Lease Finance

In our daily life we often heard about the lease in many business magazine and business newspapers.Let’s discuss what is lease , it’s type and organization involved .It will give the basic idea which will lead to study the depth of this concept later.

A lease is a financing device which has developed rapidly during the 1960s and 1970s in U.S. and in India just before middle of 1980s.

It is a form of financing employed to acquire the use of assets .Through lease ,firms can acquire the economic use of assets for a stated period of time without owing it.Every lease involves two party -the user of the assets known as lessee, and owner of the assets known as the lessor.

The asset may be plant and machinery ,land ,factory,building ,automobile,equipment ,aircraft and others.

There are two main type of the lease.

• Operating Lease:

A contract that allows for the use of an assets,but doesn’t convey the right of ownership of assets.In an operating lease ,substantially all the risks and reward incidental to the ownership are rented by lessor.Usually ,such a lease is for a term that is significantly shorter than the economic life of asset.An operating lease is not capitalized ,it is accounted as rental expense in balance sheet of the lessee.

• Finance Lease:

It is also called the Capital lease also.In this,  substantially all the risk and reward incidental to ownership of asset is transfer to the lessee.The lease term covers the major part of the economic life of the assets.Ownership transferred option at the end of the period is there with the lessee.Title might or might not be transferred eventually.

Tax Benefit:

In the operating lease ,lease payment is considered as expense .No depreciation can be claimed.While in Finance lease ,lessee can claim interest and depreciation both as it is considered as loan.

Lease Term:

In OL ,the lease term extends to less than  75% of the projected useful life of the leased assets.While in FL ,lease term is generally more than or equal to the economic life of leased assets.

Lease financial organization in India include many private sector non-bank financial companies,some private sector manufacturing companies,Infrastructure leasing and financial service limited,ICICI,Industrial Reconstruction Bank of India (IRBI),Housing Development Finance Corporation (HDFC),state industrial corporation in both private and public sectors and small manufacturing companies.The prospective entry of bank causes a very good growth of lease industry.

With a view to encourage healthy growth of financial leasing equipment as an additional source to finance ,The RBI has issued the policy guidelines in respect of role of commercial bank ,raising public deposit,capital issue and import of capital goods.

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