Lease financing denotes procurement of
assets through lease.
The subject of leasing falls in the
category of finance.
Leasing has grown as a big industry in
USA and UK and spread to other countries
in the present century.
In India, the concept was pioneered in
1973.
It is a commercial arrangement whereby
the equipment owner conveys to the
equipment user the right to use the
equipment in return for a rental.
• “Lease is a contract whereby the owner of an
asset (lessor) grants to another party (lessee)
the exclusive right to use the asset usually for
an agreed period of time in return for the
payment of the rent.”
 A lease financing is a contract whereby the owner of
an asset grant to another party the exclusive right to
use the asset usually for an agreed period of time in
return for the payment of rent.
 The rentals are pre-determined and payable at fixed
interval of time.
 A lease is an agreement allowing one party to use
another property, plant, or equipment for a stated
period of time in exchange for consideration.
Essential elements/Features of leasing
Parties to
the
contract
Ownership
separate
from user
Asset
Lease
rentals
Terms of
contract
Termination
of lease
contract
Essential elements
• 1. Parties to the contract: there are essentially two parties in a
contract of lease financing i.e. the owner (lessor) and the user of
the asset (lessee). Lessor as well as lessees may be individuals,
partnerships or joint stock companies etc.
• 2. Asset: The subject matter of the lease is the asset. The asset may
be anything i.e. an automobile, factory or a building. The asset
must, however, be of lessee’s choice suitable for his business needs.
• 3. terms of contract: the term of the lease is the period for which
the agreement of lease remains in operation. Every lease should
have a definite period, otherwise it will be legally inoperative. The
lease period may sometimes stretch over the entire economic life
of the asset (finance lease) or a period shorter than the useful life
of the asset (operating lease)
4. ownership separate from the user: during the lease tenure,
ownership of the asset vests with the lessor and its use is
allowed to the lessee. On the expiry of the lease tenure, the
asset reverts to the lessor.
5. Lease rentals: the consideration which the lessee pays to
the lessor for the lease transaction is the lease rental.
6. termination of lease contract: at the end of the lease
period, the contract may be terminated by any of the modes:
• The lease is renewed.
• The asset reverts to the lessor.
• The asset reverts to the lessor and the lessor sells it to the
third party.
• The lessor sells the asset to the lessee.
features
• The parties of lease must be competent to
contract
• No transfer of ownership
• Goods are delivered for specified period
• Rentals are payable generally in equated/level
monthly installment at beginning of every
month
evolution
• India initiated leasing in1973
• 1st leasing company is named FIRST LAESING
COMPANY OF INDIA LTD. Set up by FAROUK
IRANI WITH A.C.MUTHIA
• In 1981 few more companies joined leasing
game
• ICICI started it in 1983 to give a boost
• From 2 in 1980 to339 in 6 years
Size of leasing industry in INDIA
• It has reached to almost all sectors from
consumer finance to automobiles to
electricity,etc
• Over pats 7 yrs average growth rate is 30%
• Indian leasing has reached 14th largest place in
the world.
Parties involved
• Lessee eg PSUs, consumers, corporate
customers etc
• Lessor eg specialised leasing co.,banks,
specialised financial institutions
Steps in leasing transaction
• Lessee has to decide about type of asset
reqiured
• Lessee has to determine the supplier
• Enter a lease agreement
• Lessor has to contact supplier
• Asset is delivered
Types of
leasing
Financial and
operating
lease
Sale and lease
back
Single investor
and leveraged
lease
Domestic and
international
lease
Financial lease
• The lessor transfers to the lessee substantially all the risks
and rewards incidental to the ownership of the asset.
• It involves the payment of rentals over an obligatory noncancellable lease period.
• In such leases, the lessor is only the financier and is usually
not interested in the assets.
• It is a long term non-cancellable lease.
• It ensures the lessor for amortisation of entire cost of
investment plus the expected return on the capital outlay
during the term of the lease.
• Types of assets included under such lease are lands,
building, heavy machinery etc.
Operating lease
• It is one which is not a financial lease.
• It is a short term cancellable lease.
• In this, the lessor does not transfer all the risk and rewards
incidental to the ownership of the asset and the cost of the
asset is not fully amortised during the primary lease period.
So under this type of lease, contract lease period is always
less than economic life of the asset.
• The lessor provides services attached to the leased asset
such as maintenance, repair and technical advice.
• It is also known as service lease. Operating lease is
primarily used for computers, office equipments, trucks etc.
Single investor lease
• There are only two parties to the lease
transaction, the lessor and the lessee.
• Arrangement for assets of huge capital outlay.
• It is a 3 sided arrangement.
• Lesser borrows a part of purchase cost of the asset from the
third party i.e. lender.
• The lender is paid off from the lease rentals directly by the
lessee and surplus cash after meeting the claims of the lendor
goes to the lessor.
• Lessor acquires the asset with maximum contribution upto 50%
and rest is financed by lenders.
MANUFACTURER
LESSOR
LENDER
LESSEE
 in this, the lessee is already the owner of the
asset. He, under the lease agreement, sells the
asset to the buyer.
The buyer leases back the same asset to the
owner (now the lessee) in consideration of lease
rentals.
 under the sale and lease back, the lessee not only
retains the use of the assets but also gets funds
from the sale of the assets to the lessor.
SELLER
BUYER
LESSEE
LESSOR
Domestic lease
• A lease transaction is classified as domestic if
all the parties to the agreement are domiciled
in the same country.
International lease
If the parties to the lease transaction are domiciled in the
different countries, it is known as international lease.
International
lease
Import lease
Export lease
• Import lease: the lessor and the lessee are
domiciled in the same country but the
equipment supplier is located in a different
country.
Cross-border lease: when the lessor and the
lessee are domiciled in different countries, the
lease is classified as cross border lease. The
domicile of supplier is immaterial.
Financial evaluation of leasing
Two ways of evaluating…………………
1. Lessee’s point
of view
2. Lessor’s point
of view
Lessee’s point of view:
Lease or borrow decisions:
Steps:
Calculate present value of net-cash
flow of the buying option-NPV(B)
Calculate present value of net cash
flow of the leasing option-NPV(L)
Decide whether to buy or lease the
asset or reject the proposal .
How to decide…………………………………….
If NPV(B) is positive and greater
than NPV(L) then
• If NPV(L) is positive and greater
than the NPV(B)
then lease the asset.
• If NPV(B) as well as NPV(L)
are both negative,
reject the proposal
From the lessor’s point of view
Present value
method
Internal rate
of return
method
A. Present value method
• Determine cash outflows by deducting tax advantage
of owing an asset.
• Determine cash inflows after tax.
• Determine the present value of cash outflows and after
tax cash inflows by discounting at weighted average
cost of capital of the lessor.
• Decide in favour of leasing out an asset if p.v. of cash
inflows exceeds the p.v. of cash outflows i.e. if the NPV
is positive
B. Internal rate of return method
• Rate of discount at which the present value of
cash inflows is equal to the present value of
cash outflows.
• Can be determined with the help of
mathematical formula.
• Can also be determined with the help of
present value tables.