ABSTRACT

In recent times the Non-Banking Finance company  (NBFC s) have emerged as substantial contributors to the Indian economic growth. In Indian economy today, the financial intermediation is being conducted by a wide range of financial institutions. They are showing spectacular performance both in terms of sourcing of funds and deployment of funds in various area. This paper seeks to analyze the various sources of funds opted for vehicle finance by  financial institution.

The Banking and Non-Banking Financial institution plays an expanded role as to accelerate the growth of financial market and to provide a wider choice to the investors. The hire purchase finance adopts the automobile sector as a high way to the road transport. One estimate put about 25 to 35 percent of all civilian commercial vehicle sales was have been financed by hire purchase companies.

The companies are providing the corporate sector with alternative sources of funds and to some extent have helped to reduce the pressure on the development of financial institution which are also facing a resource crunch. Every successful company should have adequate resources at its disposal and the RBI has also issued various directions for the regulation of the deposit being raised by such companies.

VEHICLE FINANCE THROUGH HIRE PURCHASE

To begin with there are basically three ways of funding an asset

1) Hypothecation
2) Leasing
3) Hire purchase

The similarity is that all have equated monthly installments.

In Hypothecation the title (ownership) according to the sale of goods act goes to the purchaser, the asset is hypothecated to the finance company. The lien is cancelled at the end of the contract.

In Leasing the finance company is the lessor and the user is lessee. The title or the product cannot be sold or transferred to the lessee at the end of the contract.

In Hire purchase the vehicle is sold to the finance company who in turn hires it to the user. After the end of the contract the product is sold to the user after collecting an option money.

What is Hire purchase?

The term hire purchase refers to hiring of an asset for a period to time and at the end of the period purchasing the same, the person taking the asset on hire purchase acquires possession of the asset and the rights to use it.

What is Hypothecation?

In Hypothecation the contract has to be fulfilled in other words amount borrowed with interest till date of closure/foreclosure will have to be paid whereas in hire purchase if the hirer is not willing to possess the vehicle it can be surrendered by paying the hire monies and charges till the date of surrender and walk away from the contract.

How does the hire purchase agreement work?

Any product from pin to a plane can be financed. The purchaser or the user first identifies the product. He contacts the hire purchase company and after finalizing the quantum of finance, period and the financial charges, he enters into an agreement with finance company which is known to be the hire purchase agreement. The finance company is called the owner or the hiree and the user is called the hirer,  the guarantor can be accepted as per the requirements. The user or the hirer then pays an initial payment, which is called as the initial hire. Document charges as required in the particular state where the transaction is put through and incidental charges if applicable. One rupee is collected as option money in a hire purchase.

Why should this option money be collected though the financial institution would have already collected the full value of the product? the reason is a sale without consideration is null or void.

In hire purchase transactions can be done only on products where the invoice have already suffered local sales tax in the particular state where the transaction is put through. We cannot do hire purchase on CST billing. The reason is according to the sale of goods act the product is purchased and the same is sold at the end of the contract. If the product is purchased in a different state and sold in a different state it becomes first sale in the state where it is being sold. First sale attracts local sales tax. Local sales tax is not applicable for the second sale in that particular state.

Currently hire purchase has been taxed as such the customer are forced to shift from hire purchase to loan transactions which other wise mean hypothecation.

Now the competition is driving us by the way of rate war as most of the other finance companies, banks do only loan transactions as such there was a shift towards loan transaction.

Rules of the owner in Hire purchase

* The owner has to deliver possession of goods to the hirer because the hiring does not commenced until the goods has been delivered.
* The owner must have the title of goods let on hire at the time of delivering goods.
* The owner has to ensure that the goods are of mercantile quality and that they are reasonably fit for the purpose for which they are used

Rules of Hirer

* The hirer is required to take a reasonable care of goods.
* The hirer must pay the sum stated in the contract within the specified period as prescribed by the contract.
* The hirer should not pledge or sell the goods or use them for a purpose different from that are stated in the contract.
* Finally the hirer is required to pay the owner against any loss or damage that results from his negligence or misuse

Process involved in Hire purchase

* Pre finance stage:

The credit worthiness of the hirer is found based on which whether or not to strike a deal is decided

* Release of finance stage:

* Documentation followed by
* Initial payment by hirer
* Insurance cover for vehicle
* Finance is released to dealer
* Whether the vehicle is free from encumbrance-checked by financial company

* Pre finance formalities:

Once the dealer deliver the vehicle the company must deliver it to customer and must receive the invoice and delivery report, the absence of these documents will create problems.

* Assessment of Hire purchase contract:

The Hire purchase agreement usually permits to assign his interest to a third party. An assigner is technically liable only for the liabilities arising from date of assignment. In case of transfer of vehicle from hirer to assignee the hire purchase company is required to issue a non objection letter addressed to RTO.

* Documentation

Terms and condition to be followed by both the parties

* Delivery memo-given by hirer after taking the vehicle
Insurance declaration promise to pay insurance premium
Form 29 notice to transfer of ownership of a motor vehicle
Form 30 report of transfer of ownership of vehicle
Form 35 notice to termination of an agreement of hire purchase
Form61 income declaration

INTRODUCTION OF FINANCE OPTIONS FOR NEW CAR

The documentation required is minimal and there are no hidden costs. Our procedures are transparent and hassle free. Details of some of the schemes that have been designed are given below

SCHEMES                                DETAILS

Margin money                >  This is a regular scheme wherein a minimum margin of
                                      25% on the cost of the car is paid. The balance cost is
                                      Financed and repaid with financial charges in equated
                                      Monthly installments (EMI).

Advance EMI                 >  In addition to the margin money, based on the cash flow
                                      2-3 installments is paid in advance. The advantage in this
                                      scheme is that the finance charges will be less than the
                                      above margin money scheme.

Security deposits          >   A refundable security deposit(of about 10% to 25% of the
                                     Cost of the car) is placed which carries an interest at an
                                     agreed rate. the finance charges will be less than the above    
                                     margin money scheme .

100% finance              >    Here 100% finance on the cost of the car is provided for
                                      varying tenures. This is a facility under the lease option
                                      for medium and large corporate.

EMI CALCULATOR:

In this EMI calculator the calculations are done based on the amount of loan that would be liked to avail, Based on the tenure of the loan in months and the rate of annual interest applicable the EMI and the equivalent flat interest are calculated using EMI calculator. Calculation in this calculator are based on the standard formulae.

People getting into contract & Document checklist:

* Individuals
* Private & public Ltd.
* Partnership firms

Why do people finance?

* Salary class people since the price of the product are beyond their capacity they depend on finance
* sellers in order to increase the selling capacity and to enjoy good profits
* High class people in order to obtain the income tax benefits depend on finance
* It creates working capital for business and also increase the liquidity

Classification of vehicle financed

a) commercial vehicle
b) non commercial vehicle

a) commercial vehicle:

Buses (stage and contract carriage),lorry, auto rickshaws, vans, tempos. LCV, MCV, HCV, trailers, twin bus, articulated bus.

b) Non commercial vehicle:

Non commercial vehicle are financed under different segment
A-car which costs upto 3 lakhs
B-3-7 lakhs
C-7-13 lakhs
D-13 above lakhs
* For D&C segments more investment is obtained from customers to avoid risks

How is funding done?

Money is funded based on the value of the vehicle. Mostly 90% of chaises value or 70% of the cost of the vehicle is funded by the financial company .It is followed by an electronic screening system called LAMS-loans in asset management system where the proposal is entered, if there is no deviation from the policies and the entered proposal the loan is sanctioned through

a) front ended loading or
b) back ended loading.

a) front ended loading:

The major part of the money is got back in the first half of the contract. Risk involved is less for the financier since the major part of the money is got back at the first half of the contract itself.

b) back ended loading:

The major part of the money is got back only in the second half of the contract. Financiers risk is more in back ended loading

DOCUMENT CHECK LIST

INDIVIDUALS

Legal Insurance:

* Anything lend is to be comprehensively insured (completely insured)
* In case of accident insurance pay money for accidents not for vehicle
* Any vehicle accident is to be insured
* Comprehensive covers own damage
* The entire money is not given back by insurance but the damaged parts depreciated value which is reimbursement value is given back
* Insurance is to put you back to the previous position before the accident
* If not insured loans given by banks will be at higher interest rate

CONCLUSION

From this study of vehicle finance through Hire purchase it is very clear that Hire purchase is one of the best option of vehicle financing for self employed and salaried people in order to fulfill their needs and to avoid income tax problems.

It is also clear that the number of documents and guarantors authority is very strict in Hypothecation unlike Hire purchase. This is because the risk for the financiers is very high in Hypothecation since the vehicle will be in the name of the borrower whereas in Hire purchase the risk involved is comparatively less since the

Now since the competition is driving by the way of rate war as most of the other finance companies, Banks do both hire purchase and loan transaction. The one main reason for the increase in the customer preference towards loan and hire purchase is the cost benefits enjoyed by them.

Article by T. Kanimozhi, reputed faculty member.