A lease is a contract between the owner (lessor) and the user (lessee). There is various type 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 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 account/Demand loan 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 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 purpose and not for consumer durable.
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 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 automobile sector, banks have started direct finance to transport operator as the nature of advance being classified as priority sector lending.
Related Articles: (Category – Loans and Advances)
- Difference between first charge and second charge
- Difference between Prime and Collateral security
- Meaning of fixed charge, floating charge, and crystallization of charge
- Difference between Overdrafts and Cash Credit facility
- Difference between Open Cash Credit and Key Cash Credit facilities
- Difference between loans and advances in bank finances
- Difference between Demand Bills Purchase and Usance Bills Discount