Indian leasing by Vinod Kothari

Indian Leasing: Major components

There are about 400-odd large companies which have an organizational focus on leasing, and hence, are known as leasing companies.

Till recently, most of them were diversified financial houses, offering several fund-based and non-fund based financial services. However, recent SEBI rules on bifurcation of fund-based and non-fund based activities has resulted into hiving-off of merchant banking divisions of these entities. Most of these companies also offer hire-purchase activities, and some of them might have a consumer finance division as well.

These companies are known, in regulator's jargon, as non-banking financial companies, or NBFCs for short. The terms NBFCs includes several other financial concerns too, and all such companies are regulated by the Reserve Bank of India. There were no entry barriers to leasing business till recently, but the January 1997 amendments to the RBI law now require any non-banking finance company to have a prior registration with the RBI, and the conditions of registration virtually amount to authorization by the RBI.

Till 1991, there were some ten bank subsidiaries active in leasing, and over-active in stock-investing. The latter variety was ravaged in the aftermath of the 1992 securities scam.

In Feb., 1994, the RBI allowed banks to directly enter leasing. So long, only bank subsidiaries were allowed to engage in leasing operations, which was regarded by the RBI as a non-banking activity. However, the 1994 Notification saw an essential thread of similarity between financial leasing and traditional lending.

Though State Bank of India, Canara Bank etc have set up leasing activity, it is not currently at a scale to make any difference on the leasing scenario. This is different from the rest of the World, where banks are front-runners in leasing markets.

There is a wide variety of financial institutions at the Central as well as the State level in India. Apart from the apex financial institutions, viz., the Industrial Development Bank of India, the Industrial Finance Corporation of India, and the ICICI, there are several financing agencies devoted to specific causes, such as sick-industries, tourism, agriculture, small industries, housing, shipping, railways, roads, power, etc. In most States too, there are multiple financing agencies for generic or focussed cause.

Most of these institutions are using the lease instrument along with traditional financing instruments. Significantly, the ICICI was one of the pioneers in Indian leasing. At State level also, financial institutions are active in leasing business.

Some of the companies engaged in some other business which gives them huge taxable profits, have resorted to one-off leasing on a casual basis to defer their taxes. These people are interested only in leasing of high-depreciation items, preferably those entitled to 100% depreciation. The major items eligible for 100% depreciation are gas cylinders, certain energy-saving devices, pollution control devices etc. Severe scrutiny by revenue officials into lease transactions at the time of assessment has dampened the enthusiasm in this line of leasing activity, however it carries on. Mostly such lease transactions are syndicated, at times even funded, by active players in leasing markets.

This part of the lessor-industry is in highly under-grown form in India, for simple reasons. Vendor leasing is a product of competition in the product market. As competition forces the manufacturer to add value to his sales, he finds the best way to sell the product is to sell it without the buyer having to pay for it instantly. Product markets so far for most durables were oligopolistic, and good products used to sell even otherwise at a premium. With the economy decisively moving towards market orientation, competition has become inevitable, and competition brings in its wake sales-aid tools. Hence, the potential for vendor leasing is truly great.

Presently, vendors of automobiles, consumer durables, etc. have alliances or joint ventures with leasing companies to offer lease finance against their products. However, there is no devoted vendor leasing of the type popular in most of the advanced markets, where a specific leasing company or leasing program takes exclusive charge of a vendor's products.

1. Corporate customers with very high credit ratings: These essentially look at leasing to leverage against assets which are otherwise not bankable, or for pure junk financing.

2. Public sector undertakings: This market has witnessed a very rate of growth in the past. With budgetary grants to the PSUs coming to a virtual halt, there is an increasing number of both centrally as well as State-owned entities which have resorted to lease financing. Their requirements are usually massive.
3. Mid-market companies: The mid-market companies, that is, companies with reasonably good creditworthiness but with lower public profile have resorted to lease financing basically as an alternative to bank/institutional financing, which to them is time-consuming and tedious.
4. Consumers: Retail funding for consumer durables was frowned-upon at one point of time, but recent bad experience with corporate financing has focussed attention towards consumer durables which incidentally, is all the all-time favorite of financiers World-over. Most of the larger companies have expressed interest in consumer funding, with ticket size going as low as Rs. 5000.
5. Car customers: Car leasing World-over is a very big market, and the same is true for India. So long, most car leases were plain-vanilla financial leases but one now finds few instances of value-added car lease services also being offered.
6. Commercial vehicles: Commercial vehicles customers have always relied upon funding by hire-purchase companies. The customer profile ranges from large fleet owners to individual truckers.
7. Earth-moving machinery customers: These customers have also traditionally relied upon lease financing. Their requirements are generally large - each excavators costs more than Rs. 25 lacs. The income-stream is based on contracts they have - at times, the income generation may be sporadic, or the need might itself be temporary. In fact, operating leases would have been ideal in this market, but they are yet to be launched to any serious degree.
8. Govt. deptts. and authorities: One of the latest entrants in leasing markets is the Govt. itself. The Deptt. of Telecommunications of the Central Govt. took the lead by floating tenders for lease finance worth about Rs. 1000 crores. In its reforms programme, India has limits to the extent to which it can resort to deficit financing, and leasing is easily going to appeal to the Govt. , if not for cost reasons, at least for the fact that it will not feature in national accounts as a commercial financing. As a spin-off, it might even help reducing the reported deficit, as the Govt. resorts to what is loved World-over as a tool of off-balance-sheet financing.