A PROJECT REPORT ON

LEASING IN INDIA

Submitted in partial fulfillment of the requirements

For
MASTERS OF COMMERCE BANKING AND FINANCE
(2015-2016)
BY
HUMERA KHAN
ROLL NO:49
Under the guidance of
Prof. Bosco Peter

Affiliated to University of Mumbai

S.K.SOMAIYA COLLEGE OF ARTS, SCIENCE AND COMMERCE
AURBINDO, VIDYANAGAR
VIDYAVIHAR [EAST]. MUMBAI-400077

CERTIFICATE
OF
PROJECT WORK
This is to certify that,
Ms HUMERA KHAN M.com Banking and Finance Part 1 Semester-1
Roll No: 49 has undertaken and completed the project titled LEASING IN
INDIA during the academic year 2015-2016 under the guidance of Prof.
Bosco Peter submitted to this college in fulfillment of the curriculum of
MASTERS OF COMMERCE BANKING AND FINANCE,
UNIVERSITY OF MUMBAI
This is a Bonafide project work & the information presented is true &
original to the best of our knowledge & belief.

_______________
______________________
PROJECT GUIDE
EXAMINER

_____________________
COURSE COORDINATOR

EXTERNAL

__________
PRINCIPAL

DECLARATION
I, HUMERA KHAN studying in M.com Banking and Finance Part 1 course in
the academic year 2015-2016 at S.K.SOMAIYA College of Arts, Science and
Commerce and hereby declare that I have completed the project on LEASING
IN INDIA as a part of course requirements of MASTERS OF COMMERCE
Banking and Finance of University of Mumbai.
I further declare that the information presented in this project is true
and original to the best of my knowledge.

Date:

Signature of Student
HUMERA KHAN

ACKNOWLEDGEMENT

I the undersigned, have great pleasure in giving my sincere thanks to

those who have contributed their valuable time in helping me to achieve the
success in my project work. I would like to thank Principal Dr. SANGEETA
KOHLI,

SK SOMAIYA College of Arts, Science and Commerce for his

continued support. I would like to express my sincere thanks to Co-coordinator

for his constant encouragement, in completion of this project successfully.
I am indebted and thankful to my project Guide and Motivator Prof
BOSCO PETER for his valuable and timely guidance, co-operation
encouragement and time spent for this project work. I would like to thank our
Library Staff for providing me sufficient information, which helped me to
complete my project successfully. I would like to thank all the lecturers for their
support and guidance throughout the project.
I also thank my family members for their continued support in
completing this project work and last but not least, I wish to thank all my
friends and well- wishers who are directly or indirectly linked with the success
of my project.

EXECUTIVE SUMMARY
The aim of this project is to introduce the reader to the topic of LEASING IN
INDIA.
The
Leasing
industries
have
changed
rapidly
in
the changing and challenging economic environment throughout
t h e world.In this competitive and liberalized environment everyone is trying to
do better than others and consequently survival of the fittest has come into
effect.
I would like to present my project LEASING IN INDIA .The project flashes
some light on Leasing and how it is perceived by people in India. It deals with
the conceptual part of Leasing as well as its practical application in India. The
main focus of this project is on benefits and importance of Leasing in India. The
factors responsible for growth of lease in India are also dealt with in this
project. The working of Leaseplan is also covered under the project.

INDEX

SR.NO

TOPIC

PAGE NO

Introduction

7-9

History

10-14

Types of leasing

12-13

Advantages of leasing

14

Disadvantages of leasing

15

Factors responsible for growth of leasing in India

16-17

Current problems of Indian leasing

17-19

Lease vs Hire-purchase

20-21

About Leaseplan

22-43

10

Conclusion

44-47

Biblography

48

INTRODUCTION:
Lease is that agreement under which the company or Indian firm acquires the
exact right and make use of certain capital asset on the consideration of payment of
rental charges. It cannot acquire any kind of ownership to such an asset apart from
making use of it. The user comparatively pays all the expected operating costs and
also the maintenance expenses. The main corporate companies must equally take
into the consideration that developed countries like America, United Kingdom the
companies of such a countries are commonly depending on the leasing factor. In
India since era of liberalization, many of the Indian companies have equally been
involved in the leasing transactions. On the other side, many financial institutions
and even the commercial banks in the Indian Financial sector have comparatively
accepted over the same transactions.

MEANING:
The term leasing refers to a contract under which the owner of an asset allows
another person or party to use the asset in return for some rent.The persons
involved are lessor and lessee.Lessor is the owner of the asset and the lessee is the
person getting benefit of asset taken on lease.Leasing, as financing concept, is an
agreement between two parties, the leasing company or lessor and the user or
lessee, whereby the former arranges to buy capital equipment for the use of the
latter for an agreed period of time in return for the payment of rent.The rentals are
predetermined and payable at fixed intervals of time, according to the mutual
convenience of both the parties.However, the lessor remains the owner of the
equipment over the primary period.

DEFINITION:
Lease can be defined as a right to use equipment or capital goods on payment of
periodical amount.This may broadly be equated to an instalment credit being
extended to the person using the asset by the owner of capital goods with small
variation.

PARTIES TO LEASE AGREEMENT:

There are two principal parties to any lease transaction as under:
Lessor: Who is actual owner of equipment permitting use to the other party
on payment of periodical amount..
Lessee: Who acquires the right to use the equipment on payment of
periodical amount.
1. Lessees vary widely from the one-person operations to the Fortune Hundred
corporations where diverse equipments are being leased.Transactions range
from a few thousands worth of equipment to crores worth cogeneration
facilities, telecommunications systems, medical equipment etc.
2. Lessor in most cases, are corporate only.There are four basic types of such
companies: Banks or bank-affiliated firms; Captive leasing companies such
as subsidiaries of equipment manufacturers who lease out their parents
products;Independent leasing companies, which may be small and
specialized or large and diversified; Others, including those investment
bankers and independent brokers who bring the parties of a lease together.

STEPS IN LEASING TRANSACTIONS:

A contract of lease provides a person an opportunity to use an asset, which
belongs to another person.The following steps are involved in a leasing
transaction:
1. At the first instance the lessee has to take a decision regarding the required
asset.Then he has to select a supplier before selecting the type of machine.
2. The lessee then enters into a lease agreement with lessor.the lease agreement
contains the terms and conditions of the lease such as, lease period, rental
payments, details regarding renewal of lease period,cost of repair and
maintenance, insurance and any other exoenses.
3. After the lease agreement is signed the lessor consents the manufacturer and
requests him to supply the asset to lessee.

STEPS IN FINANCIAL EVALUATION:

1.
2.
3.
4.

Evaluation of client in terms of financial strength and credit worthiness.

Evaluation of security/ collateral security offered
Financial evaluation of the proposal
The most important part in lease financing is its financial evaluation both
from the point of view of lessor and lessee.

ACCOUNTING TREATMENT OF LEASE:

Lessor:

Asset on the balance sheet.

Rentals income.
Claims depreciation.
Sets off basic cost of equipment from rental for tax purpose.

Lessee:
No asset in balance sheet.
Rentals full as expenses.
Footnote in balance sheet to disclose lease obligations.

HISTORY:
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 20 th 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 totalled Rs. 2395.5 million. One can
notice the surge in number - from merely 2 in 1980 to 339 in 6 years.
Subsequent swings in the leasing cycle have always been associated with the
capital market - whenever the capital markets were more permissive, leasing
companies have flocked the market. There has been appreciable entry of first
generation entrepreneurs into leasing, and in retrospect it is possible to say that
specialised 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
10

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-liberalisation 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.

11

TYPES OF LEASE;
1.Financial Lease:
This type of lease which is for a long period provides for the use of asset during the
primary lease period which devotes almost the entire life of the asset. The lessor
assumes the role of a financier and hence services of repairs, maintenance etc., are
not provided by him. The legal title is retained by the lessor who has no option to
terminate the lease agreement.
The principal and interest of the lessor is recouped by him during the desired
playback period in the form of lease rentals. The finance lease is also called capital
lease is a loan in disguise. The lessor thus is typically a financial institution and
does not render specialized service in connection with the asset.
2. Operating Lease:
It is where the asset is not wholly amortized during the non-cancellable period, if
any, of the lease and where the lessor does not rely for is profit on the rentals in the
non- cancellable period. In this type of lease, the lessor who bears the cost of
insurance, machinery, maintenance, repair costs, etc. is unable to realize the full
cost of equipment and other incidental charges during the initial period of lease.
The lessee uses the asset for a specified time. The lessor bears the risk of
obsolescence and incidental risks. Either party to the lease may termite the lease
after giving due notice of the same since the asset may be leased out to other
willing leases.
3. Sale and Lease Back Leasing:
To raise funds a company may-sell an asset which belongs to the lessor with whom
the ownership vests from there on. Subsequently, the lessor leases the same asset to
the company (the lessee) who uses it. The asset thus remains with the lessee with
12

the change in title to the lessor thus enabling the company to procure the much
needed finance.
4. Sales Aid Lease:
Under this arrangement the lessor agrees with the manufacturer to market his
product through his leasing operations, in return for which the manufacturer agrees
to pay him a commission.
5. Specialized Service Lease:
In this type of agreement, the lessor provides specialized personal services in
addition to providing its use.
6. Small Ticket and Big Ticket Leases:
The lease of assets in smaller value is generally called as small ticket leases and
larger value assets are called big ticket leases.
7. Cross Border Lease:
Lease across the national frontiers is called cross broker leasing. The recent
development in economic liberalisation, the cross border leasing is gaining greater
importance in areas like aviation, shipping and other costly assets which base
likely to become absolute due to technological changes.

13

ADVANTAGES OF LEASING:
1. Leasing Permits Alternative Uses
A leasing arrangement provides a firm with the use and control over the assets
without incurring huge capital expenditure and requiring to make only periodical
rental payments. Thus, leasing saves funds for alternative uses.
2. Leasing Arrange Faster And Cheaper Credit
Leasing companies are generally more accommodating than banks and other
financial institutes in respect of terms of financing. As such, it has generally been
found that acquisition of assets under leasing arrangement is cheaper and faster as
compared to acquisition of assets through other sources of financing.
3. Leasing Increases Lessee's Capacity To Borrow
Leasing arrangements enable the lessee to use more of its own funds for working
capital purposes instead of using low yielding fixed assets. The debt-equity ratio of
lease does not alter because of assets acquired under lease arrangements. As such
lease arrangements can resort to further borrowings in case the need arises.
4. Leasing Protects against Obsolescence
Lease arrangements helps to protect the lessee against the risk of obsolescence in
respect of the assets which become obsolete at a faster pace.
5. Boon For Small Firm
Acquisition of assets through a leasing arrangement is particularly beneficial to
small firms which can not afford to raise their capacity on account of scarcity
of financial resources.
6. Absence Of Restrictive Convenience
The financial institution while lending money usually attach several restrictions on
the borrowers as regards management, debt-equity norms declaration of dividends
etc. Such restrictions are absent in the case of lease financing.
7 Trading On Tax Shield
In case of a non-tax paying lessee, the cost of financing an asset is much higher as
compared to a tax-paying lessee. However, when tax-paying owns the assets, he
generally passes a part of the tax benefit to the lessee by means of lower rental
charge. As a result of this favour, the real cost of the asset to the lessee, work out to
be lower than that what it would have been if he were the owner of the assets.

14

DISADVANTAGES OF LEASING:
1. Lease Expenses: Lease payments are treated as expenses rather than as
equity payments towards an asset.
2. Limited Financial Benefits: If paying lease payments towards a land, the
business cannot benefit from any appreciation in the value of the land.
Long-term lease agreement also remains a burden on the business as the
agreement is locked and the expenses for several years are fixed. In case
when the use of asset does not serve the requirement after some years, lease
payments become a burden.
3. Reduced Return for Equity Holders: Given that lease expenses reduce the
net income without any appreciation in value, it means limited returns or
reduced returns for an equity shareholder. In such case, the objective of
wealth maximization for shareholders is not achieved.
4. Debt: Although lease doesnt appear on the balance sheet of a company,
investors still consider long-term lease as debt and adjust their valuation of a
business to include leases.
5. Limited Access of Other Loans: Given that investors treat long-term leases
as debt, it might become difficult for a business to tap capital markets and
raise further loans or other forms of debt from the market.
6. Processing and Documentation: Overall, to enter into a lease agreement is
a complex process and requires thorough documentation and proper
examination of asset being leased.
7. No Ownership: At the end of leasing period the lessee doesnt end up
becoming the owner of the asset though quite a good sum of payment is
being done over the years towards the asset.
8. Maintenance of the Asset: The lessee remains responsible for the
maintenance and proper operation of the asset being leased.
9. Limited Tax Benefit: For a new start-up, the tax expense is likely to be
minimal. In these circumstances, there is no added tax advantage that can be
derived from leasing expenses.

15

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.

16

 Optimistic capital markets: Data would establish a clear connection

between bullish stock markets and the growth in both number of leasing
entities and lease volumes. Year 1994-1995 saw the peak of primary market
activity where a company, even if a new entrant in business, could price
itself on unexplainable premium and walk out with pride.
Access to public deposits: Most leasing companies in India have relied,
some heavily, on retail public funds in the form of deposits. Most of these
deposits were raised for a 1 year tenure, and on promise of high rates of
interest, at times even more than the regulated rate (which was lifted in 1996
to be reintroduced in 1998).
A generally go-go business environment: At the backdrop of all this was a
general euphoria created by liberalization and the economic policies of Dr.
Manmohan Singh.

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
17

regulations 3 times in 5 months, and there are still Committees and Task Forces on
the reconstruction job. There could not have been a worse way of handling a
sensitive sector of the economy, already in a crisis of public confidence!

The current problems of Indian leasing could be listed as follows, again without
any order of listing:
Asset-liability mismatch: Most non-banking finance companies in India
had relied extensively on public deposits -this was not a new development,
as the RBI itself was constantly encouraging and supporting the depositraising 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
18

been made, but what Indian leasing companies have suffered are certainly
problems of infancy. Credit decisions were based on a pure financial view,
with asset quality taking a back-seat.
Tax-based credits: In most of the cases of frauds or hopelessly-wrong
credit decisions, there has been a tax motive responsible for the transaction.
India has something which many other countries do not- a 100% first year
depreciation on several assets. Apparently, the list of such assets is limited
and the underlying fiscal rationale quite holy and sound - certain energy
saving devices, pollution control devices etc qualify for such allowance. But
that being the law, it is left to the ingenuity of our extremely competent tax
consultants to widen the range with innovative ideas of exploiting these
entries in the depreciation schedule. Thus, there have been cases where
domestic electric meters have been claimed as energy saving devices, and
the captive water softenizer in a hotel has been claimed as water pollution
control device! As leasing companies were trying to exploit these entries, a
series of fraudsters was successful in exploiting, to the hilt, the propensity of
leasing companies to surpass all caution and all lending prudence to do one
such transaction to manage its taxes, and thus, false papers for non-existing
wind mills and never-existing bio-gas plants were fabricated to lure leasing
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.
19

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 hirepurchase 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. Hirepurchase, 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.
20

Besides, the early motivation (which continues with a number of players even
now) of leasing was capital allowances, more significantly the investment
allowance, which was not available for transport vehicles. Hence, the leasing form
historically clung to industrial plant and machinery.
These reasons have vanished over time.
The Motor Vehicles law now treats leases and hire-purchase at par from the
viewpoint of financier-protection.
Investment allowance has been abolished, and hence, there are no
predominant tax-preferences to a lease.
The RBI treats lease and hire-purchase at par and has stopped giving a
distinctive classification to leasing and hire-purchase companies.
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.

21

About LeasePlan
LeasePlan is the worlds 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.

22

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.

Companys Vision, Mission and Values

Vision
To be the reference in vehicle management solutions in India.
Mission
In anticipating customer needs, it will provide quality vehicle management
solutions through the expertise and vitality of their people.
Values
23

Integration

Expertise

Vitality

Flexibility

Integrity

Productivity

Products and Services

The company offers tailor made solutions as per the customers requirements. It
provides wide range of products and services which are discussed below:
Products

Comfort Plan
LeasePlans Comfort Plan offers a full range of services. Designed to extract
the maximum advantage from the fleet, Comfort Plan includes everything,
from auditing the clients 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 customers resources and administrative time, but
also gains financially from LeasePlans 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 leasing. Here the open calculation schedules out
24

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 customers 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 clients 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:

25

Clients of LeasePlan India:

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

26

27

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.
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 clients existing fleet. This
product takes care of your fleets 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 lessees company
resources and administrative time, but also he stands to gain financially from
LeasePlans expertise and strong relationships with service providers

29

Interface with the Client (Marketing Manager)

Assessment of the potential of the client and credit appraisal ( LCC or LPC)

Preparation of Master Agreement (NCST)

Processing of orders (NCST and National Operations)

Order received from the client
Quote issued to the client
Order confirmation and user details
Purchase order (PO) issued to the dealer
Dealer confirmation
Insurance cover note
Registration
Delivery to user
Purchase Order receipts
Service contract activated
Issue of invoices

Business Process

The process of leasing a car can be represented as:

Pricing Model

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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.
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

Sources of funds
Interest bearing liabilities

Interest free liabilities

Interest free liabilities; 15%; 15%

Interest bearing liabilities; 85%; 85%

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. companys 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.

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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.

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 :

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 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.
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.

35

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,
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.

36

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.

37

 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.
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 cant 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
38

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)
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

39

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.
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 PDCs received) the credit conditions of the
client is updated in ELVIS.

40

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.

41

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.
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:
42

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.

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:
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For the cars delivered between 1 st 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 16 th and 30th of the month: In this case the payment
schedule starts from next month. So during the invoicing process in the month in
which car is delivered a normal billing is done against the client and bill (normal)
is raised for the EMI of next month.

Modes of Payment
There are basically three modes through which clients can make payments:
1.

MI (Monthly Instruments- Cheques)

2.

PDC (Post Dated Cheques)

3.

SI (Standing Instructions)

The client may opt for any of the above mentioned mode for making the payments.
44

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 1 st and 3rd of the month.
In case of SI the amount is directly deposited to the companys account as per the
instructions given by the client to its bank. The details regarding the amount
deposited are sent to the company for their records. The status regarding the SI is
checked on weekly basis that whether they are deposited or not and in case
deposited they have been properly knocked off or not.

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

45

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 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
46

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 matter across to the Central Board of Direct Taxes
and get a set of guidelines on true leases. Not having any guidelines leaves

47

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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BIBLOGRAPHY:
www.leaseplan.co.in
www.gtnews.com
www.vipulprakashan.com
www.shethpublications.com
www.googlw.com

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