Section
1 –Organization report
1.1 Background of ULC
United Leasing Company (ULC) Limited is the
second oldest leasing company in Bangladesh . It started its
operation back in 1989 as a joint venture with reputed foreign and local sponsors.
Incorporated as a public limited company
under the Companies Act 1913, ULC was also granted license under the Financial
Institutions Act, 1993. The shares of the company are quoted on the Dhaka Stock
Exchange since 1994.
The Company’s customers include most of the
top corporate groups in the country including some of the multinationals.
However, the Company’s major and most profitable business segments are leases
to the small and medium enterprises.
The Company enjoys a sound reputation for excellent
customer service. As an associate of a long established foreign company, it is
recognized as a reliable financial partner among the business community. Its
access to multilateral institutions like ADB and The World Bank permits it to
arrange funds at competitive rates and get their assistance in areas such as
staff training and information technology.
1.2 Corporate Objective
The main objectives of the company are to
assist the development of productive private sector industries particularly in
their balancing and modernizing programs. The company mainly extends lease
financing for machinery, equipment to the industries & vehicles for
commercial purpose. In addition it also provides project finance for expansion
of business.
The primary activity of the company is to
provide leases to different commercial organizations. It provides lease for all
sorts of manufacturing equipment and for vehicles.
1.3 Capital, Sponsors and Share Structure
Authorized
Capital of ULC is Tk. 1000 million and issued, subscribed and paid up capital
is Tk. 140 million. The sponsors and their current shareholding in the company
are as follows:
Type
|
Name
|
Share %
|
Foreign
|
Lawrie
Group Plc of the
|
20%
|
Local
|
United
Insurance Company Ltd
|
9.69%
|
National
Brokers Ltd
|
1.60%
|
|
Duncan
Brothers (BD) Ltd.
|
1.00%
|
|
Octavious
Steel & Company of Bangladesh Ltd.
|
0.71%
|
|
Institutional
|
_
|
44%
|
General
Public
|
_
|
23%
|
Table 01: Type, Name and Share (%) of Sponsors.
Illustration 01: Shareholding Structure of ULC.
1.4 Board of Directors
Its Board of
Directors consisting of nine members who are the nominees of the Institutional
Shareholders supervises the Company’s management. The Board appoints the Chairman from among
the Directors.
Name
|
Nominee of
|
|
Chairman
|
Mr. Kafiluddin
Mahmood
|
|
Directors
|
Mr. P. A.
Leggatt. MBE
|
Lawrie Group
Plc of the
|
Mr. A.S.M.O.
Subhan
|
Lawrie Group
Plc of the
|
|
Mr. O.R.A.R.
Nizam
|
National
Brokers Limited
|
|
Mr. A. Rouf
|
Amo Tea Co.
Ltd
|
|
Mr. S. Aziz
Ahmad
|
Surma Valley
Tea Co. Ltd
|
|
Mr. M. A.
Wahed
|
The Chandpore
Tea Co. Ltd
|
|
Mr. M.
Moyeedul Islam
|
United
Insurance Company Ltd
|
|
Mr. M. M. Alam
(MD)
|
The Allynugger
Tea Co. Ltd
|
|
Comp. Sec.
|
M. Ataul Hoque
|
Table 02: Board
of Directors. (ULC web site)
The Company
policy is to attract, motivate and retain top quality financial service
professionals. At present ULC’s staff strength is 60. There are three branches
in Chittagong ,
Gazipur and Jessore. The Managing
Director with the power and authority vested in him by the Board of Directors
manages the overall operation of the Company. He has a MBA and CA degree with
more than 30 years of experience in Canada and Bangladesh with
MNCs.
An Executive
Committee of the Board of Directors comprising of three Directors nominated by
the Board and the Managing Director approve lease proposals, periodical
accounts and other administrative matters.
1.4.1 Executive Committee
The
Board of Directors comprising the Managing Director and three other directors
nominated by the Board appoints the Executive Committee. The Committee is
authorized to approve all financing proposals without any limit subject to the
exposure limit specified in the policy statement. It also reviews periodical
accounts and other administrative matters.
The
Board has given authority to the Managing Director for approval of lease
proposals up to an amount of Taka 1.0 million in the case of new lessees and up
to Taka 2.5 million in case of existing lessees.
1.5 Organizational
Structure
Here,
organizational structure of United Leasing Company Limited has been
illustrated.
Illustration 02: Organizational Structure of
ULC.
1.5.1 Management
Name
and designation of management personnel are given below:
Name
|
Designation
|
Syed Ehsan
Quadir
|
Managing
Director
|
M. A. Azim
|
Deputy
Managing Director
|
M. Ataul Hoque
|
General
Manager
|
Md.
Shahabuddin
|
Deputy General
Manager
|
Avijit
Bhattacharjee
|
Head of
Accounts
|
Mohiuddin
Rasti Morshed
|
Head of
Marketing
|
Shahidul Islam
Majumder
|
Head of IT
|
Eva Rahman
|
Head of
Operations and Human Resources
|
Ashfaqul Haq Chowdhury
|
Head of
Marketing Services
|
Jamal Mahmud
Choudhury
|
Head of
Monitoring
|
Sabrina Mehnaz
|
Head of
Treasury
|
Md. Russel
Shahriar
|
Head of Credit
|
Table 03: Management
of ULC. (ULC web site)
2.1 Lease Portfolio and Sector wise Exposure
ULC provides
lease finance to the following sectors:
- Textiles
- Transport
- Apparels and accessories
- Other services
- Construction and engineering
- Financial intermediations
- Food and Beverage
- Paper and printing
- Telecommunications
- Agro based industries
- Chemicals
- Pharmaceuticals
- Other manufacturing industries
- Hospitals
- IT firms
Now, Sector wise Exposure (2004) has been illustrated below:
Illustration 03: Sector wise
Exposure (2004) of ULC.
(Annual Report-
2004)
2.2 Performance of ULC at a Glance
Here, United Leasing Company’s
performance from year 2000 to 2004 has been illustrated.
Illustration 04: Net Profit. (Appendix-01)
Illustration 05: Operating Revenue (restated).
(Appendix-02)
Illustration 06: Financial Assets (restated).
(Appendix-03)
Illustration 07: Earning Per Share.
(Appendix-04)
Illustration 08: Contracts. (Appendix-05)
(Annual Report-
2004)
2.3 SWOT Analyses of ULC
Strengths:
H
It was among the first in this industry and
therefore enjoys first mover advantages.
H
At the moment they are the market leader as they are
paying 32% Dividend and giving 2:1 Bonus Share to its shareholders this year,
which is more than any other leasing company in the country.
H
ULC has very high skilled, energetic, hard working
and motivated human resources.
H
ULC believes and practices participative
management.
H
ULC is engaged in product diversification, this
year they have introduced a new product syndicate financing and they are also
planning to introduce house loan in near future.
H
ULC has a very strong client base among the
leasing companies; most of which are the giant local and multinational
organization such as, British American Tobacco Bangladesh , HSBC, Square, Navana,
Transcom etc.
H
ULC do not comply undue political influence.
H
With its diversified business, ULC is better
equipped to compete in an ever changing and challenging business environment.
Weaknesses:
One
thing might be their lack of commitment to one big huge investment project
since they do not want to put all their eggs in one basket.
Another
major weakness of ULC is it has a very low pay structure for entry-level
employees, which can become a de-motivating factor.
Opportunities:
H
With growth in our corporate sector, the demand
for lease financing is also growing and consequently, the lease financing
industry.
H
Among visible non-functioning of development
financial institutions, ailing capital market and lack of interest of
commercial banks in term financing, the leasing industry remains the only
vibrant financial intermediaries for the medium term financing with less than 5
% non-performing loans.
H
By introducing new products such as house loan
ULC can expand its market.
Threats:
H Continuously
increasing deflation rate result into less disbursement of fund.
H There
is a clear trend of increasing competition in the lease market with the entry
of more leasing companies and leasing by commercial banks.
H Employees
of ULC are not satisfied with their low salary structure and other benefits as
a result they can switch to other competing financial organization.
Among the NBFIs
doing business in Bangladesh United Leasing Compnay is the second largest in
terms of Credit portfolio which totals around Tk. Six billion at present. But
the list of financial services ULC is offering is shorter compared to other
NBFIs.
3.0 Credit offers by ULC
Among many
products listed in its operational software, only the following six are traded
in practice.
- Lease finance:
i.
Sale & Leaseback
a.
Lease Local
b.
Lease Foreign
ii.
Hire Purchase
- Working capital finance:
i.
Short Term Loan
ii.
Factoring
iii.
Revolving Loan
- Long Term Finance:
i.
Term Loan
Unlike most of
the large NBFIs ULC does not have a merchant banking license, and cannot
perform underwriting, issue management & portfolio management services. The
deposit schemes offered do not have much variety.
Nonetheless,
over the last 17 years of operation it has emerged to be a major player in
non-bank lending market
A
detailed analysis of the products/ schemes offered by ULC is appended at the
end of the report (Appendix 2)
4.1 Credit Approval Process of ULC
Dealing Officer (i.e. the ME) prepares
the appraisal, along with the help of the AGM or the Manager, whoever is
responsible for bringing the client. Then it is passed onto the GM who reviews
the appraisal. The next person in the approval process is the MD himself. He
may either approve of it right away or recommend it to the Executive Committee.
Even if the MD gives his approval for a particular appraisal, it is reported to
the Executive Committee.
Illustration 10: Credit Approval Process.
5.1 Conclusion
Leasing industry of Bangladesh is
growing rapidly. The increasing demand of leasing is inviting more and more new
entrants into the industry. Even banks have started leasing at a lower rate
than the existing leasing firms. Moreover, with the liberalization of trade,
domestic firms are going to face high competition from foreign firms. To
survive the strong competitive wave the future is going to bring, firms should
collaborate with each other to increase their market share and hence tap the
whole domestic market.
Section 2 - Internship Project
1.0 Introduction
The main focus
of this internship paper was to study certain key features e.g. Implicit Rate,
IRR and Terms of different products, offered by United Leasing Company Limited.
The List includes Bill Discounting – Revolving, Hire Purchase – Foreign, Hire
Purchase - Sale & Hire Back, Lease – Foreign, Lease – Local, Leasing-Sale
& Lease Back, Short Term Finance and Term Loan.
The key
statistics of portfolio were analyzed for interrelationship.
Apart from these
key aggregate stats the composition of ULC’s outstanding portfolio on the basis
of finance types and finance tenure was also studied.
A specific
discrepancy of the portfolio -regarding choice of finance scheme to offer- was pointed out in the later part of
analysis.
All the
observations and findings were explained from both empirical knowledge base and
database analysis.
2.0 Executive summery
ULC’s portfolio
mainly comprises of two different types of product, namely Sale & Lease
Back & Hire Purchase. Lease & Hire Purchase does not make any practical
difference for the borrower. For a given amount of finance with same tenure and
interest rate, the rent / installment from both will be identical, the entire
cash flow will be the same and so will be the IRR. But Return on Equity
originates from accounting and taxation practices. ROE varies across terms and
asset type. In general it is such that –‘For shorter term return out of Hire Purchase is higher and in longer term
return from Lease is higher’.
While studying the relationship between Interest Rate and
Terms, it was observed that -Interest rates for longer term finance schemes are
lower than shorter term products. E.g. rate for Bill Discounting and Short Term
Finance is higher than Term Loan and Lease. But this observation had an
exception. Compared to Hire Purchase Interest Rate for Lease is higher.
Although Hire Purchase term is usually shorter than Lease. This phenomenon can
be explained by a tenure matching of short term loans to short term funds which
are expensive and about Hire Purchase a part of the tax benefit is passed on to
borrower in terms of lower interest rate.
The study of interest rate in
relation to finance amount gave evidence that for smaller credits interest rat
is charged higher and for larger credit the rate is lower. This is partly
because of stronger negotiation power of large borrowers and SMEs’
inaccessibility to finance on the other end. Indifference to slightly higher
rents for smaller finance is also responsible.
ULC has a particular product bias toward Sale & lease back. This bias is justified
by one observation where we would see that in most cases the lease term was
appropriate for choosing S&LB in stead of Hire Purchase. Nonetheless, in
many other cases Hire Purchase was ignored quite unjustifiably.
3.0 Scope &
objectives of study:
- To find out the difference in return parameters i.e. Implicit Rate (herein after referred as IR), IRR, Spread, NPV across different products/schemes.
- To find out the difference in Terms/tenure across different products/schemes.
- To find out the relationship between Return and Terms across different products/schemes.
- To find out the trend of Implicit Rates for the period January, 2000- April, 2006 and identify seasonality if present.
- To find out the interest rate sensitivity of clients to be depicted by a relation between Implicit Rate and Loan/Lease amount
3.1 Products/schemes:
The schemes
listed in the following were included in the data range for analysis
1.
BILL DISCOUNTING - REVOLVING
2.
HIRE PURCHASE - FOREIGN
3.
HIRE PURCHASE - SALE & HIRE BACK
4.
LEASE - FOREIGN
5.
LEASE - LOCAL
6.
LEASING-SALE & LEASE BACK
7.
SHORT TERM FINANCE
8.
TERM LOAN
3.2 Variables &
PARAMETERS:
The variables
and aggregate statistics listed below, were taken into account for relation and
regression analyses across the schemes listed above.
1.
Count of Finance
2.
Average of IR
3.
Max of IR
4.
Min of IR
5.
Average of IRR
6.
Max of IRR
7.
Min of IRR
8.
Average of Spread
9.
Max of Spread
10. Min
of Spread
11. Average
of Term
12. Max
of Term
13. Min
of Term
3.3 Methodology &
ANALYSIS:
- Charts and tables for Products and the given parameters like Average Implicit Rate, Avg. IRR, Avg. Term etc among different products are used to illustrate useful observations.
- Time series analysis for interest rates throughout the last 24 months.
- Multidimensional Correlation analysis among Term,
Principal, IR, IRR, Spread is done to find out inter-relations between
every two variables.
3.4 Limitations:
- Finance with structured payments was excluded from database for analysis. Unequal monthly/quarterly repayments are rare. The operational software VIEW 21 used by ULC has certain problems in reporting key figures like IRR, IR when the rents/repayments are broken down into cascaded unequal installments.
- Hypothesis testing was not done to prove relationships and observations due to lack of explanatory variable. Rather simple correlation analysis, rank and cross tabulations are used to support key observations.
- Costs and Tenure of sources of funds for ULC was relevant in certain analyses. But data regarding this was not available.
4.0 Product definitions
Leasing:
Sale & Leaseback - For an asset
already bought and in use , the lessor/borrower sells the asset to ULC &
ULC leases it back to the lessor , ownership & depreciation benefit is
retained by ULC.
Sale & Hire Back - Although much
less frequent than sale-leaseback, ULC still offers the product with no
practical difference from sale-leaseback. In general the equity participation
from the part of borrower in Hire Purchase is higher.
Hire Purchase –Local The asset is
bought from local source
Hire Purchase – Foreign ULC opens LC or
stands as guarantor to import the asset from a foreign source.
Working
capital finance:
Short Term Loan -After disbursement by
ULC, the borrower pays back the principal plus the interest in a single
tranche, after a short interval, usually 90 days.
Factoring ULC goes through the
borrowers ledger, selects some of the
renowned companies to which the borrower supplies and approves the relevant a/c
receivables for immediate discounting, the borrower needs to get the bill
endorsed for payment in favor of ULC from its customers.
Revolving Loan ( a line of credit
offered by ULC, disbursement may be made in several tranches, the total
outstanding will never exceed the approved limit, terms and conditions are set
each time before disbursement)
Long
Term Finance:
Term Loan - Long term finance repaid by
borrower; does not result in any ownership of asset for ULC at the beginning
4.1 The difference between lease and Hire Purchase
Lease & Hire
Purchase does not make ant practical difference in the cash stream of a
particular finance.
For a given
amount of finance with same tenure and interest rate, the rent / installment
from both will be identical, the entire cash flow will be the same and so will
be the IRR.
But Return on
Equity from these two differs mainly due to terms (also on the basis of asset
type). This difference in ROE across loan tenure originates from accounting and
taxation practices.
The accounting
standard in use requires that for Lease ‘Rent’ is reported as revenue and
‘Depreciation’ on leased asset as expense. The resultant difference will be
‘Income’. On Income ULC will have to pay Tax. So how much income, essentially
how much expense is shown in different years is important. The depreciation
Schedule allows different percentage of depreciation (from Initial rate to
Normal Rate) depending on the assets age.
The Depreciation
Schedule is such that it allows unequal tax benefit in different years. Cash
outflow for Tax varies accordingly.
In Hire Purchase
only interest income is reported as income, not depreciation. So tax benefit
and cash outflow relating to Tax is evenly distributed.
The integrated
cash inflow –outflow from Finance and for tax is complicated and influences the
complete return out of a Lease and return of a Hire Purchase. So it becomes a
complex decision – when to offer which. A detailed table in this regard is
appended in appendix 1.
But in general
it is such that –‘For shorter term return out of Hire Purchase is higher and in longer term
return from Lease is higher’.
5.0 Relationships/ observations/Analysis
5.1
Implacit Rate Across Products and TERMS (Bearing of Type and
Terms on Interest Rate)
The average
interest rate charged for Rents varies maximum with a range of two percent across the common schemes. The
following table depicts the observation while the table below gives figures.
Average of IR
|
|
Type
|
Avg. IR
|
BILL DISCOUNTING - REVOLVING
|
16.38
|
HIRE PURCHASE - FOREIGN
|
14.65
|
HIRE PURCHASE - SALE & HIRE BACK
|
14.65
|
LEASE - FOREIGN
|
15.53
|
LEASE - LOCAL
|
15.18
|
LEASING-SALE & LEASE BACK
|
15.72
|
SHORT TERM FINANCE
|
15.61
|
TERM LOAN
|
15.20
|
Grand Total
|
15.61
|
Findings
& Explanations
- Interest rates for longer term finance schemes are lower than shorter term product. E.g. rate for Bill Discounting and Short Term Finance is higher than Term Loan and Lease.
- Compared to Hire Purchase Interest Rate for Lease is higher. Although Hire Purchase term is usually shorter than Lease.
The reasons for
a higher interest rate in the short term are;:-
- Empirically it has been seen that short term finances are riskier than long term finances. The bad debt percentages for short term products are higher than long tenure finance. In fact, Bill Discounting is abolished (modified and then revived as Factoring) while Short Term Finance is for the time being postponed.
- Tenure Matching principal of assets and liabilities prescribes that since ULC pays higher interest rate for deposits and loans taken in the short run it should also charge a higher interest rate in the short run.
- Although Hire Purchase is provided for shorter terms, the product is different in certain aspects. Firstly, for taxation purposes the accounting for Hire Purchase is different than lease and because of a different structure in the financed asset depreciation schedule, Hire Purchase return i.e. ROE is higher in the short sun. (See Appendix 1). So part of this extra return advantage is passed on to the borrower in terms of lower interest rate.
- Although Short Term Finances are usually perceived as more risky, in case of Hire Purchase the risk is minimized by higher equity participation from the part of borrower. The financed asset’s ownership in Hire Purchase will be in ULC’s name, while the borrower might have paid as high as 20% of the asset’s purchase price.
5.2 Interest rate
sensitivity of borrowers (Relationship between Interest Rate and Loan Size)
A common
observation of ULC’s day-to-day loan/lease approvals will testify that the higher the finance amount the lower
the interest rate. Although from risk perspective the opposite should have been
true.
In the following
there is a summery correlation analysis among Principal Amount, Implicit Rate
and IRR.
Principal
|
IR
|
IRR
|
|
Principal
|
1
|
||
IR
|
-0.165177727
|
1
|
|
IRR
|
-0.207390541
|
0.911722
|
1
|
From the
correlation coefficient we can say that there is a not so strong negative
relationship of IR and IRR with Principal.
The ranked tables
below will give a clearer message
Highest
10 Finance Amount
Type
|
Principal
|
IR
|
IRR
|
LEASING-SALE & LEASE BACK
|
110,000,000
|
12.00
|
14.03
|
LEASING-SALE & LEASE BACK
|
100,000,000
|
14.00
|
14.17
|
HIRE PURCHASE - SALE & HIRE BACK
|
100,000,000
|
14.00
|
14.00
|
LEASING-SALE & LEASE BACK
|
98,456,451
|
14.00
|
14.04
|
LEASING-SALE & LEASE BACK
|
76,000,000
|
14.50
|
15.03
|
LEASING-SALE & LEASE BACK
|
73,000,000
|
14.00
|
14.56
|
LEASE - FOREIGN
|
70,256,491
|
13.50
|
15.80
|
HIRE PURCHASE - SALE & HIRE BACK
|
70,000,000
|
14.00
|
14.00
|
LEASING-SALE & LEASE BACK
|
60,000,000
|
15.00
|
15.10
|
LEASING-SALE & LEASE BACK
|
55,000,000
|
12.75
|
14.15
|
Averages
|
81,271,294.2
|
13.78
|
14.49
|
Lowest
10 finance amount
Type
|
Principal
|
IR
|
IRR
|
LEASE - FOREIGN
|
55,315
|
18.96
|
20.96
|
LEASING-SALE & LEASE BACK
|
93,000
|
15.00
|
17.00
|
LEASING-SALE & LEASE BACK
|
100,000
|
18.00
|
20.44
|
BILL DISCOUNTING - REVOLVING
|
100,370
|
16.65
|
18.65
|
LEASING-SALE & LEASE BACK
|
100,500
|
16.00
|
17.23
|
LEASING-SALE & LEASE BACK
|
113,850
|
14.00
|
14.79
|
LEASING-SALE & LEASE BACK
|
115,000
|
17.50
|
19.50
|
LEASING-SALE & LEASE BACK
|
150,000
|
15.00
|
16.47
|
TERM LOAN
|
154,000
|
14.00
|
14.00
|
BILL DISCOUNTING - REVOLVING
|
155,520
|
16.67
|
18.67
|
Averages
|
113,755.5
|
16.18
|
17.77
|
Finding & Explanation
- The tables above give evidence that the interest rate charged for higher finance amount averages lower than the interest rate charged for lower finance amount.
- The same also implies that borrowers with larger finance need are more sensitive to the interest rate.
The phenomena
witnessed can be explained by the following observations,:-
- Borrowers / Client with need of larger finance amount are larger in size, whereas smaller size credit is in demand mainly from the part of SMEs. Because of better negotiation power and greater eligibility/ accessibility to finance, large organizations can win favorable terms. SMEs due to lack of accessibility have to give in to the terms offered by lending institution.
- In case of SMEs not the Implicit Rate, only the ‘Rent’ is disclosed. Often they even lack expertise to gauge the Interest Rate. Lack of accessibility, comparison and expertise often leave them without any idea about the Implicit Rate. Moreover, loan/lease advance are utilized to leverage the return out of small finances.
- A higher interest with lower finance amount does not increase the monthly/quarterly annuity significantly. The increase in the annuity may go unnoticed, or client might be indifferent to this ‘small monthly difference’.
5.3 Product Bias (Frequency Distribution
of Products)
Among the
products/finance schemes that are in the offer list of ULC Sale & Lease Back is
much too common. Apart from different types of lease, Term Loan stands next,
then Hire Purchase . This is illustrated in the following pie diagram and
frequency distribution.
Type
|
Count
|
BILL DISCOUNTING – REVOLVING
|
51
|
HIRE PURCHASE – FOREIGN
|
5
|
HIRE PURCHASE - SALE & HIRE BACK
|
52
|
LEASE – FOREIGN
|
148
|
LEASE – LOCAL
|
108
|
LEASING-SALE & LEASE BACK
|
1070
|
SHORT TERM FINANCE
|
21
|
TERM LOAN
|
109
|
Grand Total
|
1564
|
A reason for
such bias in favor of Sale & Lease back and Lease as a whole is that most
of the finances are for Four (4) year (freq. 517). At this length of the term
return from Lease is higher than Hire Purchase. (see Appendix 1)
Count
of Term
|
|
Term (years)
|
Count
|
0
|
68
|
1
|
45
|
2
|
159
|
3
|
491
|
4
|
517
|
5
|
276
|
6
|
8
|
Grand
Total
|
1564
|
But evenly
noticeable is that a good many number of finances were provided for three or
less years. In these cases Hire Purchase could have been profitable. The
following cross tabulation of Terms across types shows that contrary to the
thumbs rule – ‘For shorter term Hire Purchase return is higher’, (see Appendix
1) Lease is still the majority in 1 to 3 years range.
Type
|
||||||
Term
|
HIRE PURCHASE - FOREIGN
|
HIRE PURCHASE - SALE & HIRE BACK
|
LEASE – FOREIGN
|
LEASE - LOCAL
|
LEASING-SALE & LEASE BACK
|
Grand Total
|
1
|
8
|
9
|
1
|
20
|
38
|
|
2
|
5
|
29
|
20
|
7
|
96
|
157
|
3
|
14
|
49
|
22
|
380
|
465
|
|
Grand Total
|
5
|
51
|
78
|
30
|
496
|
660
|
Findings & explanation
- The frequency of finances is adversely in favor of Sale & Lease Back. Marketing force of ULC is biased toward Sale & Lease Back.
- The frequency of finances is adversely in favor of 3 to 4 years range.
- If tenure is shorter than 3 years Hire Purchase should have been preferable, although Sale & Lease Back is frequent even in shorter terms (less than 3 years).
- In earlier years, in many instances Lease was preferred to Hire Purchase, although the later is supposed to be profitable.
The reason
behind this bias for sale & lease Back are,-
- Majority finances belonged to 4+ year category, so Lease was indeed the right choice.
- Prior to development of a return calculation model used by ULC, Marketing persons were not fully aware of this decision making criterion.
6.0 Conclusion
United Leasing
Company has entered a self fueling cycle over the long period of operation. The
clientele is growing very slowly, although larger credit appetite of existing
clients has sustained its growth so far. To further enhance and diversify
clientele ULC will have to add diversity to its scheme line. Revere worthy competitors are stretching
their menu. Initially this enhancement of offer may not fetch a good return,
but eventually this diversity will be needed to sustain the primary items of
the offer. A particular product bias should be avoided.
Concentration of
portfolio in a particular range of time scale 3-4 years should also be avoided.
Better fund management and credit risk analysis should be developed, which are
not yet at a standard level for ULC. Better matching of fund and scattering the
schemes across the time scale would make the portfolio more stable.
Over the years
ULC has developed its pool of human resources both from business and non
business academic background. If employees with non-business background are
recruited anyway, thorough training should be arranged, so that the entire
workforce has comprehensive knowledge of financial aspects. Then they can make
decisions in the best interest of the organization and maximize its wealth.
Appendix 1
Tax
Depreciation Rate*
|
Mode
|
|||
Asset class
|
Initial Rate
|
Normal Rate
|
Advance
|
Arrear
|
General
Machinery
|
20.00%
|
25.00%
|
Up
to 36 Months HP is better and beyond that Lease is better
|
Up
to 24 Months HP is better and beyond that Lease is better
|
Moulds/Moulding
Machine
|
30.00%
|
0.00%
|
Up
to 48 Months HP is better and beyond that Lease is better
|
Up
to 36 Months HP is better and beyond that Lease is better
|
Vehicles
|
20.00%
|
0.00%
|
Up
to 24 Months HP is better and beyond that Lease is better
|
Up
to 24 Months HP is better and beyond that Lease is better
|
Furniture
& Fixure
|
10.00%
|
0.00%
|
Up
to 72 Months HP is better and beyond that Lease is better
|
Up
to 72 Months HP is better and beyond that Lease is better
|
* For Lease only
|
Appendix 2
se
financing is the main product of United Leasing Company. The company started
ith this product and with time they have diversified their product range.
ULC has also introduced Hire Purchase
scheme in their product portfolio. This will give the clients another options
to choose. This scheme is allowed only for institutional clients. ULC does not
offer this to individuals.
Lease or Hire Purchase is asset
Financing whereby the lessor (financier) gives the right to use an asset to the
lessee (user) against regular payments termed as rent. (ULC Web site)
Mainly ULC does
asset based financing. The major modes of finance offered by ULC are:
When ULC purchases the equipment/vehicle from the client and gives it on
lease to the client. In this case the client will be regarded as the supplier.
Local Purchase:
When ULC purchases the equipment/vehicle on behalf of the client, from a
local supplier.
Foreign purchase:
When ULC purchases the equipment/vehicle on behalf of the client, from a
foreign supplier. It is worthwhile to note at this point, that in the case of
foreign purchase, the documentation department prepares the lease agreement
only and the rest of the documents are prepared by the commercial section under
the Finance department. But for local purchase, the documentation department
has plenty of work.
Leasing is
fairly a new concept in Bangladesh
and it provides finance for acquisition of asset as an additional source. The
procedures adopted in leasing are fast, flexible with minimum documentation.
What leasing offers is not the money alone, but value added to it in the form
of assistance in acquiring the asset itself and other services. In a situation
where the entrepreneur intends to acquire equipment urgently for balancing and
modernizing without straining the resource otherwise available, leasing
provides an ideal opportunity.
1. Provides up to 100% of the
cost of the equipment:
Often
no deposits or advance payments are required. For a Lease or Hire Purchase of
very low cost equipment, for a lessee which is a borderline credit risk or when
there is a tax benefit arising from the lessee making a substantial initial
rental. Clearly, any leasing facility, which requires rentals to be paid in
advance, is not 100% financing. Nevertheless, leasing often does provide a
higher percentage of financing than an equivalent installment credit facility.
2. Does not tie up valuable
working capital or credit lines:
A
leasing facility preserves liquidity for other more appropriate uses. There
may, however, be other sources of finance, which a lessee could also tap.
3. Offers cash flow benefits:
Rentals
fixed at the inception of a Lease or Hire Purchase assist expense budgeting and
cash flow forecasting. The lease term is normally related to the useful life of
the equipment.
4. Provides certainty:
A
Lease or Hire Purchase is non-cancelable, unlike an overdraft, which is
repayable on demand and may be reduced during a credit squeeze.
5. A sound hedge against
inflation:
Equipment
can be acquired at current prices and rentals met out of future earnings.
6. May be off balance sheet:
Leasing
is not borrowing and in many countries there is no accounting requirement to
show leased equipment and the corresponding liability to make future rental
payments on the balance sheet of the lessee. This treatment also has the effect
of showing an artificially low gearing.
7. May avoid loan covenants or
capital investment restraints:
While
leasing is not legally borrowing and so may circumvent restrictive loan
covenants and capital budgeting, constraint lenders and head office financial
controllers are now more aware of the leasing loophole. This feature should not
encourage a lessee to overspend.
8. Avoids dilution of share
ownership:
Leasing
may be the only way of acquiring the long-term use of major assets required by
a business without increasing the capital base. Only a lessor may be willing to
seek part of his reward through an arrangement to share in the residual value
of leased assets.
9. Straightforward:
Leasing and hire
purchase minimizes administrative costs and simplifies tax and accounting
procedures. Asset depreciation normally becomes the lessor’s responsibility.
Documentation is simplified.
10. Tax efficient:
Lease rentals are generally
fully tax deductible as operating expenses. The tax benefits arising on the
acquisition of equipment may also be maximized through a leasing arrangement by
reflecting in the rentals the value of an investment incentive, which because
of shortage of tax capacity or other reason, is not fully available to the
lessee.
Lease
and Hire Purchase Items:
Industrial
Machinery or Equipment
Office
Equipment
Medical
Equipment
Transport/Vehicle
Tenure:
H
Lease: 3 to 5 years.
H
Hire Purchase: 1 to 2 years.
Maximum
Limit Depends on:
H
Requirement and Equity Participation.
H
Merit of the Proposal.
Modes
of Repayment:
H
Equal monthly installment.
H
Payment structured to clients cash flow.
Insurance
Coverage:
H Leased
assets are to be duly covering all possible risk and premiums are to be paid by
clients.
(ULC Web
site)
Illustration 9: Finance Procedure Lease/Hire
Purchase
Besides
Financing, Factoring services includes:
Sales Ledger Maintenance
Collection of
Receivables
Reporting
H Only Seven steps:
1. Buyer
(customer) places order on seller (ULC client).
2. Seller
approaches ULC for approving of factoring facility.
3. ULC
approves the facility.
4. Seller
delivers goods/services to buyer.
5. Seller
submit/assign invoices to ULC.
6. ULC
disburse prepayment to seller.
7. Buyer
makes payments against invoices directly to ULC.
ULC reimburses
the balance amount to seller after prepayment, discount and service charges.
H Benefits:
Reduced
Investment in Receivables: Sellers’ receive payment right after delivery
and therefore sellers’ fund no longer tied up in receivables.
Expansion
of Business: As cash flows improve, sellers’ can increase business by
delivering higher volume to existing buyers and also expand business with new
ones.
Sales
Ledger Administration: ULC will administer clients’ sales ledger for the
assigned customers.
Collection
of Receivables: ULC will monitor and collect the receivables on due time
from customers.
High
Quality Reports: ULC will provide detailed reports on the performance of
client’s customers that will help the client direct client’s sales efforts.
Scope
for Additional Financing: when seller (client) utilizes factoring facility
properly, it will help ULC support the client with other services.
H Costs:
Discount:
ULC charge competitive discount for prepayment against invoices.
Service
Charge: A nominal service charge is obtained for collecting receivables
from buyers and providing reports.
It is a
short-term finance product that allows credit facility to clients against
selected receivables for supply of goods and services to meet the short-term
need. The credit facility is extended against Taka receivables only.
Any
company/institutions/firm can avail this facility. And the customer that is the
companies or firms for whom the client supplies or performs services in the
ordinary course of client’s business has to be approved by ULC.
The minimum loan
limit will be Taka 1 million and maximum will be Taka 10 million. And a certain
percent of each bills/invoice will be offered in cash to the client. And this
percent will also be selected by ULC.
Same securities
that are provided for lease financing can also be used when clients apply for
bill discounting.
This facility
ranges from 30 to 120 days. It provides liquidity to the client and they are
allowed to avail this facility 2 times per month.
The mechanism of
bill discounting can be summarized as follows:
After selling the goods on credit,
the client (supplier/dealer) invites his customer/debtor with the notification
that all monies due on the invoice are assigned to and be paid to ULC, by
printing an assignment clause on the invoice.
After entering
into the Bill Discounting Agreement with ULC, the client sells the
invoice to ULC.
ULC makes
prepayment (advances) to client up to a specific percentage of the invoice
value in accordance with the approval.
ULC assumes the collection
function (obtaining a post-dated cheque) and sends statements and reminders to
the customer (debtor).
ULC gets the
payment and at periodic intervals the details of unpaid invoices and other
control reports are submitted by ULC to the client.
After collecting
the debt from the debtor/customer, ULC pays the client the remaining percentage
of the invoice value, after deducting the service charge, and the discounting
charge.
H Benefits:
Getting Instant Cash:
As soon as the client sale the credit they get the instant cash on that
credit sales directly from ULC. Thus, the client’s cash flow is accelerated,
purchasing power increases and eventually, their production and business moves
up and credit rating improves.
Relieved of debt Collection:
As ULC undertakes/assumes, the responsibility of debt collection
(obtaining post-dated checks) on all the invoices factored and the client is
relieved of the problems of debt collection.
Sales ledgers is no more your headache:
ULC’s operation is fully computerized and they keep the client informed
through monthly sales analysis, overdue invoice analysis and debtor payments
report. Thus the client is relieved entirely of the cares and responsibility of
maintaining a sales ledger and credit control.
Besides
the client gets the benefit of credit information systems available to ULC and
a wealth of experience in the vital business of collecting cash.
H
Cost:
Interest:
Competitive rate
Service
charge: 0.25% of the total disbursed amount, minimum Tk. 5,000 (plus 15%
VAT) and maximum Tk. 10,000 (plus 15% VAT) to cover administrative expenses,
legal and documentation costs.
Syndicate finance is new concept in our leasing industry. This year
United Leasing Co. has also introduced syndicate finance for a leading
industry.
Syndicate financing is now a very useful and prospective product for
non-banking financial institutes. Large size of financial intermediation is
essential for the industrial development of our country. But it is impossible
for many NBFI’s for the government regulations. As per Bangladesh Bank rule, a
financial institute can finance at best 30% of their paid up capital. But a
project might require more than their said limit. Here the syndicate finance is
fruitful.
In the syndicate financing process- there is a leader lessor who makes
all types of negotiations, transactions, documentations, and other formalities.
The lessee will contact with only the leader lessor. In exchange of those the
leader lessor takes the commission, negotiation charge from the whole financial
income out of their portion. The risk of the project will be distributed
equally among all the members of the syndicate.
Syndicate finance has some advantages over lease and other financial
intermediations. Now days it is considered as one of the most risk free project
for the financial institutions. If the
huge amount distributed to many lessees, there has some possibilities for to
default. The organization has to give individual efforts for the individual
clients. But in syndicate financing there is the only particular client to
monitor, and precisely the client should be financially sound.
The rate
used for calculation of monthly annuity repayments- commonly called ‘rental’ or
‘Rent’
The
Internal Rate of Return after estimating the impact of Lease Advance (Initial
deduction from the finance amount), and Purchase option (End of term residual
purchase price to be received from the borrower). Usually IRR is higher than IR The
difference between IR and IRR, utilized to increase actual return from finance
amount.
Repayment
Installments or Annuity
No comments:
Post a Comment