Index

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ParticularPageNo.

1 Meaning & Features.

2 Advantages & Disadvantage.

3 Hire Purchase Cost & Charactestics.

4 Legal Position.

5 Origin & Developments.

6 Banks & Hire Purchase Business.

7 Banks Credit For Hire Purchase Business.

8Hire Purchase System Vs Installment Credit System.

The Indian Financial service industry has undergone a metamorphosis since 1990. During the late seventeenths and eighties the Indian financial Service industry was dominated by commercial banks and other financial Institution which after to the requirement of the Indian Industry. However after the economic liberalization, the entire financial sector has undergone a sea saw change and now we are witnessing the emergence of new financial product and services almost everyday. Thus the present scenarios are characterized by financial innovation and financial creativity. Hire purchase is one of the important services provided by banks and financial Institution.

Meaning: Hire purchase is a method of selling goods. In a hire purchase transaction the

goods are let out on hire by a finance company (creditor) to the hire purchase customer (hirer). The buyer is required to an amount in periodical installments during a given period. The ownership of the property remains with the creditors and passes on to the hirer on the payment of the last installment.

Definitions:The mode of acquiring ownership of consumer durables by individuals and

productive assets by manufacturers, whereby the payments for the product is conveniently spread over a period of two or three years, is known as Hire Purchase System. Hire Purchase serves as convenient tools of credit in situation where it is difficult to save in advance to make the purchase of expensive article but find it easier to make regular payment, weekly or monthly, after they receive the article.

Features of hire purchase agreement

The Hire purchase agreement serves as the basis of Hire Purchase Financing Following are some of the feature:

1. Under hire purchase system the buyer takes possession of goods immediately and agrees to pay the total hire purchase price in installments.

2. Each installment is treated as hire charges.

3. The ownership of the goods passes from the seller to the buyer on the payment of the installment.

4. In case the buyer makes any default in the payment of any instalment the seller has the right to possess the goods from the buyer and forfeit the amount already received treating it as hire charges.

5. The hirer has the right to terminate the agreement any time before the property passes. That is he has a option to return the goods in which case he need not pay installments falling due thereafter. However, he cannot recover the sums legally represent hire charge on the goods in question.

Advantages of Hire Purchase System:

Hire Purchase Financing is an ideal mode of consumer and industrial credit in many countries. Presently it has become a recognize methods of doing business whenever it in involves the sale of durable and high-price goods. Hire Purchase finance offers the following advantages.

1) No immediate cash: Hire purchase finance helps asset creation without having to immediately part with the cash.

2) Easy Possession: The hire purchase financing system helps individual of limited means to realize their dreams by facilitating the possession of article.

3) Economic Growth: Hire purchase finance helps the growth of the economy by enhancing, investment and sales. In additions the mass sale of expensive and durable goods also contributes to employment generation It helps mass production and accelerates industrials developments and economic growth.

4) Thrift: Hire purchase inculcates/forces the saving habit on the buyer so that it becomes possible to pay installment without defaults.

5) Relief to Buyer: It relieves the buyer of arranging for loans and advances, which eventually involves financial burden to pay for the asset. It is considered to be advantageous especially for the small sector farmer and industrials.

Disadvantages of Hire purchase System.

1) Available only to reputed buyers.

2) Induces mindless, indiscriminate and liberal purchase, which may lead to bankruptcy.

3) Buyer has to mortgage future income.

4) Danger of buyer losing property during the depression as the value of the property diminishes.

5) Danger of the buyer having to lose even the paid installments in the event if default.

6) Higher prices thus making the purchase and expensive proposition.

7) Loss to seller in the even of default by the buyer, which may result in the seller having to repossess an article, which may not fetch much market value.

Hire Purchase Cost:

Hire purchase finance is a lucrative form of financial investments. Although the fields appears speculative provides a high interest of income to traders. In fact traders earn doubles the nominal interest rates. Under the various system of consumer credit, interest is calculated on the nominal rate that is added to the cash prices of the asset purchased. The amount of the installment is determined by dividing the purchase price with the number of the months of credit provided by the trader. Interest liability remains the same throughout the period credit as interest is calculated on the fixed cost price of the assets.

For the trader the higher the installments price us justified on the ground that there is am inherent risks of default an repossessions, and the article not fetching a price sufficient to pay for the unpaid installments.

Person with the regular and stable income or capacity to pay installment from their current income or competent to enter into contract suitable in Hire purchase system.It is not suitable for married women or minor person without independent sources of income and personal prosperity. Foreigner and persons having no permanents resident in the country are disqualified for such credit sale.

Characteristics:

Following are the charterstics features of hire purchase financing:Popular Methods: Hire purchase is the most popular methods used for the sale

of expensive and durable goods on credit.

Retention Right: In a hire purchase, the seller sell on credit to buyer, the security begins the seller's right to retain property rights on the goods sold.

Installments: The hire purchase price is paid in installment spread over a fixed period.

Ownership: The property rights in goods sold remain with the seller, and the buyer gets legal ownership of the article only after the payment of the last payments.

Agreements: The hire purchase transactions take place through a formal written agreements signed by the seller and the buyer. The agreement provides for the payment of the price in the form of fixed equitable installment spreads over a specified period of time, the installment being in the nature if rental payables on the fixed dates.

Possessions: the buyer is given possession of the goods on payment of the first rental amount in cash, known as the down payments.

Default: When the buyer defaults, i.e. fail to either pay specified installment or insure the article in accordance with the terms of the contract, the seller has the right

to terminate the hire purchase agreement and take repossession of the article. If the agreement is terminated because of default, the hirer or buyer will have to claim to the amount already paid, since that the amount is already treated as rental charges.

No Breach of trust: Under the hire purchase agreement the buyer simply hires the articles. The buyer cannot commit any criminal breach of trust. If the buyer does so and manages to sell the articles, the seller can recovers the article from the sub-buyer, since there is no transfer of ownership.

Legal position

The Hire Purchase Act, 1972 defines a hire purchase agreement as, ‘an agreement under which goods are let on hire and under which the hirer an option to purchase them in accordance with the terms of agreement under which:

1. Payment is to be made in installments over a specified period.

2. The possession is delivered to the purchaser at the time of entering into a contract.

3. The property in the goods passes to the purchaser on payment of the last installment.

4. Each installment is treated as hire charges so that if default is made in payment of any installment, the seller is entitled to take away the goods.

5. The hirer/purchaser is free to return the goods without being required to pay any further installments falling due after the return.

Hire purchase agreement

There is no prescribed from for a hire purchase agreement, but if has to be in writing and signed by both the parties to the agreement.

A hire purchase agreement must contain the following particulars:

The description of goods in a manner sufficient to identify them.

The hire purchase price of the goods.

The date of commencement of the agreement.

The number of installments in which hire purchase price is to be paid, the amount, and the due date.

Origin & developmentThe growth and development of hire purchase system can be traced back to the

advent of industrial development in U.K., Henry Moore, a Bishogate piano_ maker introduced the system of hire purchase in 1846in U.K. Cowperwait & sons, a furniture dealer introduced the hire purchase system in U.S.A. in 1807. The singer manufacturing company started selling sewing machine under hire purchase agreement. The idea was developed by wagon companies, which were formed to finance the purchase of wagon by collieries. The wagon companies bought the wagons and then let them out collieries under hire purchase agreement.

Manufacturer or dealers themselves financed all early hire purchase transactions. Subsequently independent finance house came into existence to offer hire purchase of wide variety of consumer articles, automobiles and industrial machinery on hire purchase.

In India, hire purchase finance started only after I world war. However it was only after II world war that its growth assumed visible dimension. The concept of hire purchase was not quite popular in the pr independence period though a few were endeavoring to increase the volume of their business with the provision of extending credit to intending buyers. With the increase in economic activity, many Non- Banking Financial Companies entered the scene in the fitness and six tees.

The pioneer in the field Commercial Credit Corporation Limited, Morton and General Finance Limited and Investment Supply Limited. These companies were setup predominantly to finance road transport sector. The volume of hire purchase business was around Rs. 635 crores in 1987-88, out of which automobile accounted for 55 per cent. Today about 25 per cent of sale of commercial vehicles is accounted by hire purchase. It is estimated by the Federation Hire Purchase Association that the stock-on- hire of hire purchase companies comprising corporate and non-corporate entities would be approximately Rs. 3000 Cores now.

In addition to commercial vehicles, purchase of consumer articles like household appliance, air conditioners, refrigerators, office furniture and equipment is financed through hire purchase. In recent years, the consumer durable goods market is experiencing an unprecedented boom. The growing Indian middle-class 100 to 150 million growing at a rate of 20 percent per annum and their willingness to mortgage the future for to-days enjoyment have led to spectacular growth in hire purchase business.

The institutions engaged in the hire purchase business in organized sector include commercial banks, co-operative banks, State Finance Corporations National Small Industries Corporations and in the unorganized sector they comprise a large number of partnership firms and individuals.

National Small Industries Corporation supplies machinery small-scale industry under hire purchase. The Industrial Development Bank Of India indirectly participate in financing hire purchase business by way of rediscounting usance bills/promotes arising out of sale of indigenous machinery on hire purchase basis. The Industrial Credit and Investment Corporation also have a discounting scheme of usance bills under hire purchase scheme.

Banks and hire purchase business

Through a recent notification issued on 7.9.1990 under clause (0) of Sub Section (1) of Section 6 of the Banking Regulation Act., 1949 the Government of India has permitted banks to engage in ‘hire-purchase’ business. Through the statutory framework now enables the banks to carry on hire purchase business, and to set up subsidiaries for undertaking such business the Reserve Bank of India is of the view that in the public interest and in the interest of banking policy; the following guidelines should be made applicable to banks so far as hire-purchase business is concerned:

(1) For the present, banks shall not themselves undertake directly (i.e., departmentally) the business of hire purchase.

(2) Banks which have set up subsidiaries (i.e. a company in which it holds not less than 51% of the shares) for the business of equipment leasing, merchant banking etc., may undertake the hire-purchase business either through such a subsidiary or through a separate subsidiary. Other banks may set up subsidiaries to transact hire-purchase business either exclusively or together with the business of equipment leasing. Banks desirous of undertaking hire-purchase business through an existing or new subsidiary as above, will require prior approval of the Reserve Bank of India.

(3) An existing bank subsidiary that may hereafter transact hire-purchase business or a new subsidiary set up to transact with business, as provided in clause(2) above, shall engage itself in the financing of other companies or concerns engaged in hire-purchase business.

(4) Investment of the bank in the shares of its subsidiary set up for undertaking equipment leasing and/or hire-purchase business together with investment or the bank in shares of other companies carrying on equipment leasing and/or hire purchase business, shall not in the aggregate exceed 10 percent of the paid-up capital and reserves of the bank.

(5) While banks may invest in shares of other hire-purchase companies within the limits specified in Section19 (2) of the banking Regulation Act., 1949 with the Reserves Banks., prior approval. They shall not act as promoters of such companies.

(6) Any application to be made to the Controller of Capital Issues in connection with the setting up of a new subsidiary or for subsequent issue of capital shall need prior clearance form the Reserve Bank of India.

(7) Banks settings up a subsidiary for the purpose of carrying hire-purchase business or through the existing subsidiaries should furnish such information in such form and at such at time as the Reserve bank may required from time to time.

Banks Credit for Hire Purchase Business

The subsidiary of commercial banks lend to dealer or to finance intermediary who has already financed articles sole by the dealer to the hirer under the hire purchase contract. While considering proposal from a dealer or hire purchaser financing companies, the bank subsidiaries has to take extra precaution looking to the particular nature of transaction under the hire purchase contract.

When offered this type of business, the bank subsidiary would make an assessment of the standing and financing position of the dealer of the hire purchase company and take into consideration the principles of the stood lending and carry out the procedure below.

1) Customer: When approached for hire purchases facility the subsidiary should take care to make the assessments of the standings and financial position of the business customers.

2) Purpose: the type of the goods being used to finance in the hire purchase transaction is of the great importance. In the event of default the bank may reconsider repossessions the goods and selling them to cleat the advance. Thus if the goods can be readily sold elsewhere (e.g. a relatively new car) them these agreements are better security than those for (say camera) which will have lower resale value.

3) Amount: Bank subsidiaries taking up hire purchase business would do well to discourage small individuals loans. In order to ensure proper servicing and monitoring it is also essential to have floor limit I the amount of individual hire purchase transaction. While it may be amount of individuals hire purchase transactions. While it may be about Rs. 50,000 for automobile sector, it may be about Rs. 10,000 for consumer durables.

4) Period: The facility will normally be extended over to three years.

5) Repayment: Repayment are spread evenly or agreed over the loan period. The repayment should be adaptable to the hirer needs. The repayment can usually be tailor made suit the income generated from the use of asset so that it is self-financing. Sometimes repayment holidays can be allowed and repayment is delayed until the asset is operational or producing profit. To ensure timely recovery in the case of car two wheeler and consumer durable financing it would be preferable to have institutional tie-ups with employers/employees cooperative societies for the which eligibility criteria cab be laid down.

6) Security: Technically hire purchase advance is against hypothecation of equipment/vehicles and pledge of hundies/promotes and lodgment of hire purchase agreement. The bank subsidiary will ask borrower to complete the bank's form of security under an equitable/hypothecation charge. If the borrower is a limited company which is not if sufficient strength to allow equitable facility

and if suitable security is not avaible it is normal to obtain a debenture over the asset of the company under which a floating charge is obtained.

7) Monitoring and Control: the banks need to exercise control over the on-going situation. A periodical certificate should be obtained from the finance company at the monthly intervals stating the total amount of outstaying but excluding those hire purchase agreement which have become in arrears and are more than suggest that the particular hirer is an permanent default. The bank will keep a running total of these amount returning agreement which have become lapsed to their customer.

Safeguard:

The following important factor should be considered when granting credit for Hire Purchase sale system.

Perishability of goods.

Capital resources of the trader for the investments.

The Three C's of the buyer's financial and moral character, capacity and capital.

Degree of competitions to be met and stability of the trade.

Duration of the credit a shorter period when the business is risks and a longer period during the sales seasons with the usual period ranging from the five to seven or ten years.

Hire purchase system is always confused with Installment credit system Following are point which distinguish between them:

Hire Purchase System Installment Credit System

Actual Sale

Hire Purchase becomes an actual sale only one the pavement of the last installment

The payment of the first installment is sufficient to make Installment an outright sale.

Legal Ownership

The buyer obtains possessions without legal ownership until the last payment.

The buyer obtains both ownership and possession immediately after the agreement is executed and the first installment is paid to the seller.

Hirer/owner

The buyer is merely hiring the article and hence not its real owner

The buyer is the rightful owner on payment of the first installment.

Right to sell

A Hire Purchase cannot sell the article until the last hire a charge is paid.

The buyer can sell the article at any time.

Legal Protection

The seller gets maximum protection of the law.

The buyer gets maximum protection by the law.

Default

The buyer can lose both the article and the entire amount paid if there is default.

No risk of loses to buyer even on default.

Seller's Ownership

The seller can get back ownership and possessions if there is default.

The seller cannot repossess but has remedy can sue buyer in the court.

Bad Debt

Limited risk of Bad debt High risks of Bad debts.