, regulatory framework is
essential to control its mushroom growth and irregularities, and to ensure a healthy
growth. It is expected that a substantial number of manufacturers of many types of
equipment may set up their leasing operations either as an integral part of the parent
company or through a subsidiary to sell their products. As long as the leasing industry
continues to be innovative, it will find a ready market for the service it has to offer.
Acknowledgements
I am grateful to Dr. IM Pandey, professor of Finance, IIMA, and Dr.Mohinder N Kaura,
Senior Faculty, Finance, ASCI, for their guidance and comments. The anonymous
referees' observations and comments on an earlier draft of this paper are also
acknowledged.