Analysis of Hire Purchase PDF

An Analysis of Hire Purchase In NBFC Sector
An Analysis
of Hire Purchase system in NBFCs with reference to Shriram
Investments Ltd
A Dissertation submitted in partial fulfillment of the

requirement for the award of M.B.A Degree of Bangalore
University
By
CHETHAN G
Reg.No. 03XQCM6023
Under the Guidance of

Prof N S Vishwanath
M.P.Birla Institute of Management

Associate Bharatiya Vidya Bhavan
#43, Race Course Road Bangalore – 560001
___________________________________________________________________ 1
M P BIRLA INSTITUTE OF MANAGEMENT
DECLARATION
I hereby declare that this project work embodied in this dissertation entitled “An
analysis of hire purchase in NBFCs with reference to shriram investments ltd”
Has been carried out by me under the guidance and supervision of Prof. N S
Vishwanath, M.P.B.I.M Bangalore.
I also declare that this dissertation has not been submitted to any
University/Institution for the award of any Degree/Diploma.
Place: Bangalore
Chethan
Date:
___________________________________________________________________ 2
CERTIFICATE
I hereby certify that the project work embodied in this dissertation

entitled “ Event Study on Insider trading before Dividend announcements”
has been undertaken and completed by KIRAN K under my
guidance and supervision.
I also certify that she has fulfilled all the requirements under the
covenant governing the submission of dissertation to the Bangalore
University for the award of M.B.A Degree.
Place: Bangalore (Professor N S Vishwanath)
Date: M.P.B.I.M
Bangalore – 560001
___________________________________________________________________ 3
CERTIFICATE
This is to certify that the project work embodied in this dissertation

entitled “ Event Study on Insider trading before Dividend announcements
” has been carried out by Mr. KIRAN K under the guidance of
Prof. N S Vishwanath, Faculty, M.P.B.I.M Bangalore.
Place: Bangalore
(Dr. N.S. Malavalli)
Date: PRINCIPAL
___________________________________________________________________ 4
ACKNOWLEDGEMENT
I take this opportunity to thank Dr N.S.Mallavalli, Principal,

M.P.Birla Institute of Management for having given this opportunity to
conduct this dissertation. I would like to express my deep sense of
gratitude to my guide Prof. N S Vishwanath for providing me with
sufficient interaction, and information and for guiding me during the
course of my dissertation.
I would like to thank all the personnel of ITC LTD for their
cooperation and for providing the relevant data required. Last but not
the least; I would also like to thank my family and friends for their
support and encouragement throughout the project.
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CHAPTER I
INT
NTRRODUCTION
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Hire purchase agreement is the one under which the owner hires the
goods to the hirer, giving the hirer the option to purchase the goods. On the other
hand, when the person borrows money and pays it to the vendor, transaction
between the customer and the lender will be a loan transaction in a hire purchase
agreement, the hirer to under no obligation to buy. Where the customer is
himself the owner and with a view to finance his purchase, he enters into an
arrangement in the form of hire purchase agreement, it will be a loan transaction.
A hire purchase agreement may in substance be a loan transaction and the label
of such an agreement is not conclusive. It is open to the court to determine
whether a particular agreement is a loan transaction or a hire purchase
agreement. Thus, where the customer entered in to an agreement with the
finance company for purchase of vehicle and the vehicle was purchased in the
name of the customer and the ownership was with the customer only and the
intension of the parties was only to secure payments and the agreement in the
question would be loan transaction even though referred to as hire purchase
finance agreement.
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CHAPTER II
BACKGRO
ROUUND OF THE
S TU D Y
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2.1 EVOLUTION OF HIRE PURCHASE SYSTEM
The British concept of HIRE PURCHASE SYSTEM has, however,

been there in India for more than six decades. The first Hire purchase Company
is believed to be Commercial Credit Corporation, successor to Auto Supply
Company. While this company was based in Madras, Motor and General
Finance and Installment Supply Company were set up in North India. These
companies were set up in the 1920s and 1930. Development of Hire purchase
System took two forms: Consumer durable and Automobiles.
The dealers in respective equipment promoted Consumer Durable Hire purchase.
Thus, Singer Sewing Machine Company or Murphy Radio dealers would
provide installment facilities on Hire purchase System basis to the customers of
their products.
The other side developed very fast - Hire purchase System for Commercial
Vehicles. The dealer in commercial vehicles as well as pure financing companies
sprang up. The value of the asset being good and repossession being easy, this
branch of financing activity flourished fast, although recently, most of
automobile financing business was in hands of family owned business.
2.2 MEANING OF HIRE PURCHASE:
Hire purchase System is a mode of financing the price of the goods to be sold
on a future date. In Hire purchase Transaction, the goods are let on hire, the
purchase price is to be paid in installments and the hirer is allowed an option to
purchase the goods by paying all the installments. Hire purchase Agreement is
defined as a peculiar kind of transaction in which the goods are let on hire with
an option to the hirer to purchase them, under the following stipulations.
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Hire purchase (HP) is a well-established method of financing the purchase of

assets by businesses. Under a HP agreement the customer will pay an initial
deposit, with the remainder of the balance and interest paid over a period of
time.
The finance company, which provides finance, is known as the "creditor". It

will purchase the asset on behalf of the customer, who is known as the "hirer".
The finance company owns the asset until the final installment is paid for the
asset.
2.3 FEATURES OF HIRE PURCHASE SYSTEM:
¾ Payments to be made in installments over a specified period.

¾ The possession is delivered to the hirer at the time of entering the
contract.
¾ The property in the goods passes to the hirer on the payment of the last
installment.
¾ Each installment is treated as hire charges so that if default is made in the
payment of any installment, the seller becomes entitled to take away the
goods, and
¾ The hirer/purchaser is free to return the goods without being required to
pay any further installments falling due after the return.
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2.4 PARTIES TO HIRE PURCHASE CONTRACT
Basically there are two parties in the Hire purchase Contract viz., the
intending seller and the intending buyer or the hirer. Nowadays, Hire purchase
Contract generally involves three parties, namely, the seller, the financier and
the hirer. With the emergence of the finance function as a separate business
activity and the substantial growth of finance companies in the recent tunes, the
sale element in the Hire purchase Contract has been divorced from the finance
element. A deal now normally arranges Hire purchase Agreement through the
finance company with the customer. It is therefore a Tripartite Deal.
A Tripartite Hire purchase Contract is arranged with the following modalities.
1. The dealer contracts a finance company to finance hire purchase deals
submitted by him. For this purpose they enter into a contract drawing out
the term warranties that the dealer gives with each transaction, etc.
2. The customer selects the goods and expresses his desire to acquire them
on purchase. The dealer arranges for him the full set of documents to be
completed, to make the Hire purchase Contract. The documents are
generally printed by the finance company.
3. The customer then makes cash down payment on completing the proposal
form. The dealer generally retains the down payment as a payment on
account of the price to be paid to him by the company.
4. The dealer then sends the documents to the finance company requesting
them purchase the goods and accept the Hire purchase Transaction.
5. The finance company; if it decides to accept the transaction signs the
agreement and sends a copy to the hirer along with the instructions as to
the payment to the installments. The finance company also notifies the
same to the dealer and also him to delivery the goods, if he has not
already done it.
6. The dealer delivery the goods to the hirer against acknowledgement and
the property in the goods pass on to the finance company.
7. The hirer makes payment of the hire purchase installment periodically.
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8. On the completion of the term, the hirer pays the last installment and the
property in the goods passes to him on the issue of a completion certificate by
the finance company.
2.5 RIGHTS AND OBLIGATIONS OF THE PARTIES TO

HIRE PURCHASE SYSTEM:
2.5.1 RIGHTS OF THE HIRER:
To purchase with rebate:

The hirer has a right to purchase the goods under the agreement, at any time
during the continuance of the agreement, by giving to the owner at pay, the
balance of HIRE PURCHASE price after deducting the rebate, calculated in the
following manner:
Balance of Hire purchase Rebate = 2/38 * price not due yet / Hire purchase
Price* Hire purchase Price - Cash price
The right of the hirer cannot be taken away by an agreement to the contrary.
How ever, where the agreement provides for a higher rebate, the hirer is entitled
to it.
• To terminate the agreement:

The hirer has a right to terminate the agreement at any time before the final
hire purchase installment falls due. For this purpose the hirer has to give to
the owner at least 14 days notice of his intension to terminate the agreement.
The hirer is required to return the goods to the owner and pay the
installments which have fallen due but have not been paid, up to the date of
termination.
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• To appropriate payments
Where the hirer is required to pay several the hire purchase installments
under two or more agreements to the same owner, and he makes a payments
not sufficient to discharge the total amount when due under all the
agreements, he may appropriate the payment to such agreements.
To Assign and Transmit:

The hirer has a right to assign the right, title and interest under the agreement,
with consent of the owner. If the owner unreasonably withholds his consent,
the hirer may make assignment without his consent.
2.5.2 OBLIGATION OF THE HIRER:
To Comply With The Agreement

The Hirer must pay the hire installment in accordance with the
agreement goods caused by his negligence
Not To Make Unauthorized Use

The Hirer must not use the goods for any purpose not authorized in the
agreement, otherwise he is liable for any loss or the damage to the
goods.
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2.5.3 RIGHTS OF THE OWNER:
The owner has the right to terminate the agreement in the following cases:
• When the hirer fails to make the payment of more than one hire installments,
the owner may terminate the agreement after giving the hirer the notice in
writing. The notice should not be less than one week, where the hire purchase
installment is payable at weekly or lesser intervals and two weeks in any
other case.
• When the hirer makes any unauthorized of the goods or breaks an express
condition of the agreement, on the breach of which the owner becomes
entitled to terminate the agreement. The owner may terminate the agreement
after giving the hirer the notice in writing.
To retain hire:
The owner has right to retain the hire, which has already been paid, and to
recover the arrears due up to the date of termination. This is however, subject to
the hirers’ right to refund in case of the seizure of the goods.
To forfeit the initial deposit:

The owner has right to forfeit the initial deposit if the agreement so permits.
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2.5.4 OBLIGATION OF THE OWNER:
The owner has the following obligations:

• To supply, free of cost, a true copy of the agreement signed by him to
the hirer immediately after the execution of the agreement
• To supply on demand copy of the agreement to surety
• To supply on demand by the hirer the following information
• The amount paid by on behalf of the hirer,
• The amount due and unpaid, the date on which each unpaid
installment becomes due and the amount of each such installment
• The amount, which become payable, the date on which each
installment are to become due and the amount of each such
installments.
2.6 BENEFITS OF HIRE PURCHASE
¾ The assets can be used immediately whilst allowing repayments to be

staggered, giving companies a better cash flow
¾ HP agreements are easily negotiated and available. The most up to
date technology can be hired and used to increase company
productivity and efficiency
¾ The hirer can recover the writing down costs and VAT on the assets
¾ There is a clearly defined financial commitment from the outset
¾ Security is on the transaction that has been financed thus requiring no
additional commitment from the customer
¾ HP is not repayable on demand unless the customer defaults on the
agreement
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2.7 COMPARISON OF HIRE PURCHASE SYSTEM TO

OTHER FORMS OF FINANCING:
HIRE PURCHASE SYSTEM V/S LEASING
Leasing and Hire purchase are usually used by business to acquire plant and
equipment for use in creating the business's cash flow. Business Asset Finance
can be used for cars, trucks, machinery, office equipment, computer hardware,
office furniture and other plant and equipment, which are considered physical
assets to the business.
A lease purchase is essentially the same as HP; the main difference is in the
terms and structure of repayments. Some finance companies differentiate Lease
Purchase from Hire Purchase by using it where the customer wishes to defer
payment of a substantial part of the asset cost until the end of the agreement.
Hire purchase also, sometimes called Lease Purchase, the operation of such a
contract is very similar to Lease. Payments are made at an agreed rate and for an
agreed duration, but the important difference is that ownership of the asset does
pass to the customer. For the slightly higher risk to the hirer, the costs are
somewhat higher.
On the other hand, leasing, a product of the eighties found its application mainly
to plant and machinery. Historical reasons as to this identification of leasing with
machinery segment, and Hire Purchase with the vehicles segment, have ceased
to exist over time, and the distinction between the two is very often blurred in
practice
The lessee cannot claim depreciation and investment allowance but the hirer can
do it.
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HIRE PURCHASE SYSTEM V/S LOAN AGREEMENT
This is the most common type of credit agreement. Under credit sale you buy the
goods at the cash price. You usually have to pay interest but some traders offer
interest-free credit. Repayment is made in installments. You are the legal owner
of the goods as soon as the contract is made and the goods cannot be returned if
you change your mind. The seller cannot repossess the goods if you fall behind
in repayments but the seller can seek recovery of the money owed through the
courts. Credit sale/loan agreements are now more common than hire purchase
agreements and it is important not to confuse the two.
Under a hire purchase (HP) agreements, you are technically hiring goods until
you pay the final installment. You will not own the goods until then. This means
that you can end the agreements and return the goods at any time. However, you
will have to pay off any overdue installments and, if less than half of the total
price has been paid, you may also have to pay the difference.
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2.8 NON BANKING FINANCIAL COMPANIES ( NBFCs)
Non banking financial companies is a business entity whether incorporated

under the companies act 1956 or not which devotes its resources in providing to
the society a financial services of various descriptions which are distinct from a
normal banking services
NBFCs are principally into leasing and hire purchase and also thrive on fee-
based activities. Some of the fund based activities of NBFC’s are:
¾Hire purchase
¾Leasing
¾Bill discounting
¾Promoter funding
¾Bridge financing
¾Inter corporate deposits
¾Public deposits
There are some non-fund/ fee based activities of NBFCs. They are:
¾Merchant banking
¾Corporate advisory
¾Stock broking
¾Syndication of loans
¾Underwriting of shares and debentures
NBFCs are registered under the companies act. They are governed by the
guidelines of the RBI.
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Those engage in Merchant banking activities are further subject to scrutiny by

the SEBI. NBFCs have arrived in 1950s & 60s with an increase in economic
activities and difficulties in securing resources without being compelled to
provide collateral securities much higher than the amount of borrowed funds.
The guidelines of the RBI:
¾Credit rating
¾Reporting to RBI
¾Furnishing of half yearly return
¾Prohibition of loan against it own shares
¾Concentration on credit and investments
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CHAPTER III
DESIGN OF THE STUDY
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3.1 STATEMENT OF THE PROBLEM :

Statement of the problem of the study could be briefly stated as under: Hire
Purchase is widely used type of financing for commercial vehicles by the small
owners. What is the role of NBFCs in facilitating small owners? How important
is the hire purchase mode? These two questions are examined for research
investigation.
3.2 SCOPE OF THE STUDY :

Basically this study shows the relevance of hire purchase in transport industry by
providing funds for the purchase of commercial vehicles
¾ To put the theoretical aspects of the study into real life experience.
¾ To suggest the importance of hire purchase as a major source of
finance to substitute other forms of financing.
3.3 NEED FOR THE STUDY:

As the study is on the analysis on hire purchase in NBFCs and Hire Purchase is
widely used type of finance for commercial vehicles, the need for the study is
To know the details regarding the procedure of the hire purchase transaction,
with reference to the statement of the problem of the project.
3.4 OBJECTIVE OF THE STUDY:

The objectives are:
¾To study the procedure of hire purchase in a NBFC
¾To measure the effectiveness of hire purchase for commercial
vehicles
¾To study the legal frame work and policies of hire purchase
¾To analyze the source of funds for hire purchasing
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CHAPTER IV
REVIEW OF LITERATURE
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In a recent Credit Policy representation to the Reserve Bank Governor,

the Association of Leasing & Financial Services Cos (ALFS) has urged the apex
bank to increase the deposit acceptance limit of unrated Hire Purchase and
Leasing Companies (HPLCs) from the existing one-and-a-half times to at least
three times their Net Owned Funds (NOF).
It is further suggested that rating should not be used as a regulatory tool,

particularly when it was an option only.
The deposit acceptance limit for unrated HPLCs was prescribed in 1998
following the recommendations of the Task Force on NBFCs, with a clear
understanding that the limit would be reviewed in the light of regulatory
experience over such companies, said Mr. Mahesh Thakkar, Executive Director
of ALFS.
The level of confidence enjoyed by HPLCs today, according to him, is far more
than what it was in 1998. It is high time the RBI gave some relief to the well-run
HPLCs, which have survived the turmoil in this sector in the last three years, he
pointed out.
ALFS is of the view that with all other sources of funding drying up, public
deposits raised by these companies through their clean track record and
personalised service is the only mode of funding available.
Pointing out that the Deferred Tax accounting standard, under AS-22, now made
mandatory by ICAI, has had a severe impact on leasing companies, the
association has stated that even in a country like Pakistan, deferred tax
accounting was mandatory for all except leasing companies. ALFS has urged the
RBI to give NBFCs a time-frame of at least five years to absorb the impact of
this standard on the net owned funds of the NBFCs.
Seeking steps to create a suitable recovery mechanism for HPLCs, viewed as a

pre-requisite for payment of liabilities and public deposits like DRTs for the
NBFC sector, the association has cited problems with regard to re-possession of
assets given under HP/Lease, in case of default, with the police authorities.
Authorities, it is pointed out, are quite categorical about the fact that police
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support in repossessing assets cannot be provided in the absence of any clear law
on this.
On the Bill to amend the proposed creation and enforcement of security interest
by banks and FIs, it is suggested that the committee under Mr M.R.Umarji
(which drafted the Bill) does not include HP/Leasing activities on the grounds
that these were "title retention contracts and do not involve security interest
creation".
The association has sought insertion of a new clause in the Bill, saying "Hire
purchase/leasing contracts being title retention contracts, give full authority to
HPLCs to reposess any asset given under HP/Lease agreement, in case of
default."
Welcoming the report of the Indian Bank Association (IBS) Working Group on
financing for purchase of vehicles through HPLCs, under the chairmanship of
Mr R.V. Shastri, ALFS has stated that while the recommendations have been
accepted by the Ministry of Finance and the RBI, the commercial banks were yet
to start implementing these in practice.
The apex bank has been urged to instruct banks to start considering proposals
from the NBFC sector for on-lending to the commercial vehicles sector.
(Source: Business Line dated 26th April, 2002 and The Hindu Group of Publications)
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CHAPTER V
RESEA
EARRCH DESIGN
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5.1 RESEARCH DESIGN

Research designs simply means a search of facts answers to questions and
solutions to problems..
Research is a systematic and logical study of an issue or problem through
scientific method. It is a systematic and objective analysis and recording of
controlled observations, which may lead to the development of generalizations,
principle, resulting in predictions and possibly ultimate control of events.
In brief research design contains:
¾A clear statement of research problem
¾A specification of data required
¾Data collection
¾Method of processing and analysis of data.
Research design in specific for this study includes the following:

¾Identification of the research title – “ An Analysis of hire purchase
in NBFCs with special reference to Shriram Investments Limited,
Bangalore’’
¾Data analysis as per the stated objectives.
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5.2 SAMPLE DESIGN:

This study is an exhaustive study of the hire purchase financing with reference to
Shriram Investments ltd no need of collecting any sample as each and every
aspect has been studied here.
5.3 SOURCES OF THE DATA
PRIMARY DATA
Personal interview and discussion with the officials of the company
SECONDARY DATA
This is vast and abundant. The major sources are text books, journals and articles
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5.4 OPERATIONAL DEFINITION OF THE STUDY:
CONTRACT OF GUARANTEE” in relation to any Hire Purchase agreement

means a contract whereby a person (in this Act referred to as the surety)
guarantees the performance of all or any of the hirer’s obligations under the Hire
Purchase agreement.
¾HIRE " means the sum payable periodically by the hirer under Hire Purchase
agreement
¾HIRE PURCHASE AGREEMENT" means an agreement under which

goods are let on hire and under which the hirer has an option to purchase
them in accordance with the terms of the agreement and includes an
agreement under which-
o Possession of goods is delivered by the owner thereof to a person

on condition that such persons pays the agreed amount in
periodical installments, and
o The property in the goods is to pass to such person on the payment

of the last of such installments, and
o Such person has a right to terminate the agreement at any time

before the property so passes.
o HIRE PURCHASE PRICE" means the total sum payable by the hirer
under a Hire Purchase agreement in order to complete the purchase of, or the
acquisition of property in, the goods to which the agreement relates and
includes any sum so payable by the hirer under Hire Purchase agreement by
way of a deposit other initial payment, or credited or to be credited to him
under such agreement on account of any such deposit or payment, whether
that sum is to be a or has been paid to the owner or to any other person or is
to be or has been discharged by payment or money or by transfer or delivery
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of goods or by any other means but does not include any sum payable as a
penalty or as compensation or damages for a breach of the agreement.
o HIRER" means the person who obtains or has obtained possession of goods
from an owner under a HIRE PURCHASE agreement, and includes a person
to whom the hirer’s rights or liabilities under the a greement have passed by
assignment or by operation of law.
o "OWNER" means the person who lets or has let, delivers or has delivered
possession of goods, to a hirer under a HIRE PURCHASE agreement and
includes a person to whom the owners property in the goods or any of the
owners rights or liabilities under the agreement has passed by assignment or
by operation of law.
o “DEMAND PROMISSORY NOTE (DNP)” is a collateral security through

which the hirer argues that the owner is entitled to get the entire amount due
from him and the owner can use this DNP to sue the hirer when the amount is
not recovered.
o OVERDUE COMPENSATION” as per the agreement, it is the

compensation on overdue hp installments and other sums including taxes,
fees, repairs and suppliers, which may be due from the hirer to the owner.
o “SALE LETTER” is a letter, which can be made use by the owner at the
time of termination by default by the hirer to resell the vehicle in order to
recover the loss amount.
o “DEAL FORWARDING SHEETS” is used in order to have full details

regarding the transaction which contains the details like branch, contract
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number, details about the transaction like estimated value, advanced

amount, Interest rate, Period of agreement, Insurance, agreement terms, etc.
5.5 LIMITATIONS OF THE STUDY:

The study is relied solely on the secondary data collected

The study is confined to a particular NBFC – “Shriram Investment Limited”

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CHAPTER VI
PROFILE OF THE
INDUSTRY
NDU
___________________________________________________________________ 31
Over 70% of India'

s freight moves on trucks. Individuals own 90% of
these trucks. Despite its crucial importance to the Indian economy, finance for
small truck operators is hard to come by. At the grassroots level, only the Private
Sector Non-Banking Finance Companies (NBFCs) and lakhs of small financiers
reach out to the vast truck financing market.
Owners who operate less than 5 trucks are a majority of commercial

vehicles owners in India. Their freight earning capacity is marketed through an
efficient of intermediaries. Except for immobilization by accidents or major
repairs, the average commercial vehicle is kept busy for about 330 days a year.
The high capacity utilisation averaging over 90%, provides operates with a
steady cash flow and enables them to avail of structured financing of the lease
and hire purchase variety
The fluctuations in the freight market are not violent. And, the mobility of
the asset, coupled with an efficient intermediary system, make it possible for
operators to shift vehicles from sluggish freight markets to more buoyant ones.
This mobility provides the operator's economics with a stability that reduces
lending risks for financiers to the trucking business.
The laws governing the registration of motor vehicles in this country

effectively establish ownership, and the claims of lenders to the titles to a motor
vehicle. As a result of this, the repossession of a truck in the event of default is
easy and the fear of repossession acts as a great deterrent against default on debt-
related obligations.
Cases of irrecoverable capital loss are quite rare in the truck finance
business because, typically, the operator himself contributors 30% to 40% of the
capital cost of the vehicle, while the financier has a claim on the entire value of
the asset. By close monitoring of the debt servicing efficiency of the operator, it
is almost always possible to terminate the contract and recover dues from the
disposal of the vehicle.
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Because of the steady rise in the capital cost of new commercial vehicles,
the market for used vehicles also acquires stable buoyancy. As a result, the
financier in the truck financing business is in the comfortable position of owning
a collateral asset, which has a steady realizable value while the amount
outstanding against its hypothecation comes down with every installment
received.
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CHAPTER VII
PROFILE OF THE
ORGANIZATION
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Shriram Group is an organization with a strong corporate personality. A

multi-locational, multi-dimensional Rs.2.7 billion concern serving 2.7 million
customers, Shriram today has acquired a significant national presence in the field
of financial services, with a leadership position in many segments. Their Policy
is to achieve service exclusivity; corporate identity and customer care quality
through their vast Network Structure, Collection Centers and Network
Management.
They have also successfully diversified into transport and property

development. It's hard to imagine that they started off as a single operation in a
single town. With a vibrant and young management team heading each activity,
the group is always on the lookout for associations and opportunities, both
internationally and in India.
SERVICES:
The Shriram Group is recognised for its comprehensive range of financial
and non-financial services. The efficiency and promptness of their service is
among the best in the industry. The following are the services they offer.
FINANCIAL SERVICES
Established in 1974, the financial service companies of the Shriram
Group are major players in Truck Financing, Chit Funds, Consumer Durable
Financing, Merchant Banking and Mutual Funds.
• Truck Financing
• Chit Fund
• Investment Services
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NON-FINANCIAL AREAS
Today, Shriram is an emerging force in diverse fields – in
pharmaceuticals and auto ancillaries, transportation and property development,
project engineering and packaging. Offering a wide range of products – from oil
seals to shock absorbers to edible oils – to Indian and international markets.
The products manufactured by the Group Companies could be grouped into the
following categories:
• Auto Ancillaries
• Project Engineering and Services
• Pharmaceuticals
• Consumer Product
• Packaging and Packaging Accessories
NETWORK :
The Shriram Group, which started off as a single operation in a small
town, just two decades ago, has today emerged to be a multi-dimensional, multi-
locational corporate with more than 300 offices situated across the country.
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CHAPTER VIII
ANALYSIS AND
INTERPRETATION
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8.1 INTRODUCTION TO ANALYSIS
Hire Purchase (HP) is a well-established method of financing the

purchase of assets by businesses. Under a HP agreement the customer will pay
an initial deposit, with the remainder of the balance and interest paid over a
period of time. Hire Purchase or HP is the traditional method of financing the
purchase of a vehicle. However, you do not own the vehicle until the end of the
agreement term and if you fail to maintain the finance payments you could lose
the vehicle.
The finance company, which provides finance, is known as the
"creditor". It will purchase the asset on behalf of the customer, who is known as
the "hirer" The finance company owns the asset until the final installment is
paid for the asset.
8.2 DATA ANALYSIS

“Shriram Investments Limited” IN HIRE PURCHASE for
TRUCK FINANCING:
The Shriram Group began financing individuals for purchase of trucks in
1979. Today, the Group is among the largest financiers of individual truck
purchases. Over 60,000 truck drivers have been transformed into owners of
trucks, thanks to the Shriram Group. Nearly 140 Shriram Group Branches are
active all over India, empowering small truck operators to prosperity. And in the
process, help moving the Indian economy ahead.
These Branches also manage a huge truck portfolio for Citigroup, UTI
Bank and other Banks, exceeding Rs.500 crores (US$ 107million).
Price Waterhouse Coopers, the globally acclaimed management
accountants, audited and certified that the Group’s Truck Financing Companies
___________________________________________________________________ 38
“earn a bad-debt adjusted return of 27.6% on the funds employed” and have
achieved a collection efficiency of 98%.
With its trained manpower and a huge database of customers, the Shriram Group
helps deploy and manage roughly Rs.2, 000 crores (US$ 425 million) in truck
finance, annually. There is no better place to park your hard-earned money, for
safe and high return. And in the process, salute the “unsung heroes of the Indian
Economy”.
Growth in Truck Financing Business
TABLE 1: Growth in Truck Financing Business
___________________________________________________________________ 39
1.1 Graphical representation showing the increase in number of

branches in truck financing
140
120
No. of Branches 100
80
60
40
20
0
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
Years
The no. of branches of SIL in truck financing increased considerably over the
years the last three to four a years there isn’t any increase in the no. of branches
of SIL.
___________________________________________________________________ 40
1.2 Graphical representation showing the number of trucks

financed by SIL over the years
90000
80000
70000
No of Trucks Financed
60000
50000
40000
30000
20000
10000
0
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Years
From the above graph it is evident that there is a significant increase in the
number of trucks financed. From the year 1998 the trucks finance sector in SIL
increased very rapidly.
___________________________________________________________________ 41
1.3 Graphical representation showing the increase in number of

deposit holders in SIL
1600000
1400000
No of deposit holders
1200000
1000000
800000
600000
400000
200000
0
92
93
94
95
96
97
98
99
00
01
02
03
19
19
19
19
19
19
19
19
20
20
20
20
Years
As the number of trucks financed increased the public were more and more
willing to have a stake in the company thus increasing over the years
___________________________________________________________________ 42
CHAPTER IX
THE PROCEDURE
OF HIRE
PURCHASING IN SIL
___________________________________________________________________ 43
The procedures to be followed by Shriram Investments Limited in

financing the commercial vehicles under hire purchase are as follows:
9.1 SOURCES OF FUND FOR HIRE PURCHASE
COMPANY’S OWN FUNDS:
Shriram basically finances the old vehicles through their own funds,
which they have acquired through the deposits issued to the public, through
which they invest in the company.
Debentures / Bonds which are of various tenors ranging from 1 year to 10 years
and usually non cumulative in nature with different interest rates higher
comparative to other companies. The different type of debentures issued to the
public with their respective interest rates are as here under
• GROWTH BOND
• HAPPY BOND
• PRINCESS BOND
• PROTECTION BOND
• STRAIGHT BOND
• CUMULATIVE AND NON CUMULATIVE BONDS
___________________________________________________________________ 44
FINANCIAL TIE - UPS
Shriram also has financial tie-ups with many major banking institutions for
financing both used and new vehicles. Some of these institutions are as follows:

Citicorp Finance India Limited

Karnataka State Finance Corporation

Unit Trust of India Bank

Mangalore Catholic Christian Bank

Reddi Co-operative Bank

Bank of India
These banks finance the prospective customer through Shriram who plays the
role of financier and the power of attorney vests with Shriram investments
limited
LENDING OF FUNDS:
The funds thus collected through debentures are used to finance the customers
who are interested in owning a commercial vehicle under the hire purchase
system by the company.
___________________________________________________________________ 45
9.2 PARTIES TO HIRE PURCHASE AGREEMENT:
HIRER: Here the small operators, small commercial owners who wish to
own commercial vehicles are the hirers
OWNER: “SHRIRAM INVES TMENTS LIMITED” who is the financier is

the owner of the asset
Sanction Stage
The divisional manager in charge for the branch with the help of the Zonal
officer under the supervision of regional heads sanctions the lending amount to
the branch, which is the limit a branch, can lend to the customer for a particular
period of time as per the rules and regulations of the company.
Proposal Stage
The interested customer visits the nearby branch with a proposal and a quotation
of the vehicle, the field officer investigates the vehicle. He prepares an
inspection report, which contains the report and details of the vehicles, condition
of the vehicle. Customer contact verification is done, the company-investigating
officers do enquiries, and customer credit worthiness is determined on the basis
of the details given by the references. The customer should also produce a
guarantor who is a transporter. The customer has to produce the photograph of
the vehicle, himself and the guarantor, which would hold as a document to the
agreement. After both the parties the customer and the guarantor signs the
agreement, it would be approved by the branch manager if found worth and the
hirer has to have endorsed in the RC book with the regional transport office that
the vehicle is under Hire purchase3 agreement with the company.
Shriram identifies the prospective hirer and the guarantor. After verifying all the
necessary requirements of both the parties, it decides the value of the vehicle
based on current market value and the condition of the vehicle.
___________________________________________________________________ 46
Funding amount:
The funding amount is decided on the basis of the condition of the

vehicle and the fair market value of the vehicle. As per the norms of the
company, it can finance up to 12 years vehicles and the advance amount would
be
• 75% of OLV – Original Liquidation Value
• 60% of FMV – Fair Market Value
TABLE 1: FUNDING AMOUNT
MARKET ADVANCE FUNDING
VALUE RATE AMOUNT
415000
60% Rs.250000/-
Therefore, the said customer would be funded:
60% (415000) = 249000 which is rounded off to Rs.250000/-

Therefore as per the case, the Advanced Amount = Rs.250000/-
Shriram executes all necessary documents with the hirer; customer enters into an
agreement with Shriram.
___________________________________________________________________ 47
Advance Stage
The branch manager sends the proposal (list of invoices with hirers' details and
agreement Nos., etc) to the divisional manager for the approval and if approved
by divisional manager, he sends a demand draft of Rs.2, 50,000/- to the branch
in favour of the seller as the case may be. The branch manager sends the DD to
seller. The branch manager also finalizes the repayment schedule with the hirer
as required by the company.
The documents are later sent to the zonal manager for the reimbursement of
funds to the divisional office. The zonal manager responsible for accounting
makes the reimbursement on the verification of the documents.
Collection Stage
Shriram collects the monthly installments from the hirer and issues a receipt to
the hirer with the help of its field officers responsible for the same. The
installment period stats from the day of funding as in the DD issued. the loan
amount includes the advanced amount , interest part , insurance premium for all
the years of agreement excluding the first year.
As per the case the loan amount and monthly installments would be as follows :
___________________________________________________________________ 48
TABLE 2: DETAILS OF TRANSACTION
Advanced amount Rs.250000/-
Interest ( flat rate ) 15 %
Tenor 36 months
Insurance premium (Rs.10000/ annum for 2 years) Rs.20000/-
Note: The insurance premium of the first year is considered to be paid by the
customer himself.
INTEREST PAYABLE = Advanced Amount * Interest * Tenor
= 250000 * 15/100 * 3
= Rs.1,12,500/-
Loan Amount = Advanced Amount + Interest Payable +
Insurance Premium
___________________________________________________________________ 49
TABLE 3: CALCULATIONS Of LOAN AMOUNT
Advanced Amount 250000
Interest Payable 112500
Insurance Premium 20000
3, 82,500/-
TOTAL LOAN
AMOUNT
EMIs = Loan amount / Tenor(months)
= 3,82,500 / 36
= Rs.10, 625/ per month
The customer will receive a repayment schedule from the company which
contains the following:
TABLE 4: Repayment Schedule
Months Due Date

Installment Payable Balance
Due
___________________________________________________________________ 50
The collection detail of the customer is as follows:
TABLE 5: FLAT PAYMENT
HP Interest Principal (funded

Installment
Amount Due amount + insurance)
Year (annual)
1 127500/- 61824.33 65, 675.67
2 127500/- 37500 90,000
3 127500/- 13175.67 1,09,534
Interest Allocation on yearly basis:
1st year = 112500 * 366/666 = Rs.61824.33
2nd year = 112500 * 222 /666 = Rs.37500
3rd year = 112500 * 78 /666 =Rs.13175.67
TABLE 6 : STRUCTURED PAYMENT (40: 30: 30)
Year HP Installment Interest Principal EMIs

Amount Due
(annual)
1 153000/- 61824.33 65, 675.67 12,750
2 114750/- 37500 90,000 9562.5
3 114750/- 13175.67 1,09,534 9562.5
The branch manager also submits a statement of actual collection
hirer wise to the regional office.
___________________________________________________________________ 51
Foreclosure to Non-performing Assets
The vehicle, which does not yield income, is considered as a
Non-performing Assets
The field officer monitors the arrears position of each hirer. When the arrears are
more than 3 EMIs, the company with the help of the higher officials takes an
action against the hirer. First the company will send a notice to the hirer, if he
does not respond back, the company will deposit the post-dated cheques issued
by the hirer at the time of agreement to the bank for collection. If the cheque
bounces, the company would sue the customer with two cases namely,
• Cheating case
• Cheque bounce case
The company will repossess the vehicle from the customer and have the control
over the vehicle to recover the amount by giving the customer a notice as per the
legal procedures of the company. Then, the company would finally sell the
vehicle through auction. In case the amount recovered by selling the vehicle is
not balanced with the amount due, then they would approach the hirer legally to
recover the balance amount
¾Termination of agreements
The branch manager approaches the divisional branch for termination of

the agreement on satisfactory completion of the agreement. In case of
foreclosure by the hirer, on his own volition the foreclosure amount as
stipulated by the divisional manager will be collected by the branch
manager and paid to the zonal office. The branch manager after proper
scrutiny hands over the termination papers to regional office. Shriram
hands over the termination papers to the hirer effectively terminating the
agreement.
___________________________________________________________________ 52
CHAPTER X
TERMS AND CONDITION

ONSS
OF HIRE PURCHASE
___________________________________________________________________ 53
GUARANTEE
Guarantor is the very important and the third party to the agreement. He acts as a
security to the hirer or the agreement.
As per the agreement in case of the owner hiring out the vehicle to the hirer,
guarantor agrees to fulfill all the obligations or responsibilities to be done by the
hirer in case he fails to do so.
The guarantor shall stand discharged of his obligations as the owner receives all
amounts due owing and payable to the owner in pursuance of the agreement.
He agrees that he shall be in full force and will be valid till the complete
discharge of all liabilities of the hirer under this agreement
SCHEDULE OF PAYMENT
The hirer pays the said sum in equal installments, which are known as hire
purchase installments. Which are known as hire purchase installments and at the
end he is required to pay Re.1 with an option to buy the vehicle.
RIGHTS OF THE COMPANY AS A FINANCIER
The owner or the person authorized by the owner has a right to inspect the
vehicle any time during the agreement period. Under the hire purchase
agreement the owner shall be absolutely entitled and have full power and
authority to sell, assign or transfer his rights to the third party of his choice and
the hirer is bind to accept such third party as creditor.
The hirer would also sign a blank transfer letter, which would help the owner in
repossessing the vehicle and transferring registration in his name at the time of
termination by default to use it when necessary.
___________________________________________________________________ 54
HIRE PURCHASE AGREEMENT
As per the agreement, the hirer agrees to take and the owner agrees to let or hire
the motor vehicle from the vehicle as per the rental schedule.
TITLE AND OWNERSHIP
With regards to the ownership of the vehicle, the hirer holds the motor vehicle as
a bailee of the owner and he shall not have any right, title or interest in the motor
vehicle.
RIGHT AND OBLIGATIONS OF THE HIRER
The hirer cannot sell, transfer, assign, sublet, pledge, hypothecate the vehicle to
others or not even allow the 3rd person to use the vehicle without the consent of
the owner. The hirer shall be entitled to the manufacturers warranty benefits and
in the event of any defect in the vehicle he can directly take recourse against the
manufacturer directly as per the warranty of the manufacturer. Though the
ownership lies with the owner, the owner shall not be held responsible for any
repair, service or defects in the MV or the operation thereof.
TERMINATION BY DEFAULT
The agreement can be terminated by the owner as the hirer committing an act of
default like.
• The hirer fails to pay the installments as the required due date.
• To inform the owner about the accident occurred for more than 48 hours
which would have caused damage to the motor vehicle itself or some
other person or property.
• If the hirer is using the vehicle for any other purpose than stated in the
agreement or any other illegal purpose.
___________________________________________________________________ 55
The owner has right to repossess the vehicle upon the termination of the
agreement the hirer shall be liable to pay the owner all the arrears of the HP
installments and other changes along with the penalty as overdue payments and
all the costs incurred by the owner in repossession and the expenditure incurred
by the owner in putting the vehicle in paid.
The company has a financial tie up with many banking institutions

in financing these small operators .the scheme is as follows:
THE SCHEME:
Shriram group offers to manage truck portfolio for banks.

Banks have the option to fulfill the priority sector quota if they desire. The
scheme offers the truck operator credit on very reasonable terms in case the bank
does not the priority quota option. The Shriram group will take over the portfolio
as soon as they threaten to become NPAs.
The credit is for a five-year term.
The procedure followed is the same as above, but the bank finances the customer
and the company would be involved in all the transactions with the customer.
Collection and Payment details

The operator will make payment monthly, directly to the Shriram Investments
Limited. The Shriram Investments Limited should be authorized to give receipts
to the operator on behalf of the bank.
The Shriram Investments Limited will remit monthly collections to the bank
with an average lag of 15 days
Accounting
The Shriram Investments Limited will keep accounts for the individual operator.
The Shriram Investments Limited will give monthly statements to the bank, if
required by the bank.
___________________________________________________________________ 56
Documentation
The documentation will be between the operator and the bank. However power
of attorney will have to be given to the Shriram Investments Limited by the bank
to cover the following
• Collection and issue of receipts
• Repossession of vehicles in case of defaults
• Formalities with RTO
Custodian for documents can be appointed to monitor status of accounts and
security, if required, at bank's cost.
NPAs
Contracts with more than 4 EMIS outstanding will be considered as NPAS. The
Shriram Investments Limited will make an early settlement with respect to the
NPA contracts within a month and take over the same
DOCUMENTS TO BE SIGNED
The hirer along with the guarantor has to duly sign the following documents.
• Demand Promissory note: which shows or contains the details of the total
amount along with the interest payable due from the hirer to the owner as
per the agreement.
• Sale Letter: a letter, which can be made use by the owner at the time of
termination by default by the hirer to resell the vehicle in order to recover
the loss amount.
• The hire purchase cum guarantee agreement, which contains all the terms,
and conditions of the contract to be accepted by the hirer and the
guarantor which they are expected to accept to enter the contract.
• The hirer has to sign the following RTO forms for the respective reasons
___________________________________________________________________ 57
¾Form 20: this form is used for the registration of the vehicle as per
the rule 47
¾Form 29: Application for name transfer
¾Form 30: Application for intimation of transfer of ownership of
motor vehicle.
¾Form 35: Notice of termination of an agreement of Hp as per rule
61(1)
¾Form 26: Application for the issue of duplicate certificate of
registration as per rule 53
¾Form ACC: Application for the surrender of permit and the
clearance certificate as per rule 204.
¾Form 27: Application for assignment of new registration mark to a
motor vehicle (as per rule 54)
¾Form 33: Intimation of the change of address recording in the RC
and office records (as per rule 59)
NOTE : All the above forms should be done in duplicate if the
vehicle is held under the agreement of HP and the duplicate with
endorsement of the registering authority to be returned to the
financier
___________________________________________________________________ 58
CHAPTER XI
CON
CO NCLUSI
SIO
ON
___________________________________________________________________ 59
Hire purchase is one of the important types of financing a purchase of

commercial vehicles. It is most preferred type of financing with its advantages
over other types.
Many NBFCs are coming up with the hire purchase system to provide finance to
the commercial vehicles and improving the economic standards by making the
facility profitable and cost effective.
Shriram Investments Limited is one of the major players in Hire Purchase
industry by providing truck finance to the small owners across the country.
The study of hire in a NBFC – “ Shriram Investment Limited” reveals the
following:
¾NBFCs provide various types of financial services to the society
distinct from normal banking services, which include hire
purchase.
¾Hire purchase is the most commonly used type of financing against
leasing and hypothecation for commercial vehicles.
¾Shriram finances only small truck owner but not fleet transport,
with its own funds for used vehicles
¾Shriram also financial tie-ups with major financial companies to
finance both used and new vehicles
___________________________________________________________________ 60
CHAPTER XII
SUGGE
GESSTIONS AND
RECOMM
MMEENDATIONS
___________________________________________________________________ 61
¾The hire purchase facility should be made easily available to the

public.
¾The customer should not feel burden about the hire purchase
installments, i.e., they should be provided with better provisions in
payments.
¾The company should help the customer in owning the advanced
vehicles
¾The lending rates should be reasonable considering the economic
condition of the society.
___________________________________________________________________ 62
CHAPTER XIII
BIBLIOGRAPHY
___________________________________________________________________ 63
13. Bibliography
Books
Financial Management by Khan and Jain. 4th edition T M H Publishers

New Delhi. From page no. 21.19 to 21.32
Financial Management by Prasanna Chandra. 4th edition T M G Hill,
New Delhi.Page no. 414
Lease financing and hire purchase vinod kothari 4th edition
Websites
www.google.com
www.shriram.com
www.blonnet.com
www.hinduonline.com
___________________________________________________________________ 64

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An Analysis of Hire Purchase In NBFC Sector

A Dissertation submitted in partial fulfillment of the

Under the Guidance of

M.P.Birla Institute of Management

I hereby certify that the project work embodied in this dissertation

Place: Bangalore (Professor N S Vishwanath)

This is to certify that the project work embodied in this dissertation

I take this opportunity to thank Dr N.S.Mallavalli, Principal,

agreement, the hirer to under no obligation to buy. Where the customer is

arrangement in the form of hire purchase agreement, it will be a loan transaction.

of such an agreement is not conclusive. It is open to the court to determine

whether a particular agreement is a loan transaction or a hire purchase

agreement. Thus, where the customer entered in to an agreement with the

question would be loan transaction even though referred to as hire purchase

2.1 EVOLUTION OF HIRE PURCHASE SYSTEM

The British concept of HIRE PURCHASE SYSTEM has, however,

2.2 MEANING OF HIRE PURCHASE:

Hire purchase (HP) is a well-established method of financing the purchase of

The finance company, which provides finance, is known as the "creditor". It

2.3 FEATURES OF HIRE PURCHASE SYSTEM:

¾ Payments to be made in installments over a specified period.

2.4 PARTIES TO HIRE PURCHASE CONTRACT

2.5 RIGHTS AND OBLIGATIONS OF THE PARTIES TO

2.5.1 RIGHTS OF THE HIRER:

To purchase with rebate:

• To terminate the agreement:

To Assign and Transmit:

2.5.2 OBLIGATION OF THE HIRER:

To Comply With The Agreement

Not To Make Unauthorized Use

2.5.3 RIGHTS OF THE OWNER:

To forfeit the initial deposit:

2.5.4 OBLIGATION OF THE OWNER:

The owner has the following obligations:

2.6 BENEFITS OF HIRE PURCHASE

¾ The assets can be used immediately whilst allowing repayments to be

2.7 COMPARISON OF HIRE PURCHASE SYSTEM TO

HIRE PURCHASE SYSTEM V/S LEASING

HIRE PURCHASE SYSTEM V/S LOAN AGREEMENT

2.8 NON BANKING FINANCIAL COMPANIES ( NBFCs)

Non banking financial companies is a business entity whether incorporated

Those engage in Merchant banking activities are further subject to scrutiny by

3.1 STATEMENT OF THE PROBLEM :

3.2 SCOPE OF THE STUDY :

3.3 NEED FOR THE STUDY:

3.4 OBJECTIVE OF THE STUDY:

In a recent Credit Policy representation to the Reserve Bank Governor,

It is further suggested that rating should not be used as a regulatory tool,

Seeking steps to create a suitable recovery mechanism for HPLCs, viewed as a

5.1 RESEARCH DESIGN

Research design in specific for this study includes the following:

5.2 SAMPLE DESIGN:

5.3 SOURCES OF THE DATA

5.4 OPERATIONAL DEFINITION OF THE STUDY:

CONTRACT OF GUARANTEE” in relation to any Hire Purchase agreement

¾HIRE PURCHASE AGREEMENT" means an agreement under which

o Possession of goods is delivered by the owner thereof to a person

o The property in the goods is to pass to such person on the payment

o Such person has a right to terminate the agreement at any time

o “DEMAND PROMISSORY NOTE (DNP)” is a collateral security through

o OVERDUE COMPENSATION” as per the agreement, it is the

o “DEAL FORWARDING SHEETS” is used in order to have full details

number, details about the transaction like estimated value, advanced