financial services

Definition
Facilities such as saving accounts, checking accounts,
confirming, leasing, and money transfer, provided generally
by banks, credit unions, and finance companies.

Financial services can be defined as the products and services

offered by institutions like banks of various kinds for the
facilitation of various financial transactions and other related
activities in the world of finance like loans, insurance, credit
cards, investment opportunities and money management as
well as providing information on the stock market and other
issues like market trends.
Financial Services
Types
Insurance
A contract in which one party agrees to pay for another
party's financial loss resulting from a specified event (for
example, a collision, theft, or storm damage). Lease
agreements generally require that you maintain vehicle
collision and comprehensive insurance as well as liability
insurance for bodily injury and property damage.
Mutual Fund
A mutual fund enables investors to pool their money and
place it under professional investment management. The
portfolio manager trades the fund's underlying securities,
realizing a gain or loss, and collects the dividend or interest
income. The investment proceeds are then passed along to
the individual investors. There are more mutual funds than
there are individual stocks.
Mutual Fund
Mutual fund can be termed as a type of Investment Company
or a form of joint investment. Mutual fund provides
comparatively safe investment options to the investors. On the
other hand, the returns from the mutual funds are also high.

The mutual funds are actually huge funds where a number of

investors invest their money. This huge amount is invested in
several projects and companies that can provide desired growth
to the money.

The mutual funds are managed by the fund managers who are
selected from the most experienced professionals in the field of
finance.

These fund managers are also termed as the portfolio managers.

These people shoulder the responsibility of the mutual fund
growth that means the growth of the money.

The mutual funds invest money in the stocks, bonds, Forex

market and in a number of other investment instruments.
Investments in the mutual funds are safe because the funds are
managed by the professionals. These professionals know
everything about the market. Because of this, they can plan the
best strategy for their investment.

The investment portfolios of mutual funds are kept under

observation of the fund managers and whenever it is needed, the
portfolio is adjusted. On the other hand, an individual investor,
when new in the market, can expose his investments to the
market risks and may have to face losses. The mutual fund
provides returns that are lower than the stocks, however, the
returns are almost safe.

There are a number of mutual funds that are differentiated

according to their areas of investment. Some of these types of
mutual funds are as follows:

 Open-end fund
 Hedge funds
 Capitalization
 Bond funds
 Money market funds
 Funds of funds
 Equity funds
 Exchange-traded funds
Again, the mutual funds are subjected to a different set of rules
and regulations regarding administration, tax structure and many
more. The mutual funds distribute their income among the
investors and because of this, no tax is imposed on the income
of the mutual funds. In case of certain types of returns, the
income is tax-free for the investors also.

Banking
Financial intermediary Institutions for receiving, lending,
and safeguarding money as well as conduction other
financial transactions. There are several types of banks:
central banks, commercial banks, corporate banks, credit
unions, savings banks, trust companies, finance companies,
life insurers, investment banks, etc. Banks have drastically
evolved throughout time, increasing their services but also
becoming institutions that cater to greater numbers of
people.
Shares and Stocks
Shares are a term referred to the units of ownership interest
provided to the stockholder or owner of a company. The
term is often used in connection with the number of units
issued to an owner of Common Stock or Preferred Stock. A
stock is a certificate of ownership in a corporation. It is the
same as a share
Industry Overview
The financial sector is in a process of rapid transformation.
Reforms are continuing as part of the overall structural
reforms aimed at improving the productivity and efficiency
of the economy. The role of an integrated financial
infrastructure is to stimulate and sustain economic growth.
The growth rate of the financial sector is 15 percent.
The financial sector consists of Institutions, markets,
financial instruments, specialized and non-specialized
financial institutions of organized and unorganized financial
markets, financial instruments and services. The common
thing between all is that they facilitate transfer of funds.
These parts are not always mutually exclusive; Inter-
relationships between these are a part of the system e.g..
Financial Institutions operate in financial markets and are,
therefore, a part of such markets.
Indian Financial sector, with Ministry of Finance at the helm
as policy making body, with two regulators RBI and SEBI
consists of three principal segments i.e.
Financial Institutions
Banking Segment
Markets: Debt/Equity/Securities
Trends and Strategies in the Financial Sector
Information technology, deregulation and liberalization have
dramatically affected the financial services industry,
contributing to two trends: consolidation and increased
competition at both national and international levels.
Consolidation
Consolidation means that financial services worldwide are
increasingly concentrated in the hands of a few corporations.
Consolidation is seen as the single most important factor
transforming the financial services industry since almost a
decade. Many experts predict that consolidation will
continue and within 5 to 10 years there will be only five to
ten top financial conglomerates in the world.
In the search for more profitable opportunities, most
consolidated financial firms grew through mergers and
acquisitions or takeovers that were either friendly or hostile.
Such process took place at national and international levels
with cross-border consolidation, by trading and investing in
financial services in many countries around the world. Many
financial services categories, such as retail banking and
insurance, were increasingly being brought under one
corporate roof, which is called "cross-category
consolidation".
The strategies behind consolidation are:
a. Increasing the number of customers and beating
competitors by selling various
b. Financial products through one distribution channel.
c. Diversifying products and customers to avoid the risk and
to finance a loss-making part of the business with the profits
of another one.
d. Maintaining a large capital base as a sponge to absorb
losses and the growing cost of technology.
e. Increasing the quality of service and products to gain the
trust of the customers.
f. Increasing profitability in the battle against competitors
Competition
Consolidation is the financial industry's way of dealing with
increasing competition. Governments, regulators and
supervisors worldwide try to create and maintain a free
market with many competitors, for the sake of efficiency and
lower prices. Competition remains fierce. The struggle is
always for quicker and short-term profit which leads to
strategies for more efficiency, lowering costs, expansion of
profit-making clients and markets while outpacing
competitors. This often means an increasing effort to
standardize and automate services, to differentiate them
according to the wealth of the client and to shift the focus on
financial portfolios. One should also notice the importance of
cross selling and cross branding (some financial companies
have started to distribute products for their competitors
without operating them).
 
are those services that are commonly associated with the supply
of financial instruments such as debt securities, equity securities
and insurance policies. Generally, any person involved in the
provision of, arranging for, or the agreeing to provide an exempt
financial service is not eligible to claim input tax credits in
respect of tax paid on the inputs used in the making of that
exempt supply.
Financial Services Last Updated: June 2010
The Indian economy is estimated to have grown by 7.4 per cent
in 2009-10. According to the latest Central Statistical
Organisation (CSO) data, financial services, banking, insurance
and real estate sectors rose by 9.7 per cent in 2009-10.
As per the Securities and Exchange Board of India (SEBI),
number of registered Foreign Institutional Investors (FIIs) as on
May 31, 2010 was 1710 and the cumulative investments in
equity since November 1992 to May 31, 2010, was US$ 77.2
billion , while the cumulative investments in debt during the
same period were US$ 13.4 billion . The total FII inflow in
equity during January to May 2010 was US$ 4.6 billion while it
was US$ 5.9 billion in debt. Net investment made by FIIs in
equity between June 1, 2010 and June 14, 2010 was US$ 530.05
million while it was US$ 875.73 million in debt, as per the latest
data released by SEBI.
The average assets under management of the mutual fund
industry stood at US$ 170.46 billion for the month of May 2010,
as compared to US$ 135.58 billion in May 2009, according to
the data released by Association of Mutual Funds in India
(AMFI).
As on June 4, 2010, India's foreign exchange reserves totalled
US$ 271. billion, an increase of US$ 9.87 billion over the same
period last year, according to the Reserve Bank of India's
Weekly Statistical Supplement.
Private equity (PE) firms invested about US$ 2 billion across 56
deals during the quarter ended March 2010, according to a study
by Venture Intelligence, a research service focussed on PE and
merger and acquisitions (M&A) transaction activity in India.
The amount invested during the January-March 2010 quarter
was the highest in the last six quarters. The figure was
significantly higher than that during the same period last year
(January-March 2009) which witnessed US$ 620 million being
invested across 58 deals and also the immediate previous quarter
(October-December 2009) where investments worth US$ 1,681
million were made across 102 deals.
Also, a study by Project Finance International (PFI), a source of
global project finance intelligence and a Thomson Reuters
publication has ranked India on top in the global project finance
(PF) market in 2009, ahead of Australia, Spain and the US.
The study said the main market for PF in 2009 was the domestic
Indian market, which raised US$ 30 billion, accounting for 21.5
per cent of the global PF market. This was up from US$ 19
billion in 2008.
Qualified Institutional Placements (QIPs)
QIP is a capital raising tool, whereby a listed company can issue
equity shares, fully and partly convertible debentures, or
securities other than warrants, which are convertible into equity
shares, to a qualified institutional buyer (QIB).
In 2009, Indian companies had raised close to US$ 7.13 billion
by way of 45 QIP issuances.
Stock markets
According to data from Bloomberg, India's market cap as a
percentage of world market cap was 2.8 per cent as on
December 31, 2009.
In 2009, there were 21 IPOs that raised US$ 4.18 billion as
compared to 36 IPOs in 2008 that raised US$ 3.62 billion.
Further, according to ICICI Securities, Indian companies are
likely to raise up to US$ 42.43 billion from the primary market
over the next three years. According to Madhabi Puri-Buch,
Managing Director and CEO, ICICI Securities' nearly US$ 20
billion will be raised from the initial public offer (IPO) market
this fiscal (2010-11), of which around US$ 8.49 billion would be
from the public sector and an equal amount from private
companies.
Moreover, on the back of an increase in the participation of
agriculture and other commodities, the 23 commodity exchanges
posted 50 per cent year-on-year growth in turnover in the April-
February period of 2009-10, to touch US$ 1.53 trillion,
according to the commodity markets regulator, Forward Markets
Commission (FMC).
Insurance
India is the fifth largest life insurance market in the emerging
insurance economies globally and the segment is growing at a
healthy 32-34 per cent annually, according to the Life Insurance
Council.
According to the Insurance Regulatory and Development
Authority (IRDA), total first year premium collected in 2009-10
was US$ 24.64 billion, an increase of 25.46 per cent over US$
19.64 billion collected in 2008-09.
Further, according to IRDA, in April 2010, life insurance
companies collected first year premium worth US$ 1.29 billion,
as compared to US$ 810.9 million in the corresponding period
of 2009.
The life insurance industry is expected to cross the Rs 3 lakh
crore total premium income mark in 2010-11. “This year, we are
expecting a growth of 18 per cent in total premium income. If
achieved, it is expected to cross the US$ 64.4 billion mark,” said
SB Mathur, secretary general, Life Insurance Council. Total
premium income, at US$ 56.04 billion, rose 18 per cent during
2009-10, against US$ 47.6 billion in the previous year.
Banking services
According to the weekly statistical supplement (WSS) of the
Reserve Bank of India (RBI), Indian bank loans represented a
rise of 19.1 per cent as of June 4, 2010 while deposits were up
14.3 per cent from the previous year.
Furthermore, outstanding loans showed an increase from US$
12.39 billion to US$ 703.5 billion in the two weeks to June 4,
2010.
The WSS reflected that bank deposits rose by US$ 3.24 billion
to US$ 975 billion in the two weeks to June 4.
Exchange rate used: 1 USD = 46.74 INR (as on June 2010)

Financial services is a term used to refer to

the services provided by the finance industry. Financial
services is also the term used to describe organizations that deal
with the management of money and includes merchant
banks, credit card companies, consumer finance companies

, government sponsored enterprises, and stock brokerages.

Financial services is the largest industry (or industry category)
in the world, in terms of earnings; as of 2004, the industry
represents 20% of the market capitalization of the S&P 500.

Different Types of Financial Services

Banking, construction loans, small business loans, retirement
accounts, credit unions. With all these, and other, financial
terms and the services to which they refer to out there, one
begins to wonder if middle schools and high schools should
begin offering courses in Banking 101 as part of their
curriculum. Certainly, the first two topics alone would take
up a full school year.

It really isn't necessary, however, for one to have an

accounting degree, or even that much of an accounting
background in order to have a rudimentary understanding
of financial services. Often, simply walking into a financial
institution will allow one to pick up brochures and other
publications which can put it all into perspective.

The term financial services most often brings to mind the

more simpler aspects, of banking especially, such as checking
and savings accounts (which may or may not include
retirement accounts). As everyone knows, though, there are
other areas of financial services.
Construction loans, for example, may come through a bank,
or they may be obtained through other financial institutions.
In fact, some banks have built their reputation on the fact
that they deal primarily with such loans, although they
certainly offer loans for other things. Small business loans
can be acquired through government financial services, such
as the Small Business Administration.

Retirement accounts can, of course, be opened in a regular

bank, or one may choose to utilize the services of a credit
union. Unlike banks, credit unions require that its patrons
be members of that particular financial institution.

Membership may be "open"; that is, anyone can join, which

other credit unions will only offer their services to employees
of certain companies or businesses. The Navy Federal Credit
Union Navy Federal Credit Union, as its name implies,
serves those who are or once were members of the U. S.
Navy. Even if membership is considered "closed", however,
relatives of members are usually welcome to join.

The services are out there, and, again, it does not take a
financial "wizard" in order to access the availability of all
these institutions have to offer. One only need to open the
door to any one of the many branches of banks, and, yes,
credit unions, to find out anything they wish to know. Once
the first step has been taken, it is almost always smooth
sailing the rest of the way.
Financial Services Company
The finance industry provides a number of services to the
clients. There are different types of financial services company
to provide these services to different commercial sectors as well
as to the individuals.
There are different types of financial services like lending
money for different purposes, insurances, depository services,
mortgage services, investment services, credit rating services
and many more. The different types of financial services
company jointly create one of the largest industries of the world.

There are a number of financial services companies in the world.

Some of these companies are the following:

 Investment services company

 Insurance company
 Intermediation or advisory services company
 Conglomerates
 Bank
 Credit Rating Agencies

Bank
It is one of the biggest financial services companies of the
world. There are different types of banks in the world. Some of
these are commercial banks, private banks and many more.
There are some banks that work for the capital markets only.
Banks provide a number of financial services to the clients.
These services include depository services, lending services,
credit card facilities and many more. These services are
provided for both the individuals and the commercial sector.
There are a variety of banks, run by different organizations, for
instance:

 Banks run by the private sector (meant to earn profits by

providing financial services
 Banks regulated by the government
 Non-profit banks

Retail banking services are offered to individual clients and also

to small-scale businesses. Several banks that provide such
services are:

 Commercial bank
 Private banks
 Savings bank
 Postal savings banks
 Ethical banks
 Offshore banks
 Community development banks
 Building societies
 Community Banks
Investment banking facilities are designed mainly for corporate
clients, and consist of underwriting services, advisory services,
trade financing and so forth. These services are provided by the
following banks:
  Merchant Banks
 Investment Banks
Apart from these, there are Islamic banks that are built on
Islamic ideals and Islamic regulations. The rules and regulation
are a bit differ from other banks.

Intermediation or Advisory Services Company

These companies are basically involved in providing investment
services to the clients. There are a number of investment options
available for the investors but at the same time, every investor is
not meant for every kind of investment option. There are a
number of factors like returns from the investment, security of
the investment and several other risk factors that are involved
with the investments. These companies are designed to provide
advises to the investors in selecting the right investment options
that suit their investment plans and also the risk tolerance
capacity. At the same time, the intermediation or advisory
services companies are handling the investor's money and
investing it according to the client's choice.

Insurance Companies
The insurance companies provide the clients with risk coverage
services. These services are designed to cover a number of risks
that are related to an individual's life, property and many more.
These services are not only designed to provide security but at
the same time there are a number of insurance plans that are
designed to provide regular income to the clients. The insurance
policies can be divided in several types like general insurance,
life insurance, commercial insurances and a lot more.

Investment Services Company

The investment services companies provide services like asset
management, hedge funds, custody services and many more.

Credit Rating Agencies

The credit rating agencies are those firms that evaluate different
types of financial services companies. These ratings are based
on a number of factors like the kind of services, risk factor
involved with the services, customer facilitation and many more.

Top 10 financial services companies in India

The financial system of a country has a great impact on the
economy with financial services companies responsible for the
robust economic growth. There has to be a direct link between
the regulatory institutions and the intermediary institutions while
determining the financial system of a country.
Financial services provided by finance companies include
insurance, housing financing, mutual funds, credit reporting,
debt collection, stock broking, portfolio management, and
investment advisory.
List of top 10 financial services companies in India
Find below a comprehensive list of top financial services
companies in India.

SBI Capital Markets Limited:

This happens to be the oldest organizations in the sphere of

capital markets in India. Established in 1986 in the form of an
ancillary of SBI, they have ranked second in Asia's Project
Advisory services. The company is a traiblazer in privatization
and securitization. The subsidiaries of SBI Capital Markets are
SBICAPs Ventures Ltd., SBICAP Trustee Co.Ltd. and many
others.

Bajaj Capital Limited:

One of the major financial services companies in India, Bajaj

Capital offers best investment advisory and financial planning
services. The services are meted out to the institutional
investors, NRIs, corporate houses, individual investors, high
network clients as well.
DSP Merrill Lynch Limited:

A major player in the equity and debt market in India, DSP

Merrill Lynch offers financial advises to varied corporations and
institutions. With an array of wealth management and investor
services, their services are customized in a manner that they
meet every investor requirement.

Birla Global Finance Limited:

The subsidiary of Aditya Birla Nuvo Ltd., this company has
operations in the corporate finance and capital market arena. An
alliance with Sun Life Financial of Canada, they have given
birth to Birla Sun Life Insurance Co Ltd., Birla Sun Life
Distribution Co. and alike.

Housing Development Finance Corporation:

A best financial solution for home loans, NRI loans, HDFC is

the one stop destination for personal finance. With overseas
branches in Singapore, Kuwait, Qatar, Saudi Arabia and many
others, HDFC has been going great guns every year.

PNB Housing Finance Limited:

This company offers premium solutions for relieving the

borrower segment. The Home Loan Life Insurance Plan of this
has come in conjunction with TATA AIG, with the lowest
premium when compared to the peers.

ICICI Group:

Wide arena of financial products and services, ICICI Group has

solutions like InstaBanking, Online Trading, Insta Insure, ICICI
Bank imobile etc. Providing high class financial services in all
segments of the society, ICICI Group deals with Mutual Fund,
Private Equity, Securities, and Life Insurance etc.

LIC Finance Limited:

It is the biggest Housing Finance Company in India, providing

finance to individuals for repair or construction or renovation of
any old or new apartment or house.

L & T Finance Limited:

Established in 1994 by the Larsen and Turbo group, this has

become a significant name in the financial sector. Funds for
automobiles, Agricultural Instruments, secured loans; they have
all types of loans for a long tenure.

Karvy Group:

With Mutual Funds Services, Depository Services, Debt Market

Services, Investment Banking and many others, Karvy Group
has spanned across the domestic financial sector as well as
abroad.

Lease

Definition
A written agreement under which a property owner allows a
tenant to use the property for a specified period of time and
rent.
Leases are classified into different types based on the
variation in the elements of a lease. Very popularly heard
leases are financial and operating lease. Apart from these,
there are sale and lease back and direct lease, single
investor lease and leveraged lease, and domestic and
international lease.
Lease finance is a very important financing option for an
entrepreneur with no or inadequate money for financing
the initial investment required in plant and machinery. In
lease finance, the lessor finances the asset or equipment
and the lessee uses it in exchange of fixed lease rentals.
In other words, lease financing is an arrangement where
the lessee who requires the equipment or machinery gets
the finance from the lessor for the agreed rental payments.
Such kind of lease is called finance lease. There are many
such arrangements and hence there are many types of
lease. Let us have a look at the different kinds of lease.  
 
Certain variation in the elements of lease classifies lease
into different types. Such elements are as follows
         The degree of ownership risk and rewards
transferred to the lessee.
         No. of parties involved
         Location of lessor, lessee and the equipment
supplier
         The lessor and the lessee
 
Here, risk means the chance of technological
obsolescence and reward refers to the cash flow
generated from the use of equipment and the residual
value of the equipment.
 
Types of Lease:
On the basis of above dimensions, leases are classified
into following:
 
Finance Lease and Operating Lease: Finance lease,
also known as Full Payout Lease, is a type of lease
wherein the lessor transfers substantially all the risks and
rewards related to the asset to the lessee. Generally, the
ownership is transferred to the lessee at the end of the
economic life of the asset. Lease term is spread over the
major part of the asset life. Here, lessor is only a financier.
Example of a finance lease is big industrial equipment.  
            On the contrary, in operating lease, risk and
rewards are not transferred completely to the lessee. The
term of lease is very small compared to finance lease. The
lessor depends on many different lessees for recovering
his cost. Ownership along with its risks and rewards lies
with the lessor. Here, lessor is not only acting as a
financier but he also provides additional services required
in the course of using the asset or equipment. Example of
an operating lease is music system leased on rent with the
respective technicians.
 
Sale And Lease Back and Direct Lease: In the
arrangement of sale and lease back, the lessee sells his
asset or equipment to the lessor (financier) with an
advanced agreement of leasing back to the lessee for a
fixed lease rental per period. It is exercised by the
entrepreneur when he wants to free his money, invested in
the equipment or asset, to utilize it at whatsoever place for
any reason.
            On the other hand, direct lease is a simple lease
where the asset is either owned by the lessor or he
acquires it. In the former case, the lessor and equipment
supplier are one and the same person and this case is
called ‘bipartite lease’. In bipartite lease, there are two
parties. Whereas, in the latter case, there are three
different parties viz. equipment supplier, lessor, and
lessee and it is called tripartite lease. Here, equipment
supplier and lessor are two different parties.
 
Single Investor Lease and Leveraged Lease: In single
investor lease, there are two parties - lessor and lessee.
The lessor arranges the money to finance the asset or
equipment by way of equity or debt. The lender is entitled
to recover money from the lessor only and not from the
lessee in case of default by lessor. Lessee is entitled to
pay the lease rentals only to the lessor.
Leveraged lease, on the other hand, has three parties
– lessor, lessee and the financier or lendor. Equity is
arranged by the lessor and debt is financed by the lender
or financier. Here, there is a direct connection of the
lender with the lessee and in case of default by the lessor,
the lender is also entitled to receive money from lessee.
Such transactions are generally routed through a trustee. 
 
Domestic and International Lease: When all the parties
of the lease agreement reside in the same country, it is
called domestic lease.
International lease are of two types – Import Lease and
Cross Border Lease. When lessor and lessee reside in
same country and equipment supplier stays in different
country, the lease arrangement is called import lease.
When the lessor and lessee are residing in two different
countries and no matter where the equipment supplier
stays, the lease is called cross border lease.

Types of Lease
Many types of lease contracts are seen in practice, some of
which are as follows:
(1) Financial Lease: A long term lease contract which extends
over the whole useful life of an asset and which cannot be
cancelled is known as Financial Lease. The duration of the lease
is almost equal to the useful life of an asset. Thus whole
investment is recovered by the lessor in case of Financial Lease.
The lessee may be given an option to purchase the asset at the
expiration. Sometimes this type of lease is also known as capital
lease. In the Statement of Financial Accounting Standard No.
13, published by the U.S. Financial Accounting Standard Board,
a lease is regarded as a Capital Lease (or Financial Lease) if it
meets any one of the following conditions:
(1) The lease transfers title to the asset to the lessee by the end
of the lease period.
(2) The lease contains an option to purchase the asset at a
bargain price.
(3) The lease period is equal to or greater than, 75 per cent of the
estimated economic life of the asset.
(4) At the beginning of the lease, the present value of the
minimum lease payments equals or exceeds 90 per cent of the
fair value of the leased property to the lessor.
If any of three conditions is met, the lessee is said to have
received most of the economic benefits and risk associated with
the leased property. It is a very popular method and is a better
alternative to raising finance through debentures or bank loan.
The asset is available for use to the lessee without arranging for
the full value of the asset. Under this form of lease, the lessee
generally selects the asset and the lessor places an order for it
and gets the delivery. The lessor receives the invoice and makes
payment for it, end he retains the ownership of the asset. The
lessor is not the manufacturer of or trading in specific assets or
equipments. He simply provides finance for whatever asset the
lessee needs.
In financial lease, the maintenance and other related expenses
are normally borne by the lessee. He also bears the risk of
obsolescence. Such type of leasing arrangement is also called
‘Close-end Lease’, because it is non-cancellable. Secondly, the
lease rent is fixed in such a way that whole cost of the asset is
recovered and in addition, profit is made in such a way that a
fixed rate of return in earned on capital invested.
(2) Operating Lease : It is a type of lease in which asset is leased
for a short period and the contract is cancellable after giving
notice of a fixed period, e.g. giving an office space on a 2 year
lease cancellable on 60-days notice. Similarly lease contracts for
computers or office equipments may run for 3 to 5 years. Thus
the period of such type of lease is shorter than the asset’s
economic life. It is prevalent particularly in those machines
where technological changes are rapid.
In other words, an operating lease is one which does not satisfy
any of the conditions mentioned above in respect of Financial
Lease. In this type of lease, the original cost of the asset cannot
be recovered in a single lease, because a single lease covers a
period which is shorter than the useful life of the asset. The risk
of obsolescence remains with the lessor. Naturally, the shorter
the period of the lease, the greater will be the lease rentals. The
lessor is also responsible for the insurance and other expenses.
The operating lease is generally preferred under following
circumstances
(1) When the asset is likely to become obsolete within a short
period.
(2) When the lessee is interested in overcoming his problems
temporarily.
(3) Sale and Lease Back: This is a very popular method of
leasing. Under a sale and lease back lease, a firm or individual
who is the owner of an asset sells it to another party and the
same asset is taken on lease from that party. Thus the lessee gets
money by selling the asset and at the same time, he continues to
use the asset by paying a fixed rental. Generally the parties
interested in purchasing assets under such arrangement are
insurance companies, other financial institutions, institutional
investors, banks and other specialised leasing companies. The
lessor’gets the benefit of depreciation deductions, while the
lessee gets the benefit of increased funds, which he can use in
business. Such arrangement has become very popular in the
U.S.A. after the Second World War. The owner of the asset can
realise money by selling the asset and can also continue to use it
in his own business. The selling price is usually the fair market
price. As such contracts were made at market price, the lessor
used to get high depreciation charges. So in India, in the budget
presented to the Parliament on 22nd July, 1996, the Finance
Minister provided that the depreciation on such asset will be
allowed only on depreciated value of such an asset to the
original owner, whatever may be its market value.
In most of lease back agreements the lessee is required to pay all
maintenance expenses, property taxes, and insurance and lease
payments. In some cases, the lease arrangement allows the
lessee to repurchase the Property on termination of the lease.
This type of lease is beneficial to both the parties. The lessee
gets back the price of the asset by selling it-and so his liquidity
increases. The lessor gets the benefit of higher depreciation
charges. Such arrangement is particularly useful to companies
facing shortage of liquidity.
(4) Leveraged Leasing: This type of lease arrangement has
become popular during last few years. It is generally a popular
method of financing expensive asset. It is generally used when
the asset to be leased is a very costly one and the lessor is not
able to provide complete finance. He generally provides 25 per
cent of the cost of the asset, while the remaining amount is
provided by the financier, who may be a bank or a financial
institution, mainly as a loan. Thus three parties are involved (1)
the Lessor (2) the Lessee and (3) The Financier.
The position of the lessee is the same as in any other type of
lease. He continues to make payment of rent during the period of
the lease and continues with the right to use the asset. But the
position of a lessor is different. He does not provide 100%
finance. Generally 25% of the finance is provided by him and
the remaining 75% is provided by the financier to whom the
asset remains mortgaged. Retail stores, office buildings, multi-
purpose industrial building and even complete shopping centres
are frequently financed with this method.
(5) Service Lease: Under this arrangement the lessor provides
not only the finance but also undertakes servicing of the asset
during the lease period. Computers copiers, trucks and other
capital assets requiring maintenance are general leased under
contracts that provide maintenance or servicing of the asset
during the lease period.
In case of service lease (1) the maintenance cost is included in
lease rent. As the lessor is responsible for all routine servicing
and repairs, the lessee get protection against any major
breakdown. (2) In such leases, the lease period is no sufficiently
long to recover fully the original cost of the asset. This means
that the lease period is less than the service, life of the asset. (3)
In most cases, the service lease can be cancelled | by the lessee
by giving notice of a fixed period. But provision is made, for
penalty, if the lease is cancelled before its term.
(6) Direct Leasing: In case of direct leasing, the lessee may lease
directly from a manufacture. This is often done in case of
computers and office equipments. The asset may be purchased
by a third party, who leases it to the user, such lessors are
finance companies, commercial banks, specialised leasing
companies and also individuals. Thus in the second case the
lease is acquired through the third party. In certain cases, the
lessors get the benefit of large scale buying from manufacturer
and this benefit is passed on to the lessee in the form of low
lease rent.
In addition to the above types of leasing there are certain other
types as described below:
(7) International or Cross-border Leasing: When a lease
agreement is made between citizens of two different countries, it
is called International Leasing or Cross-border Leasing. The
lessor and the lessee are from different countries. There are very
few such lease contracts, because they involve complex
problems of law and taxation. The U.S.A., Britain, countries of
West Europe, Japan etc. started such leasing arrangements.
Particularly the costly war equipments like sub-marines etc. are
obtained on such lease, e.g. India obtained three atomic sub-
marines from Russia on lease.
(8) Medical Equipment Leasing: In fact, this is not a kind of
lease, but is a method of giving very costly medical equipments
on lease. Some of the latest machines cost crores of rupees,
which an individual doctor or a charitable hospital may not
afford. Hence, special leasing companies have come into
existence to lease such costly machines and equipments.
(9) Sales-Aid Leasing: When a manufacturer himself starts a
Leasing Company and leases products manufactured by him to
customers, then it is sales-aid leasing. The leasing company aids
the manufacturer in selling. Of course, here again this is not a
kind of lease, but is an arrangement by which products are
leased by the manufacturer.
From the above discussion, it becomes clear that there are
mainly two types of leases vis. Financial Lease and Operating
Lease. Some authors describe direct leasing, sale and lease back
as well as leveraged lease as a part of Financial Lease.
Equipment Lease Financing Terms and Features

 Benefits of Leasing Equipment for Your Business

 Ownership of Equipment (under the lease agreement)
 Tax Implications of Equipment Leasing
 Purchase Options
 Goods and Services Tax (GST) and the Provincial or
Harmonized Sales Tax
 Multiple Equipment Purchases
 Business Equipment That We Finance

Benefits of Leasing Equipment for Your Business

Working with RBC Royal Bank's account manager and Leasing
specialist team, we can provide you with a customized analysis
demonstrating the potential benefits of leasing versus traditional
equipment financing methods.
 

Ownership of Equipment (under the lease agreement)

As lessor under the equipment lease agreement, RBC Royal
Bank owns the equipment and claims the Capital Cost
Allowance on any equipment that is leased. You are responsible
for the maintenance and insurance costs associated with the
equipment that is leased and all warranties are transferred
directly to you.
 

Tax Implications of Equipment Leasing

Lease payments are usually 100 percent tax deductible, which
allows you to deduct the payments as a business expense. Please
consult with a tax adviser to determine if equipment leasing is
an appropriate form of financing for your company.
 

Purchase Options
The purchase option is a reasonable estimate of the Fair Market
Value of the equipment at the option date determined at the
beginning of the lease. In order for your company to deduct
lease payments as an expense, a purchase option must be
calculated and represent a true estimate of the Fair Market value.
 

Goods and Services Tax (GST) and the Provincial or

Harmonized Sales Tax
The lessor pays all applicable taxes at the time the equipment is
originally purchased. However, lease payments include GST and
Provincial or Harmonized Sales Tax.
 

Multiple Equipment Purchases

A lease line of credit may be very beneficial to your company in
accommodating multiple equipment leases. Much like an
operating line of credit, a lease line is an approved lease facility
with a preset dollar value. This enables you to acquire
equipment quickly and effectively.
 

Business Equipment That We Finance

RBC Royal Bank offers lease financing for a wide range of
equipment in a number of different industries, including:

 Manufacturing: production equipment, material handling

equipment
 Transportation: tractors, trailers, railway cars
 Construction: loaders, backhoes, cranes
 Business Services and Information Systems: computers,
furnishings, fixtures, hardware, software, furniture
 Resource Equipment: logging equipment, electric shovels,
compressors, drilling equipment
 Medical & Health Services: x-ray machines, ultrasound
machines, furniture
 Airline: aircraft, engines, baggage carts
  Agriculture1: combines, ploughs, tractors
Under the Bank Act, banks are restricted from leasing consumer
goods, passenger vehicles and light trucks .
Advantages and Disadvantages of Lease Financing for
Businesses
Related Articles

 Equipment Lease Financing

 Financing Equipment with Business Loans
 Creating a Capital Equipment List
It has become increasingly more common in recent years for
companies to lease equipment. Each leasing agreement needs to
be read through carefully to understand the terms and conditions
within said lease.
Typically a lease can run anywhere from one to five years. Most
equipment necessary in commercial businesses today, including
technical equipment, can be leased. Some leases provide an
option to then purchase the equipment at substantially less
money when at the end of the term of the lease. By leasing
equipment, if structured properly, you can maintain your credit
availability, as the lease debt does not have to be considered a
direct liability on your financial statements. This is
advantageous, as it does not limit your ability to borrow from
lending sources.
Advantages of lease financing:
  It offers fixed rate financing; you pay at the same rate
monthly.
 Leasing is inflation friendly. As the costs go up over five
years, you still pay the same rate as when you began the
lease, therefore making your dollar stretch farther. (In
addition, the lease is not connected to the success of the
business. Therefore, no matter how well the business
does, the lease rate never changes.)
 There is less upfront cash outlay; you do not need to make
large cash payments for the purchase of needed
equipment.
 Leasing better utilizes equipment; you lease and pay for
equipment only for the time you need it.
 There is typically an option to buy equipment at end of
lease term.
 You can keep upgrading; as new equipment becomes
available you can upgrade to the latest models each time
your lease ends.
 Typically, it is easier to obtain lease financing than loans
from commercial lenders.
 It offers potential tax benefits depending on how the lease
is structured.
One of the reasons for the popularity of leasing is the steady
stream of new and improved technology. By the end of a
calendar year, much of your technology will be deemed
"dinosaurs." The cost of continually buying new equipment to
meet changing and growing business needs can be difficult for
most small businesses. For this reason leasing is very
advantageous.
Leasing can also help you enhance your status to the lending
community by improving your debt-to-equity and earnings-to-
fixed assets ratios. There are a variety of ways in which a lease
can be structured. This provides greater flexibility so that the
lease is structured to best accommodate the individual cash flow
requirements of a specific business. For example, you may have
balloon payments, step up or step down payments, deferred
payments or even seasonal payments.
Disadvantages of lease financing:
Leasing is a preferred means of financing for certain businesses.
However it is not for everyone. The type of industry and type of
equipment required also need to be considered. Tax implications
also need to be compared between leasing and purchasing
equipment.

 You have an obligation to continue making payments.

Typically, leases may not be terminated before the original
term is completed. Therefore, the renter is responsible for
paying off the lease. This can pose a major financial
problem for the owners of a business experiences a
downturn.
 You have no equity until you decide to purchase the
equipment at the end of the lease term, at which point the
equipment has depreciated significantly.
 Although you are not the owner, you are still responsible
for maintaining the equipment as specified by the terms of
the lease. Failure to do so can prove costly.
Types of leasing options:
 Capital - Lessee owns the equipment and therefore
takes depreciation. Offers 100%, fixed-rate financing,
with terms ranging from two to 10 years, depending
on the economic life of the asset
 Tax Lease – Also known as an operating lease. Payment
is considered rental expense, not a loan payment, and
is fully tax-deductible. At the end of the term, you have
a residual position and an option to purchase the
equipment at fair market value. There is no obligation
to buy the equipment at the end of the lease term
 TRAC Lease (Terminal Rental Adjustment Clause) -
Designed for commercial vehicles, this lease has the
advantages of a Tax Lease, plus a fixed-purchase option
at the end of the term
 Municipal Leases - Provides a financing option to meet
specific needs for government entities