Hire-purchase: Meaning and evolution of hire-purchase in India

Under the hire-purchase system, goods are delivered to the buyer at the time of the purchase agreement with a condition that Payment will be made in installments but a buyer will become the owner of goods only on the payment of the last installment. In this system, the buyer pays the price of the goods in installments i.e. monthly, quarterly, or yearly, etc., and also some amount of interest. Unlike consumer loans with repayment of a loan under installments where the buyer of the product is treated as a borrower, such installments of hire-purchase are to be treated as hire of these goods until the amount decided in the agreement has been fully paid. Legally, the property (ownership) in the goods remains with the vendor till the last installment is paid.

The main features of a hire purchase agreement are as below:

In the case of hire purchase, the person who has taken possession of the goods on hire cannot transfer them to a third party because he/she does not own the goods till the payment of goods is fully paid. Every installment gets treated as a hire charge for the asset’s use. Usually, the hiree charges interest on a flat rate

Evolution of hire-purchase:

Hire-purchase transactions first started in England in the mid-nineteenth century, against the backdrop of the Industrial Revolution, when sewing machines were sold under a formal agreement to hire with the option to purchase. Later, other consumer durable goods began to fall under the scope of such agreements. The introduction of automobiles accelerated the spread of hire purchase transactions.

Hire-purchase transactions were first introduced in India at the turn of the twentieth century. The Madras (present Chennai) based Auto Supply Company Ltd. in 1920, later known as Commercial Credit Corporation, was the first hire purchase company. Other notable companies based in the north included the Motor and General Finance Company and the Installment Supply Company in 1925.

In the beginning hire-purchase was promoted by the dealers in consumer durables in India. Dealers of Singer Sewing Machine Company and Murphy Radio were at the forefront of extending installment facilities on a hire-purchase basis to the customers of their products. Later stage hire-purchase of commercial vehicles developed very fast. Instead of dealing directly with the hirer, the new form became popular. The owner sold his goods to financing companies, renting them out to the hirers/intended under hire purchase agreements.

Hire purchase agreements gained popularity in the postwar years, proving particularly useful in the road transport and automobile industries, namely financing commercial vehicles. It is a special system of credit purchase and sale. With the proliferation of hire purchase transactions, there has also been a fair amount of litigation. The courts have been active in elaborating on the various aspects and features of hire purchase agreements. Several government-appointed committees, including the Masani and James Raj Committees, have acknowledged the role of hire purchase agreements in developing the road transport industry. Hire purchase is governed by the Hire Purchase Act of 1972.

Essentially, asset-based financing in India particularly by non-banking financial companies is split into two documentation modes – lease and hire-purchase. These two are technically different instruments, but there is not much that differs between the two, except for the caption. 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 have the same effect on pretax income and balance sheet values, be it lease or hire-purchase transactions.

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