United Leasing Company Limited.doc

United Leasing Company_ Internship Report

INTERNSHIP REPORT

Subject:

INTERRELATION BETWEEN PRODUCTS, INTEREST RATES &

TERMS OF FINANCE

Internship Organization:

United Leasing Company Limited

22 , Kazi Nazrul Islam Avenue, Dhaka

Prepared for:

Internship Supervisor

Mr. Imran Rahman

Associate Professor

IBA, Univ. of Dhaka

Prepared by

Maruf Haider

ZR 33, BBA 10th

Institute of Business Administration

University of Dhaka.

April 8, 2023

United Leasing Company


June 25, 2006

Mr. G. M. Chowdhury

Chairman

Internship & Placement Program

Institute of Business Administration

University of Dhaka

Dear Sir:

I am glad to submit my Internship Report for the Internship Program (BBA 10th, 2006),

herewith.

I considered your remarks and instructions very carefully while preparing this report. I

tried my level best to follow your schedule, format and discipline.

I tried to comprehend all the areas related to this report. This has certainly enhanced my

knowledge base with a practical orientation.

Thank you for your consideration.

Sincerely Yours,

Maruf Haider

ZR -33 , BBA 10th

IBA

Univ. of Dahaka



TABLE OF CONTENTS

SECTION 1 –ORGANIZATION REPORT

1.1 BACKGROUND OF ULC

1.2 CORPORATE OBJECTIVE

1.3 CAPITAL, SPONSORS AND SHARE STRUCTURE

1.4 BOARD OF DIRECTORS

1.4.1 EXECUTIVE COMMITTEE

1.5 ORGANIZATIONAL STRUCTURE

1.5.1 MANAGEMENT

2.1 LEASE PORTFOLIO AND SECTOR WISE EXPOSURE

2.2 PERFORMANCE OF ULC AT A GLANCE

2.3 SWOT ANALYSES OF ULC

3.0 CREDIT OFFERS BY ULC

4.1 CREDIT APPROVAL PROCESS OF ULC

5.1 CONCLUSION

SECTION 2 - INTERNSHIP PROJECT

1.0 INTRODUCTION

2.0 EXECUTIVE SUMMERY



3.1 SCOPE & OBJECTIVES OF STUDY:

3.1 PRODUCTS/SCHEMES:

3.2 VARIABLES & PARAMETERS:

3.3 METHODOLOGY & ANALYSIS:

3.4 LIMITATIONS:

4.0 PRODUCT DEFINITIONS

4.1 THE DIFFERENCE BETWEEN LEASE AND HIRE PURCHASE

5.0 RELATIONSHIPS/ OBSERVATIONS/ANALYSIS

5.1 IMPLACIT RATE ACROSS PRODUCTS AND TERMS (Bearing of Type and

Terms on Interest Rate)

5.2 INTEREST RATE SENSITIVITY OF BORROWERS (Relationship between

Interest Rate and Loan Size)

5.3 PRODUCT BIAS (Frequency Distribution of Products)

6.0 CONCLUSION



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.

1.21.2 CCORPORATEORPORATE O OBJECTIVEBJECTIVE

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.

United Leasing Company Page 0


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 UK 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 U.K.

Mr. A.S.M.O. Subhan Lawrie Group Plc of the U.K.

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.


Operations Finance CRM HR

Monitoring Marketing Services

Marketing

Accounts

Commercial

Treasury

IT


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:



1. Textiles

2. Transport

3. Apparels and accessories

4. Other services

5. Construction and engineering

6. Financial intermediations

7. Food and Beverage

8. Paper and printing

9. Telecommunications

10. Agro based industries

11. Chemicals

12. Pharmaceuticals

13. Other manufacturing industries

14. Hospitals

15. 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.

Net Profit

2000 2001 2002 2003 2004

95 75 77110

154

Year

Tak

a(m

illi

on

)

Year Taka(million)

Illustration 04: Net Profit. (Appendix-01)



Operating Revenue (restated)

2000 2001 2002 2003 2004

326 396 473 553 618

Year

Tak

a (m

illio

n)

Year Taka(million)

Illustration 05: Operating Revenue (restated). (Appendix-02)

Financial Assets (restated)

2000 2001 2002 2003 2004

1959 2364 2871 34064011

Year

Taka

(mill

ion)

Year Taka(million)

Illustration 06: Financial Assets (restated). (Appendix-03)



Earning Per Share

2000 2001 2002 2003 2004

136 108 110158

220

Year

Taka

Taka

Year

Illustration 07: Earning Per Share. (Appendix-04)



Contracts

2000 2001 2002 2003 2004

1119 1299 1622 1867 2306

Year

Taka

(mill

ion)

Year Taka(million)

Illustration 08: Contracts. (Appendix-05)

(Annual Report- 2004)

2.3 SWOT ANALYSES OF ULC

Strengths:

It was among the first

in this industry and therefore enjoys first mover advantages.

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.



ULC has very high

skilled, energetic, hard working and motivated human resources.

ULC believes and

practices participative management.

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.

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.

ULC do not comply

undue political influence.

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:

With growth in our

corporate sector, the demand for lease financing is also growing and

consequently, the lease financing industry.

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.

By introducing new

products such as house loan ULC can expand its market.

Threats:

Continuously increasing deflation rate result into less disbursement of fund.

There is a clear trend of increasing competition in the lease market with the

entry of more leasing companies and leasing by commercial banks.

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.

1. Lease finance:

i. Sale & Leaseback

a. Lease Local

b. Lease Foreign

ii. Hire Purchase

2. Working capital finance:

i. Short Term Loan

ii. Factoring

iii. Revolving Loan

3. 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.


Marketing Executive

Prepares Credit Appraisal

Reviewed by GM

Approved by MD/ Executive Committee

Reported to Executive

Committee (if approved by MD)


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:

1. To find out the difference in return parameters i.e. Implicit Rate 1(herein after

referred as IR), IRR2, Spread3, NPV across different products/schemes.

2. To find out the difference in Terms/tenure across different products/schemes.1 The rate used for calculation of monthly annuity repayments- commonly called ‘rental’ or ‘Rent’2 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 IR3 The difference between IR and IRR, utilized to increase actual return from finance amount.



3. To find out the relationship between Return and Terms across different

products/schemes.

4. To find out the trend of Implicit Rates for the period January, 2000- April, 2006

and identify seasonality if present.

5. 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:

1. 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.

2. Time series analysis for interest rates throughout the last 24 months.

3. Multidimensional Correlation analysis among Term, Principal, IR, IRR, Spread is

done to find out inter-relations between every two variables.

3.4 LIMITATIONS:

1. 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.

2. 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.



3. 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.

Lease Local -The asset is bought from local source & leased back to the Lessor.

Lease Foreign - ULC opens LC or stands as guarantor to import the asset, leases it back

to Lessor

HIRE PURCHASE

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’.


Total

13.5

14

14.5

15

15.5

16

16.5

17

BIL

LD

ISC

OU

NT

ING

-R

EV

OL

VIN

G

HIR

E P

UR

CH

AS

E-

FO

RE

IGN

HIR

E P

UR

CH

AS

E-

SA

LE

& H

IRE

BA

CK

LE

AS

E -

FO

RE

IGN

LE

AS

E -

LO

CA

L

LE

AS

ING

-SA

LE

&L

EA

SE

BA

CK

SH

OR

T T

ER

MF

INA

NC

E

TE

RM

LO

AN

Total

Average of IR

Type


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 Rents4 varies maximum with a range of two percent

across the common schemes. The following table depicts the observation while the table

below gives figures.

4 Repayment Installments or AnnuityUnited Leasing Company

Page 21

Total

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

BIL

LD

ISC

OU

NT

ING

-R

EV

OL

VIN

G

HIR

E P

UR

CH

AS

E-

FO

RE

IGN

HIR

E P

UR

CH

AS

E-

SA

LE

& H

IRE

BA

CK

LE

AS

E -

FO

RE

IGN

LE

AS

E -

LO

CA

L

LE

AS

ING

-SA

LE

&L

EA

SE

BA

CK

SH

OR

T T

ER

MF

INA

NC

E

TE

RM

LO

AN

Total

Average of Term

Type



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

1. 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.

2. 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;:-

1. 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.

2. 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.

3. 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.

4. 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


HIRE PURCHASE - SALE & HIRE BACK 100,000,000 14.00 14.00




LEASE - FOREIGN 70,256,491 13.50 15.80

HIRE PURCHASE - SALE & HIRE BACK 70,000,000 14.00 14.00



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


BILL DISCOUNTING - REVOLVING 100,370 16.65 18.65





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

1. 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.

2. 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,:-

1. 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.

2. 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.

3. 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.

Total

BILL DISCOUNTING - REVOLVING

HIRE PURCHASE - FOREIGN

HIRE PURCHASE - SALE & HIRE BACK

LEASE - FOREIGN

LEASE - LOCAL

LEASING-SALE & LEASE BACK

SHORT TERM FINANCE

TERM LOAN

Count of Type

Type

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


Total

0

1

2

3

4

5

6

Count of Term

Term


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

1. The frequency of finances is adversely in favor of Sale & Lease Back. Marketing

force of ULC is biased toward Sale & Lease Back.

2. The frequency of finances is adversely in favor of 3 to 4 years range.

3. 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).

4. 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,-

1. Majority finances belonged to 4+ year category, so Lease was indeed the right

choice.



2. 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 classInitial Rate

Normal Rate Advance Arrear

General Machinery 20.00% 25.00%

Up to 36 Months HP is better and beyond that Lease is better


Moulds/Moulding Machine 30.00% 0.00%



Vehicles 20.00% 0.00%



Furniture & Fixure 10.00% 0.00%



* 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:

Sale and Lease back:

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


1.1 LEASE FINANCE AND HIRE PURCHASE


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.


1.1.1 Advantages Lease Finance and Hire Purchase


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:

Lease: 3 to 5 years.

Hire Purchase: 1 to 2 years.

Maximum Limit Depends on:

Requirement and Equity Participation.

Merit of the Proposal.

Modes of Repayment:

Equal monthly installment.

Payment structured to clients cash flow.

Insurance Coverage:


1.1.2 Terms & Conditions


Leased assets are to

be duly covering all possible risk and premiums are to be paid by clients.

(ULC Web site)


1.1.3 Finance Procedure of Lease & Hire Purchase

Initial approach discussion

Finance application

Credit appraisal review

Agreement

Purchase of equipment for Lease / HP

Local purchase Import of equipment

Purchase order

Delivery

Opening of letter of credit (L/C)

Customer clearance

Delivery

Delivery


Illustration 9: Finance Procedure Lease/Hire Purchase

Besides Financing, Factoring services includes:

Sales Ledger Maintenance

Collection of Receivables

Reporting

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.

Benefits:


1.2 FACTORING OF ACCOUNTS RECEIVABLES

Execution


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.

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.


1.3 BILL DISCOUNTING


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.



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.

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.


1.4 SYNDICATE FINANCE

Date post:	08-Nov-2014
Category:	Documents
Upload:	tanjina-rahman
View:	115 times
Download:	0 times

United Leasing Company Limited.doc

Documents