Certify and Increase Opportunity.
Be
Govt. Certified Commercial Banker

Leasing

Leasing is a process by which a company acquires the use of a certain fixed assets for which it must pay a series of periodic (tax deductible) payments. The ‘lessee’ is the receiver of these assets under the ‘lease’ contract. The ‘lessor’ is the owner of the assets, in this case it is the bank. The Reserve Bank allows banks to take direct exposures in areas like equipment leasing, hire purchase and factoring. According to RBI guidelines, bank’s exposure to lease financing should not exceed 25 percent of net worth in the case of an individual borrower and 50 percent in the case of a group of borrowers.

9.9 Types of leases

• Sale and lease back arrangements: Under this lease a firm that owns the asset (building, land and equipment) sells the asset and simultaneously executes an agreement to lease the asset back for a specified period on specific terms.
• Operating leases: Here, the lessor is to maintain and service the leased asset and the cost of such maintenance is built into the lease payment.
• Straight financial or capital lease: A financial lease is a long-term agreement extending over the estimated economic life of the asset. The lessor agrees to finance the use of the equipment by the lessee over time and is not subject to cancellation by the lessee before the end of the base lease period.
• Leveraged leases: This is a lease where the lessor pays some of the money required to purchase the asset and borrows the rest from a lender. The lender is given a secured interest on the asset and an assignment of the lease and lease payments. The lessee makes payments to the lessor, who makes payments to the lender.
• Housing Finance: Housing finance provided by a bank involves the acquisition or construction of houses, including acquisition or development of land in connection therewith. Commercial banks make mortgage loans for land, construction or a completed dwelling unit either a flat in or multi-storied building or an independent unit. The cost of financing to the borrower depends on the level of interest rates, term to maturity and whether the mortgage is fully amortised and has fixed or variable interest rates.