Chapter 39: Leasing and Hire Purchase (JAIIB - MODULE D)
1. Which of the following best describes Lease Finance?
A. Financing arrangement where the lessee uses an asset without owning it
B. Short-term working capital loan
C. A type of overdraft facility
D. Equity investment by financial institutions
Lease Finance allows a lessee to use an asset owned by the lessor in return for periodic lease rentals, without transfer of ownership.
2. Leasing in India formally began in which year with the establishment of the first leasing company?
A. 1960
B. 1970
C. 1973
D. 1982
Leasing in India began in 1973 when First Leasing Company of India Ltd. was set up in Chennai, marking the evolution of lease finance in the country.
3. In which type of lease does the lessor transfer substantially all the risks and rewards associated with ownership?
A. Operating Lease
B. Sale and Leaseback
C. Leveraged Lease
D. Financial Lease
In a Financial Lease, risks and rewards of ownership are transferred to the lessee even though legal ownership remains with the lessor.
4. A company sells its machinery to a leasing company and immediately takes it back on lease. This is called:
A. Direct Lease
B. Sale and Leaseback
C. Cross-border Lease
D. Operating Lease
Sale and Leaseback allows a company to free up capital by selling an asset to a lessor while continuing to use it under a lease arrangement.
5. Which of the following is TRUE about an Operating Lease?
A. Asset is leased for its entire economic life
B. Lessee bears all risks of ownership
C. Lease period is shorter than asset’s economic life
D. Lessee is responsible for disposal of the asset
In Operating Lease, the lease tenure is shorter than the asset’s economic life and the lessor typically bears risks related to obsolescence and disposal.
6. Which of the following is a major advantage of Lease Finance for the lessee?
A. Ownership is immediately transferred to lessee
B. Lease rentals are not tax-deductible
C. High initial capital outlay is required
D. Provides 100% financing without upfront payment
Lease Finance provides the lessee with use of the asset without upfront investment, making it a popular choice for businesses with limited capital.
7. Which of the following is considered a disadvantage of Lease Finance for the lessee?
A. Ownership of the asset never transfers to the lessee
B. Lease rentals are deductible expenses
C. Asset obsolescence risk is borne by the lessor
D. Provides 100% financing
A key disadvantage of leasing is that the lessee never gains ownership, even after paying rentals for the entire lease period.
8. From the perspective of the lessor, which of the following is an advantage of Lease Finance?
A. Risk of default is completely eliminated
B. Provides steady cash flow through periodic rentals
C. Lessee maintains ownership of the asset
D. No risk of obsolescence for the lessor
The lessor benefits from regular lease rentals, which provide predictable cash inflows over the lease tenure.
9. Which asset class has traditionally dominated the leasing market in India?
A. Office equipment
B. Consumer durables
C. Transportation equipment
D. IT hardware
Transportation equipment such as vehicles and aircrafts have historically formed the largest share of leased assets in India.
10. In the Indian leasing industry, which of the following asset classes has shown significant growth in recent years?
A. IT and office equipment
B. Traditional plant & machinery
C. Agricultural implements
D. Residential buildings
IT and office equipment leasing has grown rapidly due to shorter technology life cycles and the need for frequent upgrades.
11. How does leasing generally affect a company’s debt-equity ratio?
A. It increases the debt-equity ratio as lease is treated as a loan
B. It decreases the debt-equity ratio significantly
C. It may keep the ratio lower compared to term loans, since lease is often treated as an off-balance sheet item
D. It eliminates the ratio completely
Lease obligations often do not appear as traditional debt on the balance sheet (especially operating leases), hence companies may report lower debt-equity ratios compared to borrowing for purchase.
12. What is the impact of lease rentals on the Profit & Loss account of a lessee?
A. Lease rentals are treated as capital expenditure
B. Lease rentals are charged as revenue expenditure
C. Lease rentals are added to reserves
D. Lease rentals increase the asset base of the company
Lease rentals are treated as revenue expenses in the lessee’s books, thus reducing taxable income.
13. Under Indian law, which Act primarily governs leasing transactions?
A. Negotiable Instruments Act, 1881
B. Banking Regulation Act, 1949
C. Companies Act, 2013
D. Indian Contract Act, 1872
Leasing agreements are contracts between lessor and lessee, hence governed primarily by the Indian Contract Act, 1872, along with provisions of other relevant laws.
14. Which of the following is TRUE about the legal ownership of an asset under a lease agreement?
A. Ownership remains with the lessor throughout the lease period
B. Ownership is transferred to lessee midway
C. Ownership automatically shifts after payment of rentals
D. Ownership is shared between lessor and lessee
In leasing, ownership always rests with the lessor; the lessee only has the right to use the asset during the lease term.
15. Which regulatory body in India oversees leasing activities conducted by Non-Banking Financial Companies (NBFCs)?
A. SEBI
B. IRDAI
C. RBI
D. Ministry of Finance
RBI regulates NBFCs engaged in leasing and hire purchase under the RBI Act, 1934, prescribing prudential norms and reporting requirements.
16. As per RBI guidelines, NBFCs carrying out leasing activities are classified under which category?
A. Core Investment Companies
B. Asset Finance Companies
C. Infrastructure Debt Funds
D. Microfinance Institutions
NBFCs engaged in financing of physical assets like automobiles, machinery, or equipment under leasing/hire purchase are classified as Asset Finance Companies (AFCs).
17. In a Hire Purchase transaction, when does the ownership of the asset transfer to the hirer?
A. At the start of the agreement
B. After payment of the last installment and exercise of option to purchase
C. After payment of the first installment
D. Automatically after 50% of installments are paid
In hire purchase, the hirer gets possession at the start but ownership passes only after all installments are paid and the option to purchase is exercised.
18. Which of the following best distinguishes Hire Purchase from Leasing?
A. Lease involves transfer of ownership, hire purchase does not
B. In both, ownership is transferred at the beginning
C. Lease rentals are capitalized, hire purchase installments are not
D. In hire purchase, ownership may transfer at the end; in lease, ownership always remains with lessor
Under hire purchase, ownership may pass to the hirer after completion of installments, while in leasing ownership always rests with the lessor.
19. Hire Purchase in India gained momentum primarily with the growth of which industry?
A. Automobile industry
B. Real estate sector
C. Telecom industry
D. FMCG sector
Hire purchase became popular in India mainly through the automobile industry, where consumers could buy vehicles by paying in installments.
20. Which legislation in India governs the rights and obligations of hirer and owner in a Hire Purchase agreement?
A. Indian Partnership Act, 1932
B. Companies Act, 2013
C. Hire Purchase Act, 1972 (though not fully enforced)
D. Factories Act, 1948
The Hire Purchase Act, 1972 was enacted to regulate hire purchase transactions, though it has not been fully enforced. Hence, such agreements are largely governed by the Indian Contract Act.
21. In case of default under a Hire Purchase agreement, the owner has the right to:
A. Convert the hire purchase into a lease
B. Transfer ownership to a new hirer automatically
C. Force the hirer to pay only 50% of dues
D. Repossess the asset as ownership remains with the owner until full payment
Since ownership remains with the hire vendor until the hirer pays all installments, the owner can repossess the asset in case of default.
22. In a hire purchase contract, who is the actual owner of the goods until the last installment is paid?
A. Hirer
B. Bank
C. Owner/Financier
D. Guarantor
In a hire purchase contract, ownership remains with the owner/financier until the hirer pays the final installment and exercises the option to purchase.
23. Who is the party that takes the goods on hire purchase and pays installments?
A. Hirer
B. Financier
C. Supplier
D. Guarantor
The Hirer is the party who takes the goods on hire purchase, makes installment payments, and has the option to acquire ownership after completing payments.
24. In hire purchase, what is the role of the supplier?
A. Pays installments on behalf of hirer
B. Provides financing for the goods
C. Acts as guarantor to the owner
D. Supplies the goods to the hirer under the hire purchase agreement
The supplier provides the goods to the hirer under the hire purchase agreement, while the financier/owner provides funding and retains ownership until full payment.
25. Which of the following is a key difference between Leasing and Hire Purchase?
A. In both, ownership immediately passes to the user
B. In leasing, ownership always remains with lessor; in hire purchase, ownership transfers after final installment
C. In leasing, option to buy is compulsory; in hire purchase, no such option exists
D. Leasing is only for immovable property, while hire purchase is for movables
In leasing, ownership of the asset always remains with the lessor. In hire purchase, ownership transfers to the hirer after the last installment and exercise of the purchase option.
26. Which of the following statements is TRUE regarding Leasing vs Hire Purchase?
A. In leasing, depreciation is claimed by lessor; in hire purchase, by hirer
B. In leasing, risk of ownership lies with hirer
C. In hire purchase, lessor retains depreciation benefits
D. Leasing always requires collateral security, unlike hire purchase
In leasing, the lessor owns the asset and claims depreciation. In hire purchase, the hirer eventually becomes the owner and claims depreciation after ownership transfer.
