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Meaning ‘Microfinance’ refers to the provision of financial services to low income clients, including the self employed. Most of the clients of microfinance are self employed both in urban and rural areas; they usually are farmers, rickshaw drivers, tailors or blacksmiths, who need small sums of money to set up their shop or for buying supplies needed to run their businesses successfully.
Meaning Microfinance activities are not limited to providing loans but includes an array of financial services offered to people with limited or no access to financial services. The services include: • Loans to start a new business or to support an existing business • Savings products. • Insurance products. • Collateral substitutes such as group guarantees or compulsory savings. • Access to repeat loans based on repayment performance • Loans for personal expenses like marriages, festivals, etc.
Grameen Bank of Bangladesh The Grameen Bank is a microfinance institution started in Bangladesh that makes small loans to the impoverished without requiring collateral. It adopts the ‘group based’ credit approach It was started in 1976 by Prof Muhammad Yunus Its significant borrowers are women.
Commercialization of Microfinance Does commercialization mean a change in the vision and mission of the Microfinance Institution? Or should it be seen as a road to sustainability? Commercialization of microfinance generally refers to the application of market based principles and a major paradigm shift from the donor dependent arena into managing their own business as a part of the regulated financial system
SKS Microfinace SKS Microfinance is India’s largest and the world’s fastest- growing microfinance organization. Started in 1998 as an NGO, SKS transformed into an NBFC in 2005 and is regulated by the RBI. SKS has been able to ensure a repayment rate of over 99 % on its loans.
Meaning - Lease A lease transaction is a commercial arrangement whereby an equipment owner or Manufacturer conveys to the equipment user the right to use the equipment in return for a rental. "Why own a cow when the milk is so cheap? All you really need is milk and not the cow."
Essentials of a Lease Contract • Parties to the contract: Owner and the User; Lessor and Lessee. Sometimes there is a lease broker and a lease financer. • Asset: The asset, property or equipment to be leased is the subject matter of a contract of lease financing. • Ownership Separate from user: During the lease tenure, ownership of the asset rests with the lessor and its use is allowed to the lessee.
Essentials of a Lease Contract • Term of Lease: It is a period for which the agreement of lease remains in operation. The lease may stretch over the economic life of the asset. • Lease Rentals: The lease rentals are so structured as to compensate the lessor for the investment made in the asset in the form of depreciation, interest, insurance, repairs, etc. • Modes of Termination Lease • The lease is renewed • The asset reverts to the lessor • The asset reverts to the lessor and the lessor sells it to a third party. • The lessor sells the asset to the lessee
Types of Lease • Finance and Operating Lease • Sale and Lease Back and Direct Lease • Single Investor Lease and Leverages lease • Domestic and International Lease
Finance Lease In a finance lease the lessor transfers to the lessee all risks and rewards of the asset. It involves payment of rentals over an obligatory non cancellable lease period. In Finance lease the lessor is generally not interested in the asset. This lease is also called ‘Full payout lease’ Types of assets included under such lease are ships, aircrafts, railways, buildings, etc.
Operating Lease In operating lease the lessor does not transfer all the risks and rewards incidental to the asset. The cost of the asset is not fully amortized during the primary lease period. The lessor provides service attached to the leased asset such as repairs, maintenance and technical advice. For this reason operating lease is also called as ‘Service Lease’. Operating lease is generally used for computers, office equipments, trucks, telephones etc
Sale and Lease Back The owner of the equipment sells it to a leasing company (lessor) which sells it back to the owner (lessee). For e.g. The bank sells its safe deposit vaults to the lessor and leases it back and rents it to its customers. The lease back arrangement in sale and lease back can also be in a form of operating or financing lease.
Direct Lease In direct lease, the lessee, and the owner of the equipment are two different entities. Two types of direct lease: • Bipartite Lease • Tripartite Lease
Single Investor Lease There are only 2 parties to the lease transaction, the lessor and the lessee. The leasing company (lessor) funds the entire investment by a appropriate mix od debt and equity. Incase of default in servicing the debt by the leasing company, the lender is not entitled to payment from the lessee.
Leveraged Lease There are 3 parties to the transaction • Lessor (equity investor) • Lender • Lessee The lessor buys the asset through borrowings with full recourse to the lessee and without any recourse to itself.
Domestic and International Lease Domestic Lease A lease transaction is classified as domestic if all parties to the agreement are domiciled in the same country. International Lease A lease transaction is classified as international if all parties to the agreement are domiciled in different countries.
Advantages of Leasing • To the Lessee • Financing of capital goods • Additional Source of Finance • Less Costly • Ownership Preserved • Avoids Conditionality • Flexibility in Structuring rentals • Simplicity • Tax Benefits • Obsolesce risk is Averted • To the Lessor • Full Security • Tax Benefit • High Profitability • Trading on Equity • High Growth Potential
Limitation of Leasing • Restriction on use of the equipment • Limitations of Finance lease • Loss of residual value • Consequences of default • Understatement of Lessee’s Asset • Double sales tax
Meaning – Hire Purchase Hire purchase is a type of installment credit under which the hire purchaser, called the hirer, agrees to take the goods on hire at a stated rental, which is inclusive of the repayment of principal as well as interest, with an option to purchase. Under this transaction, the hire purchaser acquires the property (goods) immediately on signing the hire purchase agreement but the ownership or title of the same is transferred only when the last installment is paid.
FEATURES • Hire Purchase is an agreement to hire an asset over a predefined period with an option to purchase as the end of the agreement. • After all the payments have been made, the business customer becomes the owner of the equipment. • Under hire purchase system, the buyer takes possession of goods immediately & agrees to pay the total hire purchase price in installments • In case the buyer makes any default in payments of any installments the seller has right to repose the goods
When Is Leasing a Good Option? Leasing is a good option for businesses that need equipment for short periods of time. For instance, you may require a special machine for a project. After the project, you will have no need for the machine. In such cases, it would be more cost effective to lease the machine for the duration of the project instead of purchasing it. Increasingly, many small businesses are beginning to lease computers, photocopiers and fax machines. Not only does it help to reduce the upfront cash needed to purchase these items, but it also shifts the responsibility and cost of maintenance and servicing to the supplier
When is Hire Purchase a Good Option Hire purchase is a better option when you need to use the equipment or asset frequently e.g. delivery vans. Hire purchase allows you to eventually own the equipment as opposed to purely renting the equipment. In leasing, you can only rent the item if it is available. If your business depends on an equipment or asset, you cannot afford to lease
