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Renate Kloeppinger-Todd Rural Finance Advisor The World Bank

The World Bank. Leasing as Credit Alternative Financing the Agricultural Value Chain Conference held in Mumbai, India, March 16-17, 2007. Renate Kloeppinger-Todd Rural Finance Advisor The World Bank. What is Leasing?.

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Renate Kloeppinger-Todd Rural Finance Advisor The World Bank

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  1. The World Bank Leasing as Credit AlternativeFinancing the Agricultural Value ChainConference held in Mumbai, India, March 16-17, 2007 Renate Kloeppinger-Todd Rural Finance Advisor The World Bank

  2. What is Leasing? • Contract between two parties: the party that owns an asset ( lessor) lets the other party (lessee) use the asset for a predetermined time in exchange of periodic payments • Separates ‘use’ of asset from ‘ownership’ of asset. • Finance Lease (The Credit Alternative) • Amortizes asset price - includes purchase option for a token amount at end of lease period • Lessee responsible for maintenance and all risks usually associated with ownership without actually owning the asset • Non-cancellable AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  3. Advantages: The Client Perspective • Asset serves as collateral, additional collateral not required • Lesser credit history may suffice • May require less down payment • May have better prices • Potential tax-benefits AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  4. Advantages: The Leasing Company Perspective • Lower transaction costs • Stronger security: ownership rights versus weaker collateral rights • Less incentives to default, less costs of repossession • Usually more flexible pricing • Lease rates not usually regulated (loan rates often are) • Less costs of regulatory compliance • Leasing companies often exempt from prudential regulations. AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  5. Economy Wide Benefits • Increase in capital investment • Particularly for the ‘Missing Middle’ • Capital market development • Leasing companies borrowing from insurance companies, pension funds • Increased competition in the financial market • Competition for banks on products and prices. AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  6. Firm Case 1: John Deere, Mexico • Fully-owned subsidiary of John Deere • US$ 74million lease portfolio in 2004 • 85% in farm equipment • Rural leases: examples • US$107,000 Harvester • US$ 21,000 Seeding Machine • US4 11,000 Cultivating Implements AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  7. Firm Case 2: DFCU Leasing,Uganda • Profitable, publicly listed company. • US$ 25.7 million lease portfolio in 2004 • 20% portfolio in rural areas; 10% portfolio and 16% leases in Agriculture • Rural Leases- Examples • US$ 70,000 Cotton-ginning equipment • US$34,000 bakery equipment • US$ 6,000 milling equipment AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  8. Firm Case 3: Uzselkhozmash Leasing, Uzbekistan • State-owned company • US$76.6 million lease portfolio, end-2005 • 100% rural leases • Primary client group: farm enterprises • Average lease size: US$13,700 AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  9. Firm Case 4: Network Leasing, Pakistan • Profitable, publicly listed private company. • US$ 11.6 million lease portfolio in 2004 • 21% portfolio & 43% leases in rural areas • Rural Leases- Examples • US$ 420 Buffaloes • US$ 2793 clinic lab-equipment • US$ 402 school furniture AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  10. Five Lessons specific to rural leasing • Leasing is a means to acquire productive assets • Rural enterprises of different sizes benefit, but providers may not be able to serve all markets • Non-farm enterprises account for a significant portion of rural leases • Rural leasing can be profitable but may require initial donor/government support • A rural-only leasing company may not be viable AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  11. India Market: A Shrinking Sector • Sector • 47% reduction in transactions in 2004 over 2003. • Leased Assets in 2004 less than 1/3rd of that in 2000. • Key Factors • Highly liquid banking sector, corporate cash-surplus • Upcoming uniform VAT regime could help. • Non-bank Financial Services Bill pending Parliament approval Source: World Leasing Yearbook 2006 AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  12. India: Key Issue – Tax Regime • Service Tax on Full Rental • Complex Sales Tax Regime • Particularly when lessor and lessee in different States • Inadequate Understanding by Tax Authorities • Differential treatment of depreciation for tax and accounting purposes AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

  13. Concluding Thoughts • Improving the Policy Environment? • Legal – Financial Leasing Law • Tax – Level Playing Field • Regulatory • Potential Initiatives? • Training for lessors and regulators • Public Awareness AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March 15 - 17, 2007

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