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.

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

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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.

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).

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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.

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 12-13th 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.

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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:

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.

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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.

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!

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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

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

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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 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.

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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.

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.

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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.

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.

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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.

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

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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.

Mission

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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

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

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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:

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Clients of LeasePlan India:

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

clients are:

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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.

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Operating Lease

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

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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.

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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).

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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.

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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.

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Revenue Model

Financing Management Fees Others

Revenue Model

Financing Management Fees Others

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.

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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,

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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.

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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)

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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.

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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.

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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.

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.

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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.

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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.

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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)

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.

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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

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

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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:

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

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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

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.

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References

Primary Source

Mr. Subroto Chakravarty, regional Operations Head, Leaseplan

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

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Annexure

Questionnaire

Q1. The business idea of LeasePlan seems to be very innovative with respect to the

Indian scenario; can you give us a brief idea of who your major customers and

competitors are?

Q2. What are the processes followed before and after cars are leased to a customer?

Q3. What are the major modes through which you collect payment from your customers?

Q4. Can you tell us something about the various products and services offered by

LeasePlan? Do you offer both operating and financial lease?

Q5. Can you give us an idea of the kind of credit check that is conducted on your

customers, before doing business with them?

Q6. What do LeasePlan do to cover operational risk?

Q7. Can you also highlight the major sources of funding for LeasePlan?

Q8. Can you help us in identifying the major cost centers and sources of income for the

company?

Q9. What are the components of Lease Rentals charge from the customers?

Q10. Can u tell us something about the Billing cycle and business process involved while

leasing a car?

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