report on premier leasing
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Performance and leasing practice of premier leasingTRANSCRIPT
1 | P a g e
A report on
Lease Practice in Bangladesh
(Premier Leasing and Finance Limited)
Department of Finance
University of Dhaka
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A report on
Lease Practice in Bangladesh
(Premier Leasing and Finance Limited)
Course Title: Investment Banking and Lease Financing
Course Code: F-403
Prepared For
Farzana Lalarukh
Associate Professor
Department of Finance
University of Dhaka
Prepared By
Date of Submission: 23 September,2013
Sl. No. Name ID
1. Robin Kumar Saha 16-039
2. Deepangkar Saha 16-089
3. Farhanur Rahman Naim 16-135
4. Muhammad Shamim Hossain 16-151
5. MD. Anowarul Hoque 16-253
6. MD. Omar Faruk 16-265
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Executive Summary
The project on Lease practice in Bangladesh has been a very good experience. Leasing is
alternative way of financing and so every individual or organization take utmost care in their
investment and managerial decisions. An organization financing can be met very swiftly by way
of lease financing as there are more players in the industry.
This project is a sincere effort to study and analyze the lease practices of Premier Leasing and
Finance Ltd. The project focused on mainly accounting and legal aspects of leasing of the
organization. How they initiate lease, how they evaluate a lessee, what basin terms and
conditions basically are there, what they do in case of non-payment etc.
The report is a bridge between the institute and the organization. This made us to be involved in
a project that helped us to employ my theoretical knowledge about the myriad and fascinating
facets of finance. Moreover, in the process I could contribute substantially to the organization‟s
growth. The experience that we gathered has certainly provided the orientation, which we
believe will help us in shouldering any responsibility in future.
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Contents
1. Executive summary 03
2. Introduction 06
3. Lease practices in Bangladesh 07
4. Accounting Guidelines of leasing in Bangladesh 08
5. Taxation of Leases in Bangladesh 10
6. Company profile 12
7. Leasing overview Of Premier Leasing and Finance Limited 17
8. Accounting Treatment of Lease by PLFL 20
9. Legal actions taken by PLFL 22
10. Conclusion 23
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Introduction
Lease financing is the most important issue that determines the direction of financial behavior in
an organization, a financial level of effort, and the organization‟s level of persistence in the face
of obstacles of other types of financing. Now-a-days lease financing is the most emphasized
topic to any challenging institution or organization to develop their financial resources as well as
profit maximization or maximization of owner‟s equity. Lease financing is so central to
management because it explains why it is better for the organization together financially
solvency by lease financing. By lease financing an organization can reach its specific destination.
If an organization has effective lease financing efficiency it can survive & develop quickly than
others. At first an organization considers lease financing and other financing cooperatively with
one another than it takes decision to apply lease financing or other financing whichever is best.
If other financing is the best than the lease financing then it will be selected, not lease financing.
So from this comment it will be clear that lease financing must be selected it is not necessary. So
which is the best is considerable matter.
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Lease Practice in Bangladesh
Lease financing was first introduced in Bangladesh in the early 1980s. Industrial development
leasing company of Bangladesh ltd. (IDLC), the first leasing company of the country, was
established in 1986 under the regulatory framework of Bangladesh Bank. It was a joint venture
of the Industrial Promotion and Development Company of Bangladesh ltd. (IPDC), International
Finance Corporation, and Korea development leasing corporation. Another leasing firm, the
united leasing company ltd. started its operations in 1989. The number of leasing companies
grew quickly after 1994 and by the year 2000, rose to16. The leasing business became
competitive with the increase in the number of companies and wider distribution of their market
share. There are, however, six other companies conducting leasing business in the country,
although they do not use the word leasing in their names. in terms of money value, the leasing
business in Bangladesh increased from tk 41.44 million in 1988 to tk 3.16 billion in 2000.
Lease financing, as organized in Bangladesh, operates with the following objectives:
To assist the development and promotion of productive enterprises by providing
equipment lease financing and related services
To assist in balancing, modernization, replacement and expansion of existing enterprises;
To extend financial support to small and medium scale enterprises
To provide finance for various agriculture equipment
To activate the capital market by operating as managers to the issue, underwriters, or
portfolio managers.
The functions of a lease business include lease financing, short-term financing, house building
financing, and merchant banking and corporate financing. In this last group of functions, the
leasing business in Bangladesh moved away from regular leasing activities and is now involved
in stock-market related activities such as issue management, underwriting, trust management,
private placement, portfolio management, and mutual fund operation.
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Leasing companies, however, face some problems in conducting their business in the country.
The relatively slow growth of the demand side compared to the fast growth of the lease business
is one such problem. This leads many leasing companies to operate in partial capacity. The
culture of loan default that prevails in the country is also a deterrent. Leasing companies often
find it difficult to raise funds through short- or long-term borrowing from money and capital
markets. They are hard pressed to deal with the financial assets because of the present laws of the
country, which are also not fully enforceable.
Leasing business is gaining increased importance in the economy of Bangladesh with its gradual
transformation from an agrarian to industrial one. The government periodically revises the trade
and industrial policy to create a liberal business environment both for domestic and foreign
investment. Increased investment in the energy sector as well as in power, transport,
telecommunications, water and sanitation, and safe disposal of wastes is expected to bring
further opportunities for leasing industries.
At present there are several leasing companies operating their business.
Industrial Development Leasing Company of Bangladesh Ltd.(IDLC)
United Leasing Company
Uttara Finance & Investment company Ltd.
Phoenix Finance and investment Ltd
Bay leasing & Investment Ltd.
Premier Leasing and Finance Limited
GSP Finance company (BD) Ltd.
Prime Finance & Investment Ltd.
First Lease Finance and Investment Limited
Lankabangla Finance Limited
International Leasing & Finance Company Ltd.
Peoples Leasing and Fin. Services Ltd.
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Accounting Guidelines of leasing in Bangladesh
The issue of accounting for leases has had a bull‟s-eye on its back for decades. Lease accounting
is a form-driven standard. Minor changes to the provisions of a lease contract will result in an
accounting outcome that suits the parties to the transaction without affecting, in a significant
way, the underlying economics. Thus, lease accounting has been one of the most, if not the most,
gamed accounting pronouncements of all times.
The Institute of Chartered Accountants of Bangladesh (ICAB) recently adopted a revised
accounting standard no. BAS 17: (Leases) on 18 November 2003. The new standard is applicable
for all leases entered on or after January 1, 2004: from this, it is understood that the statement
will not affect past leases. However, for practical considerations, it will be advisable for
companies to switch over to the new method in respect of all lease transactions, including those
which are running.
A finance lease is a lease that transfers in substance all the risks and rewards incident to
ownership of an asset. Title may or may not eventually be transferred. The risks incident to
ownership of an asset mentioned above include variations in return due to changing economic
conditions, and losses resulting from the idleness of the capacity of the asset or technological
obsolescence. The rewards incident to ownership of an asset include the economic benefits
obtained from the direct use of the asset during its useful life, the appreciation in value of the
asset and proceeds realized on disposal of the asset.
Accounting treatment of finance leases - by the lessor such lessor are normally banks or similar
lending institutions. When entering into a finance lease the lessor is in substance making a loan
which will be repaid with interest. Despite having legal title to the asset subject to the lease, the
lessor does not recognize this as an asset on its balance sheet, as it does not control the asset and
does not have access to the future economic benefits. The lessor does however have the asset of a
future income stream and accordingly recognizes a debtor „net investment in finance leases‟.
The purpose of the special accounting treatment for leases is to ensure that the economic owner
of the leased asset (the lessor or lessee) capitalize the leased asset. The party (either lessor or
lessee) who takes the main risks in and reaps the main rewards from the use of the leased asset
accounts for the leased asset in balance sheet.
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Disclosures Requirement
BAS 17, paragraph 39, requires enhanced disclosures compared to the original standard. Lessors
under finance lease are required to disclose, in addition to disclosure under BAS 323, the
following:
(a) Reconciliation between the gross investment in the lease at the balance sheet date, and the
present value of minimum lease payments receivable at the balance sheet date. In addition, an
entity shall disclose the gross investment in the lease and the present value of minimum lease
payments receivable at the balance sheet date, for each of the following periods:
Not later than one year.
Later than one year and not later than five years.
Less than five years.
(b) Unearned finance income.
(c) The unguaranteed residual values accruing to the benefit of the lessor.
(d) The accumulated allowance for uncollectible minimum lease payments receivable.
(e) Contingent rents recognized as income in the period.
(f) A general description of the lessor‟s material leasing arrangements
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Taxation of Leases in Bangladesh:
The taxation system in Bangladesh has been a subject matter of criticism over a last few years.
The system is characterized by a large number of incentives, tax holidays and concessions as a
result of which the share of corporate taxation to total tax collection by the Govt. has come down
drastically over the past few years. Taxes on corporate profits, of both domestically and foreign
owned companies amounts insignificant as a 0.95% of GDP in Bangladesh, compared with more
than6% in developed nations. The main reason cited for this low contribution is the tax
incentives granted by the Govt. which are very liberal as compared to its counterpart countries. It
is probably with tax reform in view that the Govt. carried out certain reforms in depreciation
laws in Budget 1998-99. Among other provisions, the important change that would have a far
reaching effect on leasing companies is the change in depreciation system by scrapping of initial
year depreciation allowance, extra shift allowance and normal depreciation, replaced by a single
rate of normal depreciation. The following are the important features of taxation of leasing in
Bangladesh:
No true lease guidelines:
There are apparently no rules to distinguish genuine lease transactions from plain financing
transactions. This is one of the most important rules to have in a developing market and an
important lesson can be learnt in this regard from India.
A lease, in order to qualify for tax deduction, has to be different from a plain financial
transaction. Evidently, no depreciation benefit can be claimed in case of a transaction of simple
financing of an asset. In addition, one must also appreciate that if an agreement has the color of a
lease transaction but in essence is nothing but a financial transaction, the outer form of the
transaction will be ignored, and based on its intrinsic substance, it would be reckoned as a
financial transaction.
The meaning of the above is that if a lessor in Bangladesh writes a lease transaction which has
the legal form of a lease, but is in substance nothing but financing transaction on the security of
an asset, such lease will not be regarded as a lease but as a secured financing. Obviously, it is not
enough to call an agreement lease agreement: in taxation, nomenclatures are ignored and the
reality is looked into.
To guide parties as to what are the important attributes of a lease transaction that would
distinguish it from a financial transaction, one would find, in advanced leasing markets, detailed
rules or standards that define a true lease. In absence of such guidelines, it is quite common,
particularly in nascent stages of development of an industry, for players to make mistakes which
turn out to be costly both for the revenue and for the players themselves.
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India, like Bangladesh, does not have true lease guidelines. As a result, around1987-1989, when
leasing grew very rapidly in the country, a number of lessors wrote leases for assets that never
existed. There was obviously no intent to cheat the revenue, but such practices were founded on
a premature belief that all agreements which look like lease agreements will be acceptable for tax
purposes.
Even today, in spite of the fact that India today is a mature market compared to many others, a
number of Indian Lessors make mistakes which would only prove to be fatal over time.
The trouble with a no-rule regime is that it encourages unintentional malpractices. Of course, tax
avoidance and evasion can exist even where there are elaborate rules, but the trouble with
absence of rules is that it breeds innocent non-compliance.
Bangladesh must notify true lease guidelines, and sooner the better. It must, most importantly,
educate tax payers on what is the elementary distinction between a lease and a hire-purchase
transaction, since in the latter case, depreciation cannot be claimed by the lessor.
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Company profile
Premier Leasing & Finance Limited, a third generation financial institution, was registered on
September 26, 2001 as a Public Limited Company as Premier Leasing International Limited with
authorized capital of TK.400 million and initial paid-up capital of TK.51 million. The company
went for public subscription by floating its shares in the capital market in July 2005. Company‟s
issued and fully paid-up capital as on December 31, 2008 stood at TK.344 million.
The company was renamed as Premier Leasing & Finance Limited on September 25, 2007. The
company was given license by Bangladesh Bank on February 4, 2002 to operate as a Financial
Institution. All activities of the company are regulated by the Bangladesh Bank as per financial
institutions act, 1993.
The company started its operation in the leasing sector in Bangladesh from February 25, 2002
and carrying out its activities by allowing Lease Finance and Term Finance in various sectors,
viz. transport, industrial expansion, household durables, office equipment, agricultural
equipment, industrial machinery and equipment etc.
Vision: To be a front runner as a financial institution in Bangladesh.
Mission: PLFL aims towards achieving its vision through offering wide range of products and
services for its clients and through customer satisfaction.
Theme: PLFL always strives to uphold the dictum „Client First‟.
Company Objectives
1. Provides financial services for Balancing, Modernization, Replacement and Expansion
(BMRE) for product diversification and quality improvement of the existing prospective
and profitable industrial units/ enterprises.
2. Invests in import substitute and export oriented industries on priority basis.
3. Finances in Small and Medium Enterprises (SME) for poverty alleviation and creation of
employment opportunity.
4. Finances for procurement of machinery and equipment for infrastructure development.
5. Extends financing to fixed income groups and professionals for procurement of
household appliances and other essentials.
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6. Provides loan for construction or purchasing of apartment/ home, commercial space,
shops or other real estate products.
To invest in priority sectors like:
BMRE of existing industrial units
Export oriented industries
Import substitute industries
Industries based on local raw materials
Infrastructure development projects
Power generation
Pharmaceutical industries
Hospital, Clinic & Diagnostic centers
Environment friendly projects
Small and Medium Enterprises (SME)
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Products of Premier Leasing and Finance Limited
Lease Finance
Lease financing against industrial machinery, medical equipment, office equipment, generators,
vehicles, engine etc. to all major industrial sectors.
Term Loan
For meeting various regular capital/ fixed expenditures like balancing of product line,
modernization of manufacturing process, expansion of capacity & space etc.
Long term Loan to Real Estate Developer and Apartment purchase
Financial assistance and support for construction and purchase of apartment/ home, commercial
space etc. under the PLFL own scheme.
SME Finance
Finance in small and medium enterprises (SME) for poverty alleviation & creation of
employment opportunity.
Syndicated Finance
Syndicated finance with banks and financial institutions for meeting large financial needs.
Housing Finance
House building finance including house building loan under the PLFL own scheme as well as
under refinancing scheme of Bangladesh Bank.
PLFL’s Deposit Schemes
PLFL accept deposits from corporate bodies, banks, insurance companies and individuals and
offers the following five attractive products:
Monthly Savings Scheme (MSC)
Under this scheme any adult person having sound mind can open one or more MSS account(S) in
his/her single name at any branch of PLFL for 3, 5 & 8 years term.
Monthly Income Deposit (MID)
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Under this scheme, the depositor receives a fixed monthly return against the deposit amount. It is
best suited for retired people, housewives and senior citizen who look forward to a regular source
of income.
Annual Income Deposit (AID)
Under this scheme, the depositor receives high return every year against the deposit.
Double Money Deposit (DMD)
This is a time specified deposit scheme where the depositors' money will be doubled in a
specified period. This scheme helps individuals to meet their substantial future requirements.
Triple Money Deposit (TMD)
Under this unique scheme depositors will receive triple the amount they deposit on completion of
a specific term. Return is accumulated under this scheme and helps individuals to meet their
future requirements.
Special features of the Deposit Products:
Highly attractive return on deposits
Multiple schemes may be availed simultaneously
Minimum deposit is Tk. 10,000 -Tk. 50,000 except monthly saving scheme
In monthly saving scheme, deposit is ranges from Tk. 1,000 - Tk. 25,000
No hassle, prompt issue of receipts.
Easy withdrawal of interest and encashment arrangements
Quick loan facility up to 80% of deposited amount
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Portfolio of premier Leasing and Finance Limited
Premier Leasing and Finance Limited hold a diversified portfolio. Major portion of its portfolio
is Lease Finance. It holds about 51% of its total portfolio. Others are Term finance holding 43%,
Securities holding 4% and House Building 2%.
51%43%
4%
2%
Portfolio of Premier Leasing and Finance Limited
Lease Finance
Term Finance
Securities
House Building
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Leasing overview Of Premier Leasing and Finance
Limited
Since inception company‟s vision is to be a leading player in financial industry by way of wide
range of products and giving utmost customer satisfaction by excellence in services. It has
always pushed for “Client First” philosophy in its business and this has paid considerably. It has
achieved different milestones with this policy and has today become a respected name in the
financial world of Bangladesh.
Company has grown only because of its wide range of products catering to almost all kinds of
business community in Bangladesh. It gives Lease Finance to industry for purchasing equipment
and machinery and gives term loans for longer duration to acquire fixed assets like land and
building.
While lending, it has always focused on client‟s history, Good Credit Rating, past track record,
and also taken adequate security and guarantee so as to avoid loan defaults.
Lease Finance:
The company provides lease finance to acquire all types of machinery and equipment for
industries, manufacturing and service units. The time ranges from 2 to 5 years. With advantages
like prompt service, easy documentation procedures, maximum funding, tax benefits, etc., PLFL
provides lease finance to the eligible people.
Premier Leasing and Finance limited involves in finance lease. It is a commercial arrangement in
which the client or lessee that will use the equipment selects the specific items it desires and
negotiates the price and delivery terms with the manufacturer or distributor.
The lessee then arranges with premier leasing and finance limited to buy the equipment from the
manufacturer or distributor and the lessee simultaneously executes an agreement to lease the
equipment from premier finance and leasing company.
The lessee will have use of that asset during the lease; will pay a series of rentals or installments
for the use of that asset. The Lessor that is PLFL will recover a large part or all of the cost of the
asset plus earn interest from the rentals paid by the lessee or client. The lessee has the option to
acquire ownership of the asset; paying the last rental, or bargain option purchase price.
Premier leasing and Finance limited is the legal owner of the asset during duration of the lease.
However the lessee has control over the asset providing them the benefits and risks of
(economic) ownership.
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PLFL
Contacts
Lessee
Contacts
Purchase
the
equipment
and
handover to
lessee
Installment
payment
Premier Leasing and
Finance Limited
Client/Lessee
Transfer
of title
(5%)
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Lessee Credit Requirement
Most of the cases the lessee contacts first for leasing purpose, in that situation Premier Leasing
and Finance Limited maintain some leasing credit requirements. PLFL is interested in the
financial condition of the client or lessee and other pertinent business information. Among the
primary considerations of PLFL are the intrinsic value and marketability of the equipment or
property and the cash flow of the lessee.
Premier Leasing and finance limited provides lease against mortgage. Such mortgage can be
lessee‟s land, building, machinery etc.
Credit Risk Grading is a vital factor before taking any investment decision. For lack of weaker
risk grading, an investment decision may turn into a bad one. Premier Leasing and Finance
Limited grade credit risk on five distinct Criteria.
A. Financial Risk (weight 50%)
1. Leverage: (15%) Debt equity ratio(x)- times total liabilities to tangible net worth
2. Liquidity: (15%) Current ratio (x)- times current assets to current liabilities
3. Profitability: (15%) operating profit margin (%)
4. Coverage: (5%) interest coverage ratio (x) time‟s earnings before interest and tax interest on debt.
B. Business/industry risk (weight 18%)
1. Size of business: the size of the borrower‟s business measured by the most recent year‟s total
sales. Preferably audited numbers.
2. Age of business: the number of years the borrower engaged in the primary line of business.
3. Business outlook: Critical assessment of medium term prospects of industry, market share and
economic factors.
4. Industry growth: Strong (10%), good (>5%-10%), moderate (1%-5%)
5. Market competition: Dominant player, moderate competitive, highly competitive
6. Entry/Exit Barriers
C. Management risk (Weight 12%)
1. Experience: Quality of management based on total numbers of years of experience of the senior
management in the industry.
2. Second line/Succession.
3. Team work.
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D. Security risk (weight 10%)
1. Security coverage (primary): Fully pledge facilities/substantially cash covered.
2. Collateral Coverage (Property Location): Registered mortgage on municipal corporation/Prime
area Property.
3. Support (Guarantee): personal guarantee with high net worth or strong corporate guarantee,
personal guarantee or corporate guarantee with average financial strength.
E. Relationship risk (weight 10%)
1. Account conduct: More than 3 years accounts with faultless record, less than 3 years accounts
with faultless record, account having satisfactory dealings with some late payments.
2. Utilization of limit (actual/projected): More than 60%,40%-60%,less than 40%.
3. Compliance of covenants/ Conditions : Full compliance, some non-compliance, no compliance
4. Personal Deposits: Personal accounts of the key business sponsors/ principals ar maintained in the
bank, with significant deposits.
These are the five Credit Risk Grading (CRG) Criteria for evaluating the project. By going through the
process if a project scores 75-84 then the project will be acceptable for investment.
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Accounting Treatment of Lease by PLFL
Accounts Kept by PLFL
The company, through implementation of BAS 17, has been following the finance lease method
for accounting of lease incomes. The aggregate lease receivables including un-guaranteed
residual value are recorded as gross lease receivables while the excess of gross lease receivables
over the total acquisition cost and interest during the acquisition period of lease assets constitutes
the unearned lease income.
Initial direct costs (if any) in respect of lease are charged in the period in which such costs are
incurred.
The unearned lease income is usually amortized to revenue on a monthly basis over the lease
term yielding a constant rate of return over the period
1. lease receivables(net lease receivables + Advance of leases)
2. Interest income from leases
3. Unearned interest income
4. Interest suspense accounts
5. Provisions for leases
Bangladesh bank FID circular no. 3 of 2006 requires that interest on loan/lease classified as
SMA( Special mention Account) and above will be credited to interest suspense account instead
of crediting the same to income account. Recovery of interest amount are credited to interest
suspense account and recognized as income on cash basis.
Leasing Scenarios of PLFL
Particulars 2012 2011
Interest come from lease 292,099,185 287,331,814
Lease Receivables 2264910647 2408815128
Lease finance 764467000 956712000
Lease assets portfolio of PLFL stood at Tk. 292.79 million in YE 2012, representing 0.02%
growth from preceding year. It is expected that the lease assets portfolio of the company will
increase further. However, insufficient marketing operation and monitoring set- up may lead to
increasing in assets infection. Total overdue amount was Tk. 53.49 million, representing 12.31%
of outstanding lease financing. NPL ratio in this class of finance was high and the coverage was
as low as 8.40% only. However, management did not formally reschedule any lease assets so far,
though; undocumented flexible terms & conditions facilities in some cases have been observed.
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Legal actions taken by PLFL
In case of non-payment or delay in rental payment by the lessee, Premier Leasing and Finance
Ltd. Follows a multilayer steps for recovering the payments which are discussed below.
Messenger Negotiations
At the first level they sent their correspondence to the lessee to discuss the matter. The
correspondence maintains all formalities and code of conduct guided by the PLFL. He then talks
about the reasons of the non-payment or delay and try to come a to solutions. If this first visit
does not work out successfully, they send another correspondence again to the premises of
lessee.
Expanding the time
Another approach taken by the PLFL is to expanding the time for installment payment. This
approach is taken if the correspondence reports suggest positivity of the lessee. If the
correspondence report suggests negativity of the lessee, PLFL will sue against the lessee in The
Money Loan Court Act -2003.
The Money Loan Court Act -2003 (The Artha Rin Adalat Ain, 2003)
This law is related to the establishment of the Artha Rin Adalats (Money Loan Courts) in
Bangladesh to adjudicate the cases relating to the recovery of loans of financial institutions and
for the settlement of disputes between the borrowers and the lenders. Earlier, the cases for loan
recovery were the jurisdiction of the general civil courts.
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Conclusion
The leasing market is becoming more competitive because of the new leasing companies are
entering the market. However, There are still leasing companies are doing well. The political
stability and overall economic development is an essential precondition of the smooth growth of
this sector. If we can ensure these two preconditions, the leasing sector of Bangladesh would be
able to perform a strong role in our industrial development. If we disuses more and more about
lease financing, and if we try to spread it among our general public about its advantages, we will
go clearly ahead. It is very favorable to apply lease financing in Bangladesh. From above
discussion, it is clear that, in many sectors lease financings better than other financing. If we
know about lease financing properly, we can use or we can avail all the advantages of lease
financing where other financing is not favorable for us.