financial servides

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Financial services Notes for BBM

MOHAMED SADATH, Faculty member, S.R.S FIRST GRADE COLLEGE, TUMKUR Page 1

Chapter 1

Introduction:The principle of management by objectives rightly suits the financial services management. The basic

objectives of management in financial services are cost effectiveness, efficiency in service quality and

profitability. In this service sector quality counts more than the quantity.

Management of financial services requires a combination of talents in marketing & area, finance area andin HRD capital market deals with raising of finance, arranging for loans, creating in capital and securities,

etc. But being a service sector market management of a human component is vital for its operation.

Capacity to take decisions and right decisions in time is essential part of capital market management.

Corporate data and information is available, it is the manager's competency to pick up the correct

information, analyse it and draw a correct conclusion market and investment analysis requires an expert

financial manager.

Meaning of Financial Services:The term "Financial Services" in a broad sense means "mobilizing and allocating savings". Thus, it

includes all activities involved in the transformation of saving into investment. The financial service can

also be called 'financial intermediation'. Financial intermediation is a process by which funds are

mobilised from a large number of savers and make them available to all those who are in need of it andparticularly corporate customers. Thus, financial services sector is a key area and it is very vital for

industrial developments.

DefinitionThe term financial services can be defined as the activities, benefits, satisfaction connected with the sale

of money, that offer to users or customers, financial related values.

NATURE OR CHARACTERISTICS OF FINANCIAL SERVICES

The financial services has the following characteristics:

1. INTANGIBLE: Financial services cannot appeal to a buyers sense of touch, taste, smell, sight orhear. Thus an organization providing financial services is largely dependent on the feedback from

the public as to effectiveness, quality and attractiveness of the services rendered.

2. DIRECT SALE: Direct sale is the only possible channel of distribution. There are no middlemanin between. In order to ensure that the services are available at the right time and the right place,

simultaneous production and distribution of financial services is undertaken by the service

organization.

3. HETROGENITY: In order to provide a variety of financial and related needs of differentcustomers in different areas financial service organization has to offer a wide range of products

and services. They provide special services to industrial customers and retail services covering

insurance money receipt or storage etc.

4. FLUCTUATION IN DEMAND: The demand for certain categories of financial services ex. Lifeinsurance, its demand fluctuate according to the level of general economic activity. This factorputs extra pressure on the role & functions of marketing and insurance organization.

5. PROTECT CUSTOMERS INTEREST: The responsibility of any financial service organizationto protect customers interest is important not just in banking and insurance but also in other

sectors of the financial services.

6. LABOUR INTENSIVE: Personalized services versus automation is an important issue infinancial services. The financial service sector is highly labour intensive. It leads to increase in

cost of production and consequently affect the price of financial products. Because of high


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personnel cost involved and to enhance customers convenience increased use of technology is

being made.

7. GEOGRAPHICAL DISPERSION: Financial services must have both appeal and widerapplication. To ensure this the service providing organization must have massive branch network

so that benefits of convenience are enjoyed by international, national and local customers.

8. LACK OF SPECIAL IDENTITY: Customers usually approach a nearby branch of a bank orfinancial institution because it is convenient to them. As the competing product offered by

various service organizations are similar the emphasis is more on the package than the product.

The package consists of branch location, staff, services, reputation, advertising and new services

offered from time to time. Thus, major competitors offering similar services place more emphasis

on the promotional aspects rather than on the inherent uniqueness of a particular financial

institutions service.

9. INFORMATION BASED: Financial service industry is an information based industry. Itinvolves creation and use of information. Information is an essential component in the production

of financial services. Cost of processing information is quite relevant in the profitable production

of financial services.

10.REQUIRE QUALITY LABOUR: Financial services require huge amounts of high quality labourto deal with information & communication with the market. The type of labour range from

workers performing simple task to those undertaking complex analysis and negotiations require

years of training and experience. The importance of labour cost and the role of human inputs in

financial service production can be realized from the salaries paid in this industry. Financial

services firms have to make extra efforts to attract, motivate, and retain the human resources they

require in order to survive, grow and prosper in future.

TYPES OF FINANCIAL SERVICES

As we have seen earlier financial services are offered by various financial organization or institutions,

commercial banks and merchant bankers. These financial services can be classified into two typesbasically:

1. Asset based/fund based2. Fee based/advisory services

1. ASSET BASED / FUND BASED SERVICESThese financial services includes all such type of services which involves investment in some kind of

physical asset for which the payment is being made either in future or at present in full or partial in the

form of interest or dividend. It involve some kind of assets.

a) LEASING FINANCE: Leasing is an arrangement that provides a firm with the use and controlover assets without buying and owing the same. A lease is a contract between the owner of the

asset(lessor) and the user of the asset(lessee), whereby the lessor gives the right to use the asset

to the lessee over an agreed period of time for a consideration called the lease rental. The lessee

pays the lease rent periodically to the lessor as regular fixed payments over a period of time as

mentioned in the terms and conditions of the agreement. At the expiry of the lease period the

asset reverts back to the lessor or the lessee may buy the asset.

So, leasing is an alternative to purchase of an asset in order to acquire the services of that asset.


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Leasing is a process by which a firm can obtain the use of certain fixed asset for which it must

make a no. Of contractual, periodic & tax deductible payments.

b) HIRE PURCHASE: Hire purchase is an alternative to leasing as a source for equipmentfinancing. Hire purchase means a transaction where goods are purchased and sold on the terms

that:

1. Payment will be made in installments.2. The possession of the goods is given to the buyer immediately.3. The property(ownership) in the goods remains with the vendor till the last installment is

paid.

4. The seller can repossess the goods in case of default in any payment of any installments.5. Each installment is treated as hire charges till the last installment is paid.

c) BILL DISCOUNTING: According to Indian Negotiable Instruments Act 1881, the bill ofexchange is an instrument in writing containing an unconditional order, signed by the maker,

directing a certain person, to pay a certain sum of money to, or to the order of, a certain person,

or to the bearer of that instrument. The bill of exchange is used for financing a transaction in

goods which means that it is essentially a trade related instrument.

Discounting of B/E is a fund based financial service provided by finance companies. The

act of handling over an endorsed B/E for ready money is called discounting of bill. The margin

between the ready money paid and the face value of the bill is called the discount rate and is

calculated as a rate percentage per annum on the maturity value. The maturity of a bill of

exchange is defined as the date on which payment will fall due. Normal maturity periods are 30,

60, 90, 120 days bills maturing within 90 days is most popular.

CREATION OF B/E: Suppose a seller sells a good or merchandise to buyer. In most cases, the

seller would like to be paid immediately but the buyer would like to pay only after sometime, that

is the buyer would wish to purchase on credit. For this problem the seller draws a B/E of a given

maturity on the buyer. The seller has now assumed the role of a creditor and is called the drawer

of the bill. The buyer who is the debtor is called the drawee. The seller then sends the bill to thebuyer who acknowledges his responsibility for the payment of the amount on the terms

mentioned on the bill by writing his acceptance on the bill. The acceptor could be the buyer

himself or any third party willing to take on the credit risk of the buyer.

d) CONSUMER CREDIT: Consumer credit includes all asset based financing plans offered toindividuals to help them acquire durable consumer goods. In a consumer credit transaction the

individual/consumer/buyer pays a part of cash purchase price at the time of delivery of the asset

and pays the balance with interest over a specified period of time. The main providers of

consumer credit are foreign/multinational banks, commercial banks and finance companies &

cover items such as cars, scooters, vcrs, tvs, refrigerators, washing machines, home appliances,

personal computers, cooking ranges, food processors etc.

e) VENTURE CAPITAL: Venture capital is a form of financing designed for funding hightechnology, high risk and perceived high risk projects. The term venture capital represents

financial investments in a highly risky projects with the objective of earning a high rate of return.

A venture capitalist provides funds to entrepreneurs & enterprises pursuing new and unexplored

avenues. They helps the promote to actualize the project and attain commercialization. Financial

support s extended not only as a conventional loan with fixed repayment schedules, but also in

the form of equity or quasi-equity instruments with a conscious intention of sharing the rewards


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as well as the risks with the sponsor of the project. Financier provides management support to

establish the venture successfully. Thus V.C. is a medium for translating the entrepreneurial

ideas from research laboratory stage to the production line and further on to get the products to

the market.

There is significant scope for venture capital companies in our country because of

increasing emergence of technocrat entrepreneurs who lack capital to be risked. These venturecapital companies provide the necessary risk capital to the entrepreneurs so as to meet the

promoters contribution as required by the financial institutions. In addition to providing capital,

these firms take an active interest in guiding the assisted firms. Some V.C. firms are:-

1. Venture capital fund of IDBI2. Technology development & information corporation of India ltd.(ICICI) & (UNIT TRUST)3. Risk capital & technology corporation ltd (RCTC)4. Infrastructure leasing and financial services ltd.5. Stock holding corporation of India ltd. (SHCIL)6. The credit rating information services of India ltd.(CRISL)

f) HOUSING FINANCING: Housing finance has merged as a fund based financial service in thecountry with the setting up of National Housing Bank (NHB) by RBI in 1988 whose main

objective is to provide finance for house building. The main components of the housing finance

system are the NHB, the HUDCO Housing and urban development corporation, Insurance

organizations, commercial and co-operative banks & specialized Housing finance institution in

the public private and joint sector such as HDFC, Citi Home, Dewan Housing Finance and so on.

g) INSURANCE SERVICES: Insurance is a contract whereby the insurer that is insurancecompany agrees/undertakes in, consideration of a sum of money (premium), to make good the

loss suffered by the insured (policy holder) against a specified risk such as fire or compensate the

beneficiary (insured) on the happening of the specified event such as accident or death. The

document containing the terms of contract between the insurer and the insured is called policy.

The property which is insured is the subject matter of insurance. The interest which the insuredhas in the subject matter of insurance is known as insurable interest. Depending on the subject

matter, insurance services are divided into:-

1. Life2. General

Initially there were only two public organization LIC & GIC but with the setting up of IRDA

(Insurance regulatory & development authority) new ventures came into existence.

h) FACTORING: Factoring may broadly be defined as the relationship created by an agreement,between the seller of goods & services and a financial institution called a factor, whereby the

later purchases the receivables of the former and also control and administers the receivables of

the former.

Factoring as a fund based financial service, provides resources to finance receivables as

well as facilitates the collection of receivables. It is another method of raising short term

finance through account receivables credit offered by commercial bank and factors. A

factor is a financial institution which offers services relating to management and

financing of debts arising out of credit sales. At present following companies operate in

this field:-

Canbank Factors Ltd


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

2. FEE BASED / ADVISORY SERVICESIn fee based services there is no physical asset only advisory services are given. And for those advisory

services payment is given to the service provider as a fees for the services or advice.

a) PORTFOLIO MANAGEMENT: These services are offered not only to the companiesissuing the securities but also to the investors. They advice their clients, mostly institutional

investors, regarding investment decision as the quantum of amount of security and the type

of security in which to invest. They renders necessary services to the investors by advising

on the optimum investment mix, taking into account factors like: objectives of the

investment, tax bracket applicable to the investor, need for maximizing returns, capitalappreciation etc. Thus such firms undertake the function of purchase and sale of securities

for their clients so as to provide them portfolio management services. Some firms manage

mutual funds and offshore funds.

b) CORPORATE COUNSELING: This advice is usually provided to corporate unit. Such firmsrender advice to corporate enterprises from time to time in order to improve performance and

build better image/reputation among investors and to increase the market value of its equity

shares. Counseling is provided in the form of opinions, suggestions and detailed analysis of

corporate law as applicable to the business units. In India Punjab National Bank is one of the

examples.

c) ISSUE MANAGEMENT: This service is mainly confined to management of new publicissues of corporate securities by the newly formed companies, existing companies and

foreign companies in dilution of equity. These firms acts as sponsors of the issues. They

obtain consent of the controller of capital issues which is SEBI and provide a number of

services to ensure success in the marketing of the securities. The services provided are:-

Preparation of prospectus Preparation of plan and budget of issues Selection of institutional and broker underwriters and underwriting agreements Advertising and arranging publicity agency for post and pre issues Selection of issue house Advising clients regarding a fresh issue, additional issues, bonus and write issues. Take decision as to the size and timing of the public issues

d) CORPORATE RESTRUCTURING: The growth of the firm can be achieved internallyeither by developing new products or externally by acquisitions, mergers, amalgamations,

absorption and so on. The activities related to the expansion and contraction of a firms

operations or changes in its assets or financial or ownership structure are referred to as

corporate restructuring. And the most common forms of corporate restructuring are


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merger/demergers, amalgamations & acquisition/ takeovers, buyouts or financial

restructuring.

e) CREDIT RATING: Credit rating agencies are the institutions that rate the companies orfirms for their creditworthiness. Credit rating is the opinion of the rating agency on the

relative ability and the willingness of the issuer of a debt instrument to meet the debt service

obligations as and when they arise. It is an indicator expressing the underlying credit qualityof a debt issue program.

The business firm can raise funds at a cheaper rate with a good rating. The fund ratings

are useful to the banks and other financial institutions when they decide on lending and

investment strategies. A company with highly rated instruments ahs to make least efforts

in raising funds through public. In India, there are three major credit raising agencies

namely CRISL-Credit rating information service of India ltd, ICRA-Investment

information and credit rating agency of India ltd, CARE- Credit analysis and research.

f) STOCK BROKING: Since SEBI was setup stock broking has emerged as a professionaladvisory service. Stock broking is a member of a recognized stock exchange who buys, sell

or deals in shares/securities. There are many stock broking firms in India which gives

advisory service to its clients regarding investment in securities. Thus the broker are the

intermediary between the investor and the stock market. The brokers invest in the securities

on behalf of the investor and charges fees/ commission for those services. These brokers are

registered with SEBI and they are abide by its rules, regulations and by-laws.

g) LOAN SYNDICATION: Some institutions provides specialized services in preparation ofproject, loan applications for raising short term as well as long term credit from various

banks and financial institutions for financing the project or meeting the working capital

requirements. Loan syndication involves following services:

Assisting the clients in the estimation of total cost on the project and prepare financialplan to meet that cost.

Assisting clients in the preparation of loan application for financial assistance from termlenders/ financial institutions/ banks and monitoring their progress.

Follow up of the term loan application with the financial institution and banks andobtaining the satisfaction for their share of participation.

Assisting the client for negotiation for the sanction of appropriate facilities.IMPORTANCE OF FINANCIAL SERVICES

1. Economic Growth: The financial service industry mobilizes the savings of the people andchannels them into productive investment by providing various services to the people. In fact, the

economic development of a nation depends upon these savings and investment.

2. Promotion of Savings: The financial service industry promotes savings in the country byproviding transformation services. It provides liability, asset and size transformation service by

providing large loans on the basis of numerous small deposits. It also provides maturity

transformation services by offering short-term claim to savers on their liquid deposit and

providing long-term loans to borrowers.

3. Capital Formation: The financial service industry facilitates capital formation by renderingvarious capital market intermediary servicescapital formation in the very basis for economic


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growth. It is the principal mobilizer, of surplus funds to finance productive activities and thus it

promotes capital accumulation.

4. Provision of Liquidity: The financial service industry promotes liquidity in the system byallocating and reallocating savings and investment into various avenues of economic activity. It

facilitates easy conversion of financial asset into liquid cash at the discretion of the holder of such

assets.5. Financial Intermediation: The financial service industry facilitates the function of

intermediation between savers and investors by providing a means and a medium of exchange

and by undertaking innumerable services.

6. Contribution to GNP:The contribution of financial services to GNP has been going onincreasing year after year in almost all countries in recent times.

7. Creation of Employment Opportunities: The financial service industry creates and providesemployment opportunities to millions of people all over the world.

PRESENT SCENARIO OF FINANCIAL SERVICES

1. Conservatism to dynamism:At present, the financial system in India is in a process of rapid transformation, particularly after theintroduction of reforms in the financial sector. The main objective of the financial sector reforms is to

promote an efficient, competitive and diversified financial system in the country. This is essential to raise

the allocative efficiency of available savings and to promote the accelerated growth of the economy as a

whole. The emergence of various financial institution and regulatory bodies has transformed the financial

services sector from being a conservative industry to a very dynamic one.2. Emergence of Primary Equity Market: The capital markets have become a popular source of

raising finance. The aggregate funds raised by the industries have gone from Rs. 5976 crore in

1991-92 to Rs. 32382 crore in 2006-07. Thus the primary market has emerged as an important

vehicle to channelize the savings of the individuals and corporates for productive purposes and

thus to promote the industrial & economic growth of our nation.

3. Concept of Credit Rating: The investment decisions of the investors have been based on factorslike name recognition of the company, reputation of promoters etc. now, grading from anindependent agency would help the investor in his portfolio management and thus, equity grading

is going to play a significant role in investment decision making.

Now it is mandatory for non-banking financial companies to get credit rating for their debt instruments.

The major credit rating agencies functioning in India are:i. Credit Rating Information Services of India Ltd.

ii. Credit Analysis and Research Ltd.iii. Investment Information and Credit Rating Agency.iv. Duff Phelps Credit Rating Pvt. Ltd.

4. Process of Globalization: The process of globalization ha paved the way for the entry ofinnovative financial products into our country. The government is very keen in removing all

obstacles that stand in the way of inflow of foreign capital. India is likely to enter the full

convertibility era soon. Hence, there is every possibility of introduction of more and moreinnovative financial services in our country.

5. Process of Liberalization: The government of India has initiated many steps to reform thefinancial services industry. The Government has already switched over to free pricing of issues

from pricing issues by the Controller of capital issues. The interest rates have been deregulated.

The private sector has been permitted to participate in banking and mutual funds and the public

sector undertakings are being privatized. The financial service industry in India has to play a


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positive and dynamic role in the years5 India has to play a positive and dynamic role in the years

to come by offering many innovative products to suit to the varied requirements of the millions of

prospective investors spread throughout the country.

Causes for Financial Innovation:(1) Economic liberalization: Reform of the financial sector constitutes the most important component of

India's programme towards economic liberalisation. The recent economic liberalization measures haveopened the door to foreign competitors to enter into

(2) Investor awareness: With a growing awareness amongst the investing public, there has been a distinct

shift from investing the savings in physical assets like gold, silver, land, etc. to financial assets like

shares, debentures, mutual funds etc.

(3) Low profitability: The profitability of the major financial intermediary, namely the banks has beenvery much affected in recent times. There is a decline in the profitability of traditional banking products.

(4) Customer service: Now-a-days the customer's expectations are very great. They want newer products

at lower cost or at lower credit risk to replace the existing ones.

(4) Keen competition: The entry of many financial intermediaries in the financial sector market has led to

severe competition among themselves. This keen competition has paved the way for the entry of varied

nature of innovative financial products so as to meet the varied requirements of the investors.

(5) Improved communication technology: The communication technology has become so advanced thateven the world's issuers can be linked with the investors in the global financial market without any

difficulty by means of offering so many options and opportunities.

(6) Global impact: Many of the providers and users of capital have changed their roles all over the world.

Financial intermediaries have come out of their traditional approach and they are ready to assume more

credit risks.

(7) New Financial Products and Services: Today, the importance of financial services is gaining

momentum all over the world. In these days of complex finance, people expect a financial service

company to playa very dynamic role not only as a provider of finance but also a departmental store of

finance. Sophistication and innovations have appeared in the arena of financial intermediaries.


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Chapter 2

Leasing:

Definition:"Lease is a form of contract transferring the use or occupancy of land, space, structure or equipment, in

consideration of a payment, usually in the form of a rent." - Dictionary of Business and Management

"Lease is a contract whereby the owner of an asset (lessor) grants to another party (lessee) the exclusive

right to use the asset usually for an agreed period of time in return for the payment of rent. - James C. VanHorne

"A contract between lessor and lessee for the hire of a specific asset selected from a manufacturer or

vendor of such assets by the lessee. The lessor retains the ownership of the asset. The lessee has

possession and use of the asset on payment of specified retain over the period.

- Equipment Leasing Association of UK

Types of Lease:(1) Financial Lease: A financial lease is also known as capital lease, long term lease, net lease and close

lease. In a financial lease, the lessee selects the equipments, settle the rights and terms of sale and.

arranges with a leasing company to buy it. He enters into a irrevocable and non-cancellable contractual

agreement with the leasing company. The lessee uses the equipment exclusively maintains it, insures and

avails of the after sales service and warranty backing it. He also bears the risk of obsolescence as it standscommitted to pay the rental for the entire lease period. The financial lease may also contain a non-

cancellable clause which means that the lessor transfers the title to the lessee at the end of the lease

period. The financial lease is very popular in India as in other countries like USA, UK and Japan. On all

India basis, at present, approximately a lease worth Rs. 75 to 100 crores is transacted as tax planningdevice.

(2) Operating Lease: An operating lease is also known as service lease, short term lease or true lease. In

this lease, the contractual period between lessor and lessee is less than the full expected economic life of

equipment. This means that the lease is for a limited period, may be a month, six months, a year or few

years. The lease is terminable by giving stipulated notice as per the agreement. The leaser does the

services like handling warranty claims, paying taxes, scheduling and performing maintenance and

keeping complete record. Lease is suitable for;

(a) Computers, copy machines and other office equipments, vehicles, materials handling equipments, etc.which are sensitive to obsolence, and

(b) Where the lessee is interested in tiding over temporary problem

(3) Sale and Lease Back: Under this type of lease, a firm which has an asset sells it to the leasing

company and gets it back on lease. The asset is generally sold at its market value. The firm receives the

sale price in cash and gets the right to use the asset during the lease period. The firm makes periodical

rental payment to the lessor. The title to the asset vests with the lessor.

(4) Leverage Lease: A leverage lease is used for financing those assets which require huge capital outlay.

The outlay for purchase cost of the asset generally varies from Rs. 50 lakhs to Rs. 2 crore and has

economic life of 10 years or more. The leverage lease agreement involves three parties, the lessee, the

lessor and the lender. The lessor acquires the assets as per the terms of the lease agreement but finances

only a part of the total investment, say 20% to 50%. The balance is provided by a person or a group of

persons in the form of loan to the lessor. The loan is generally secured by mortgage of the asset besidesassignment of the leased rental payments. The position of the lessee under a leverage leasing agreement is

the same as is the case of any other type of lease. In leveraged lease, a wide range of equipments such as

rail, road, rolling stock, coal mining, electricity generating plants, pipe lines, ships, etc are acquired.

(5) Cross Border Lease: Cross border lease is international leasing and is known as transnational leasing.

It relates to a lease transaction between a lessor and lessee domiciled in different countries and includes

exports leasing. In other words, the lessor may be of one country and the lessee may be of another

country. To illustrate, if a leasing company in USA makes available an Air bus on lease to Air India, there

would be a cross border lease.


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Advantages of LEASING to LESSEE

There are several extolled advantages of acquiring capital assets on lease:

(1) Saving of capital:Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee

is not to provide or pay any margin money as there is no down payment. In this way the saving in capital

or financial resources can be used for other productive purposes e.g. purchase of inventories.(2) Flexibility And Convenience:

The lease agreement can be tailor- made in respect of lease period and lease rentals according to the

convenience and requirements of all lessees.

(3) Planning Cash Flows:Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming

into the business from the use of the same assets.

(4) Improvement In Liquidity:Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back

technique.

(5) Shifting of Risk of Obsolescence:The lessee can shift the risk upon lessor by acquiring the use of asset rather than buying the asset.

(6) Maintenance And Specialized Services:In case of special kind of lease arrangement, Lessee can avail specialized services of lessor for

maintenance of asset leased. Although lessor charges higher rentals for providing such services, lessees

overall administrative and service costs are reduced because of specialized services of the lessor.

(7)Off-The-Balance-Sheet-Financing:Leasing provides "off balance sheet" financing for the lessee, in that the lease is recorded neither as an

asset nor as a liability.

Disadvantages of LEASING to LESSEE

(1) Higher Cost:The lease rental include a margin for the lessor as also the cost of risk of obsolescene, it is, thus regarded

as a form of financing at higher cost.

(2) Risk of being deprived the use of asset in case the leasing company winds up.(3) No Alteration In Asset:Lessee cannot make changes in asset as per his requirement.

(4) Penalties On Termination Of Lease:The lessee has to pay penalties in case he has to terminate the lease before expiry o lease period.

Advantages of LEASING to LESSOR(1) Higher profits:

The lessor can get higher profits by leasing the asset.

(2) Tax Benefits:The lessor being owner of asset can claim various tax benefits such as depreciation.

(3) Quick Returns:By leasing the asset, the Lessor can get quick returns than investing in other projects of long gestationperiod.

Disadvantages of LEASING to LESSOR(1) High Risk of Obsolescence:

The lessor has to bear the risk of obsolescence as there are rapid technology changes.

(2) Price Level Changes:In case of inflation, the prices of asset rises but the lease rentals remain fixed.

(3) Long term Investment:


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Leasing requires the long term investment in purchase of an asset, and takes long time to cover the cost of

that asset

PROBLEMS OF LEASINGLeasing has great potential in India. However, leasing in India faces serious handicaps which

may mar its growth in future. The following are some of the problems.

1. Unhealthy Competition:The market for leasing has not grown with the same pace as the number of lessors. As a result,

there is over supply of lessors leading to competitor. With the leasing business becoming more

competitive, the margin of profit for lessors has dropped from four to five percent to the present 2.5 to 3

percent. Bank subsidiaries and financial institutions have the competitive edge over the private sector

concerns because of cheap source of finance.

2. Lack of Qualified Personnel:Leasing requires qualified and experienced people at the helm of its affairs. Leasing is a

specialized business and persons constituting its top management should have expertise in accounting,

finance, legal and decision areas. In India, the concept of leasing business is of recent one and hence it is

difficult to get right man to deal with leasing business. On account of this, operations of leasing business

are bound to suffer.

3. Tax Considerations:Most people believe that lessees prefer leasing because of the tax benefits it offers. In reality, it

only transfers; the benefit i.e. the lessees tax shelter is lessors burden. The lease becomes economically

viable only when the transfers effective tax rate is low. In addition, t axes like sales tax, wealth tax,additional tax, surcharge etc. add to the cost of leasing. Thus leasing becomes more expensive form offinancing than conventional mode of finance such as hire purchase.

4. Stamp Duty:The states treat a leasing transaction as a sale for the purpose of making them eligible to sales tax.

On the contrary, for stamp duty, the transaction is treated as a pure lease transaction. Accordingly a heavy

stamp duty is levied on lease documents. This adds to the burden of leasing industry.

5. Delayed Payment and Bad Debts:

The problem of delayed payment of rents and bad debts add to the costs of lease. The lessor does

not take into consideration this aspect while fixing the rentals at the time of lease agreement. Theseproblems would disturb prospects of leasing business.

Playerys in the indian leasing industryThere is a shake out in the market at the moment-90% of which is complete. Today there are close to 800

leasing companies in the market of these, about 50-60 companies operate on a national level. This figure

once stood at 4000. This is an indicator of the enormity of the shakeout in the market. The top ten players

in the market account for about 65% of the market.

Company Name

Volume Of

Business(Rs. In Crores

approx)

Asset Categories

LeasedAverage Lease

TenorNature Of

Leases

TATA FINANCE 500

Aircrafts100% Depreciable

AssetsInfrastructural

Equipment

8-10 YearsFinancialOperating

L & T FINANCE 30EquipmentComputers

5 YearsFinancialOperating


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KOTAK MAHINDRA20

Commercial

Vehicles3-4 Years Financial

ICICI 1500

Capital EquipmentShipsAircraftsRailway Wagons

5-10 Years Financial

FIRST LEASING 150VehiclesEquipmentComputers

3-5 Years Financial

IL & FS 500

Plant & MachineryShipsAircraftsPower Equipment

5-7 YearsFinancial

Operating

ASHOK LEYLAND

FINANCE50

VehiclesPlant & Machinery

5-7 Years Financial

CHOLA- MUNDULUM

FINANCE50

VehiclesComputersEquipment

5 YearsFinancialOperating

SREI INTERNATIONAL 30

Construction

Equipment100% Depreciable

Assets

5 Years Financial

Documents

financial servides