Factors that contributed to growth of Indian leasing:

With the exception of 1996-97 and 1997-98, the 1990s have generally been a good
decade for Indian leasing. The average rate of growth on compounding basis works out
to 24% from 1991-92 to 1996-97. Broadly, the following factors have been responsible
for the growth of Indian leasing, in no particular order:

• No entry barriers - any one could float a leasing entity, and even an existing
company not in leasing business can write a lease purely for tax shelters.
• Buoyant growth in capital expenditure by companies - The post -liberalization
era saw a spate of new ventures and fresh investments by existing venturers.
Though primarily funded by the capital markets, these ventures relied upon
leasing as a source of additional or stand-by funding. Most leasing companies,
who were also merchant bankers, would have funded their clients who hired them
for issue management services.
• Fast growth in car market: Needless to state with facts, the growth in car
leasing volume has been the highest over these years - the spurt in car sales with
the entry of several new models was funded largely by leasing plans.
• Tax motivations: India continues to have unclear distinction between a lease that
will qualify for tax purposes, and one which would not. In retrospect, this is being
realized as an unfortunate legislative mistake, but the absence of any clear rules to
distinguish between true leases and financing transactions, and no bars placed on
deduction of lease tax breaks against non-leasing income, propelled tax-motivated
lease transactions. There was a growing market in sale and leaseback transactions,
which, if tested on principles of technical perfection or financial prudence, would
appear to be a shame on everyone's face.
• Optimistic capital markets: Data would establish a clear connection between
bullish stock markets and the growth in both number of leasing entities and lease
volumes. Year 1994-1995 saw the peak of primary market activity where a
company, even if a new entrant in business, could price itself on unexplainable
premium and walk out with pride.
• Access to public deposits: Most leasing companies in India have relied, some
heavily, on retail public funds in the form of deposits. Most of these deposits were
raised for a 1 year tenure, and on promise of high rates of interest, at times even
more than the regulated rate (which was lifted in 1996 to be reintroduced in
1998).
• A generally go-go business environment: At the backdrop of all this was a
general euphoria created by liberalisation and the economic policies of Dr.
Manmohan Singh

The current problems of Indian leasing could be listed as follows, again without any
order of listing:
 Asset-liability mismatch: Most non-banking finance companies in India had
relied extensively on public deposits -this was not a new development, as the RBI
itself was constantly encouraging and supporting the deposit-raising activities of
NBFCs. If the resulting asset-liability mismatch, to everybody's agreement, is the
surest culprit of all NBFC woes today, it must have been a sudden realization,
because over all these years, each Governor of the RBI has passed laudatory
remarks on the deposit-mobilization by NBFCs knowing fully well that most of
these deposits were 1-year deposits while the deployment of funds was mostly for
longer tenures. It is only the contagion created by the CRB-effect that most
NBFCs have realized that they were sitting on gun-powder all these years. The
sudden brakes put by the RBI have only worsened the mismatch.

Generally-bad economic environment: Over past couple of years, the

economy itself has done pretty badly. The demand for capital equipment has been
at one of the lowest ebbs. Automobile sales have come down, corporates have
found themselves in a general cash crunch resulting into sticky loans.

Poor and premature credit decisions in the past: Most NBFCs have learnt a
very hard way to distinguish between a good credit prospect and a bad credit
prospect. When a credit decision goes wrong, it is trite that in retrospect, it
invariably seems to be the silliest mistake that ever could have been made, but
what Indian leasing companies have suffered are certainly problems of infancy.
Credit decisions were based on a pure financial view, with asset quality taking a
back-seat.

Tax-based credits: In most of the cases of frauds or hopelessly-wrong credit

decisions, there has been a tax motive responsible for the transaction. India has
something which many other countries do not- a 100% first year depreciation on
several assets. Apparently, the list of such assets is limited and the underlying
fiscal rationale quite holy and sound - certain energy saving devices, pollution
control devices etc qualify for such allowance. But that being the law, it is left to
the ingenuity of our extremely competent tax consultants to widen the range with
innovative ideas of exploiting these entries in the depreciation schedule. Thus,
there have been cases where domestic electric meters have been claimed as
energy saving devices, and the captive water softenizer in a hotel has been
claimed as water pollution control device ! As leasing companies were trying to
exploit these entries, a series of fraudsters was successful in exploiting, to the hilt,
the propensity of leasing companies to surpass all caution and all lending
prudence to do one such transaction to manage its taxes, and thus, false papers for
non-existing wind mills and never-existing bio-gas plants were fabricated to lure
leasing companies into losing the whole of their money, to save the part that
would have gone as government taxes !

Extraneous problems - frauds, closures and regulation: As they say, it does

not rain, it pours. Several problems joined together for leasing companies - the
public antipathy created by the CRB episode and subsequent failures of some
 good and several bad NBFCs, regulation by the RBI requiring massive amount of
provisions to be created for assets that were non-performing, etc. It certainly was
not a good year to face all these problems together.

From here on, where? :

Having gone through a very bad 1997-98, there is currently nothing that points to a better
time - the general business sentiment remains as depressed as before, if not more because
of the post-nuke sanctions and continuing political uncertainty, business investments are
not picking up, and more NBFCs may fail during the current year when most of them are
supposed to tone down their dependence on public deposits very significantly. At the
same time, fresh entry from foreign banks and financial institutions has not stopped - on
the contrary, one sees a number of foreign players entering India. Perhaps they have
found it to be a good time, particularly as vultures on the lookout for failing or falling
NBFCs.

The question, therefore, is, what does the future hold?

Much of the following may be pure conjecture, but the author's views on what the future
holds for NBFCs in India are as under:

1. Reduced number of players:

Not too many people will dispute the observation that India has far too many
finance companies that can possibly sustain in time to come. If we forget about
the 37000-odd companies that have registered with the RBI as NBFCs (that
number is a miracle – and the entire credit can be taken by the draftsman of the
RBI legislation), there are, no doubt, about 500 reasonably large NBFCs in the
country. The Association of Leasing and Hire-purchase Cos. (ALFS) itself has
over 500 members. If one ignores the honorary members, and those who are not
into leasing, but including the members of the Equipment Leasing Association,
500 is a very safe number.

ALFS does not have too many regionally centered smaller players as its members.
They have their membership with local hire-purchase associations. There are
about dozen hire-purchase Associations in the country, and not all players can be
expected to be a member of one of these. The combined membership strength of
all of the Associations would be not less than 2000 firms, and an equal number of
firms may be taken as those who are not registered with any Association at all.

The number adds to an astounding 4000 players!

This means that at the current juncture, the number of lessors in India is more than
the total number of players in USA, which is the largest market in the World!
 A number of factors will precipitate the consolidation in Indian leasing, and the
process is already on. First, bifurcation of leasing and non-leasing activities, such
as merchant banking, will go a long way in breaking the financial conglomerates,
who may find themselves better focusing on investment banking rather than
dabbling into leasing at the same time. Second, in whichever forms of business,
mass distribution is possible, that is, where the customer is more or less
homogenous, larger firms will eat up the shares of the smaller ones. This is
something everyone can see happening in the car finance market. Three, reduced
rates by the industry leaders will set benchmark rates in the market which will
force many marginal players out. Fourth, regional players will survive but will
find their relevance in a new avtar as "lease brokers", or to use a better word,
"lease originators". These firms will originate small ticket leases, sell their
portfolios to larger players, thereby encashing their wafer-thin spreads and
walking out to originate another transaction. Such activity has flourished in USA,
and we will see much of the same story in India too.

2. Cross-border competition:

Cross-border competition will come in two forms: direct cross-border

transactions, and cross-border investments in lease transactions. This author
estimates that the second variety of transactions will gain momentum before the
first. A number of global leasing giants have already occupied their positions in
India. Capital account convertibility measures will precipitate the process. The
impact of foreign investments will be greater consolidation activity at home.

3. Segmentation and positioning:

This is a common feature of growth: during the initial phases of growth of any
industry, there is a trend towards diversification: firms try to attain growth in
numbers by unfocused diversification, but soon realise that diversified presence
creates organisational pressures which are difficult to cope with. This leads to a
trend towards consolidation and focused growth. Leasing firms of yesteryears
were everything: money market players, merchant bankers and discount houses.
Gradually, both regulators and industry participants have realised that clearer
roles are necessary for stability.

Leasing companies in time to come will not only choose their segment within the
financial services industry but also within the leasing industry. Equipment-type
focus will also be seen in time to come. This change may take some time to be
noticed.

4. End of tax-based leasing:

This author has consistently opined against tax-based leasing, and that advice has
so far fallen flat because most of the leasing in the past was triggered by tax
motives, sometimes greedy tax motives. Spate of income-tax problems in the past
 has made some leasing companies wiser, but there will be more of such problems
when the disputed questions reach appellate levels. In the opinion of the author,
the leasing industry must take the matter across to the Central Board of
Direct Taxes and get a set of guidelines on true leases. Not having any
guidelines leaves too many things to the discretion of the tax officer which does
not provide a safe harbour to the transaction.

5. Emergence of vendor leasing:

There are so many merits in vendor-based leasing that it is surprising that it has
not made its debut in India still. For the asset vendor, a leasing plan is a sales-aid,
and for the lessor, it is easy access to a vast market, with equipment support from
the vendor. In 1997-98 and after, many lessors will be forced to leave general
equipment leasing market and line up with suppliers of equipment. Vendor leasing
in time to come will be a very significant part of the leasing market.

6. Asset-based funding:

True asset-based funding is an extension of the vendor lease market. The two
generally go together to develop into operating leasing. Full scale operating
leasing, that is, leases will in-built cancellation options, will take quite some time
to develop in India, but features of operating leases will be introduced once
vendor tie-ups take place.

7. Price-based competition:

This factor might as well have been placed as the first in order of significance, but
its impact on the leasing market is subjective. In the author’s opinion, the
intensity of price-based competition will be split between the corporate finance
market and the consumer finance market. The latter has always placed emphasis
on service, accessibility, and nonquantifiables of that sort, but the corporate
finance market consists of a professional treasury manager who will have to
justify the cost of money to his boss. So far, leasing has continued to sell itself on
several intangibles as speed, smile, and simplicity, but corporate finance quickly
moves to a dilemma where every one is fast, everyone smiles and every one is
simple enough for the sophisticated audience. It is there the price becomes
decisive. Leasing, with all its cost additives as sales-tax and stamp duties, will
have to sustain as a cost-competitive financing option