Lessors May Get Breather On Loan Assets

The Reserve Bank of India (RBI) is likely to give a breather to the lease and hire purchase companies.

The central bank is planning to redefine leasing and hire purchase companies as entities which have at least 60 per cent of their assets in leasing, hire purchase and loan assets.

As per the present regulations, loan assets are not included in the stipulated 60 per cent.

The change in the stipulation is pursuant to a presentation made by the Association of Leasing and Financial Services (AL&FS) to the Reserve Bank of India (RBI) which according to the association's executive director Mahesh Thakkar is being favourably considered.

The change in the norm will help the bottomline of the non-banking finance companies as leasing income could be subject to service tax as proposed in the latest budget.

AL&FS has been able to get a an interim stay order from the Madras high court on the imposition of the service tax, but an implementation of it will bring down the volume of the leasing activity.

Thakkar said: "The margin for the leasing business is already at very low levels and the imposition of service tax is likely to be passed on the customer and hence the business volumes will shrink. Banks can get away with the problem as they can substitute loans for leasing. But for leasing and hire purchase companies who are primarily non-banking finance companies (NBFCs), the scope is limited because of the current stipulation. Once the RBI liberalises the regulations, NBFCs will also be able to offer loans in lieu of lease and hire purchase."

He said at present, due to liberalisation in the financial sector, banks are able to enter all businesses that the NBFCs are in.

The change in the stipulation will help the NBFCs to compete with banks in the loan assets market. "This may not translate into booming business in the NBFC sector as we have other problems too, but will provide some breathing space for them," said Thakkar.