Analysis of Hire Purchase

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

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An Analysis of Hire Purchase In NBFC Sector

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 Date:

Chethan

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An Analysis of Hire Purchase In NBFC Sector

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 Date:

(Professor N S Vishwanath) M.P.B.I.M Bangalore – 560001

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An Analysis of Hire Purchase In NBFC Sector

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 Date:

(Dr. N.S. Malavalli) PRINCIPAL

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An Analysis of Hire Purchase In NBFC Sector

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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An Analysis of Hire Purchase In NBFC Sector

CHAPTER I

INT NTR RODUCTION

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An Analysis of Hire Purchase In NBFC Sector

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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An Analysis of Hire Purchase In NBFC Sector

CHAPTER II

BACKGRO ROU UND 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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An Analysis of Hire Purchase In NBFC Sector

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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An Analysis of Hire Purchase In NBFC Sector 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 feebased 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 ___________________________________________________________________ 23 M P BIRLA INSTITUTE OF MANAGEMENT

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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 EAR RCH 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 whicho 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 ___________________________________________________________________ 29 M P BIRLA INSTITUTE OF MANAGEMENT

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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 IND NDU USTRY

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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 debtrelated 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, multilocational 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

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An Analysis of Hire Purchase In NBFC Sector

“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

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An Analysis of Hire Purchase In NBFC Sector

1.1 Graphical representation showing the increase in number of branches in truck financing

140 No. of Branches

120 100 80 60 40 20 2003

2002

2001

2000

1999

1998

1997

1996

1995

1994

1993

1992

0

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.

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An Analysis of Hire Purchase In NBFC Sector

1.2 Graphical representation showing the number of trucks financed by SIL over the years

90000

No of Trucks Financed

80000 70000 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.

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An Analysis of Hire Purchase In NBFC Sector

1.3 Graphical representation showing the increase in number of deposit holders in SIL

1600000

No of deposit holders

1400000 1200000 1000000 800000 600000 400000 200000

19 92 19 93 19 94 19 95 19 96 19 97 19 98 19 99 20 00 20 01 20 02 20 03

0

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

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An Analysis of Hire Purchase In NBFC Sector

CHAPTER IX

THE PROCEDURE OF HIRE PURCHASING IN SIL

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An Analysis of Hire Purchase In NBFC Sector

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

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An Analysis of Hire Purchase In NBFC Sector

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.

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An Analysis of Hire Purchase In NBFC Sector

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 M P BIRLA INSTITUTE OF MANAGEMENT

An Analysis of Hire Purchase In NBFC Sector

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

60%

Rs.250000/-

415000

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.

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An Analysis of Hire Purchase In NBFC Sector

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 :

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An Analysis of Hire Purchase In NBFC Sector

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

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An Analysis of Hire Purchase In NBFC Sector

TABLE 3: CALCULATIONS Of LOAN AMOUNT Advanced Amount

250000

Interest Payable

112500

Insurance Premium

TOTAL AMOUNT

LOAN

20000 3, 82,500/-

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

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An Analysis of Hire Purchase In NBFC Sector

The collection detail of the customer is as follows: TABLE 5: FLAT PAYMENT Interest

Year 1

HP Installment Amount Due (annual) 127500/-

Principal (funded

61824.33

65, 675.67

2

127500/-

37500

90,000

3

127500/-

13175.67

1,09,534

amount + insurance)

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

Principal

EMIs

1

HP Installment Interest Amount Due (annual) 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.

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An Analysis of Hire Purchase In NBFC Sector

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.

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An Analysis of Hire Purchase In NBFC Sector

CHAPTER X

TERMS AND CONDITION ONSS OF HIRE PURCHASE

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An Analysis of Hire Purchase In NBFC Sector

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.

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An Analysis of Hire Purchase In NBFC Sector

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.

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An Analysis of Hire Purchase In NBFC Sector

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.

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An Analysis of Hire Purchase In NBFC Sector

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 M P BIRLA INSTITUTE OF MANAGEMENT

An Analysis of Hire Purchase In NBFC Sector

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

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An Analysis of Hire Purchase In NBFC Sector

CHAPTER XI CON CO NCLUSI SIO ON

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An Analysis of Hire Purchase In NBFC Sector

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

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An Analysis of Hire Purchase In NBFC Sector

CHAPTER XII

SUGGE GESSTIONS AND RECOMM MME ENDATIONS

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An Analysis of Hire Purchase In NBFC Sector

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.

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An Analysis of Hire Purchase In NBFC Sector

CHAPTER XIII

BIBLIOGRAPHY

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An Analysis of Hire Purchase In NBFC Sector

13. Bibliography Books ƒFinancial Management by Khan and Jain. 4th edition T M H Publishers New Delhi. From page no. 21.19 to 21.32

ƒFinancial Management by Prasanna Chandra. 4th edition T M G Hill, New Delhi.Page no. 414

ƒLease financing and hire purchase vinod kothari 4th edition

Websites www.google.com www.shriram.com www.blonnet.com www.hinduonline.com

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