Leasing Finance:
A lease is a contract between the owner (lessor) and the user (lessee). There are various types of lease viz. operating lease, finance lease, etc. In terms of lease agreement, the lessor pays money to the supplier who in turn delivers the article to the lessee. The lessee (hirer of the article) makes periodical payment to the lessor. At the end of the lease period, the asset is restored to the lessor. Commercial banks in India have been financing the activities of leasing companies, by providing overdraft/Cash credit accounts/Demand loans against fully paid new machinery or equipment by hypothecation of security. The repayment should be from rentals of machinery/ equipment leased out. The maximum period of repayment is five years or the economic life of the equipment whichever is lower. The financier bank is allowed for periodical inspection of the asset. Lease contracts are only for productive purposes and not for consumer durability.
Hire-Purchase finance:
Hire-purchase transactions are very similar to leasing transactions. In hire–purchase agreement, at the end of the stipulated period, the hirer (lessee) has options either to return the asset to the leasing company while terminating the agreement or purchase the asset upon terms set out in the agreement In terms of leasing agreement the ownership continues to remains with the Leasing company(Lessor). Since hire-purchase finance takes place predominantly in the automobile sector, banks have started direct finance to transport operators as the nature of advance is classified as priority sector lending.
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.
The major difference between leasing and hire-purchase:
Hire purchase involves the gradual payment of installments by the hirer, leading to ownership transfer at the end, whereas, leasing entails periodic payments for the use of an asset without ownership transfer, with options to return, extend, or asset purchase at the end of the lease term. In other words, hire purchase grants eventual ownership through installment payments, while leasing offers usage rights without ownership, allowing flexibility and lower upfront costs. Choose based on ownership goals and financial considerations.
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