Leasing as Credit Alternative Financing the Agricultural Value Chain Conference held in Mumbai, India, March 16-17, 2007 Renate Kloeppinger- Todd Rural.

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Presentation transcript:

Leasing as Credit Alternative Financing the Agricultural Value Chain Conference held in Mumbai, India, March 16-17, 2007 Renate Kloeppinger- Todd Rural Finance Advisor The World Bank

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , What is Leasing? Contract between two parties: the party that owns an asset ( lessor) lets the other party (lessee) use the asset for a predetermined time in exchange of periodic payments Separates ‘use’ of asset from ‘ownership’ of asset. Finance Lease (The Credit Alternative) Amortizes asset price - includes purchase option for a token amount at end of lease period Lessee responsible for maintenance and all risks usually associated with ownership without actually owning the asset Non-cancellable

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Advantages: The Client Perspective Asset serves as collateral, additional collateral not required Lesser credit history may suffice May require less down payment May have better prices Potential tax-benefits

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Advantages: The Leasing Company Perspective Lower transaction costs Stronger security: ownership rights versus weaker collateral rights Less incentives to default, less costs of repossession Usually more flexible pricing Lease rates not usually regulated (loan rates often are) Less costs of regulatory compliance Leasing companies often exempt from prudential regulations.

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Economy Wide Benefits Increase in capital investment Particularly for the ‘Missing Middle’ Capital market development Leasing companies borrowing from insurance companies, pension funds Increased competition in the financial market Competition for banks on products and prices.

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Firm Case 1: John Deere, Mexico Fully-owned subsidiary of John Deere US$ 74million lease portfolio in % in farm equipment Rural leases: examples US$107,000 Harvester US$ 21,000 Seeding Machine US4 11,000 Cultivating Implements

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Firm Case 2: DFCU Leasing, Uganda Profitable, publicly listed company. US$ 25.7 million lease portfolio in % portfolio in rural areas; 10% portfolio and 16% leases in Agriculture Rural Leases- Examples US$ 70,000 Cotton-ginning equipment US$34,000 bakery equipment US$ 6,000 milling equipment

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Firm Case 3: Uzselkhoz mash Leasing, Uzbekistan State-owned company US$76.6 million lease portfolio, end % rural leases Primary client group: farm enterprises Average lease size: US$13,700

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Firm Case 4: Network Leasing, Pakistan Profitable, publicly listed private company. US$ 11.6 million lease portfolio in % portfolio & 43% leases in rural areas Rural Leases- Examples US$ 420 Buffaloes US$ 2793 clinic lab-equipment US$ 402 school furniture

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Five Lessons specific to rural leasing Leasing is a means to acquire productive assets Rural enterprises of different sizes benefit, but providers may not be able to serve all markets Non-farm enterprises account for a significant portion of rural leases Rural leasing can be profitable but may require initial donor/government support A rural-only leasing company may not be viable

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , India Market: A Shrinking Sector Sector 47% reduction in transactions in 2004 over Leased Assets in 2004 less than 1/3 rd of that in Key Factors Highly liquid banking sector, corporate cash- surplus Upcoming uniform VAT regime could help. Non-bank Financial Services Bill pending Parliament approval Source: World Leasing Yearbook 2006

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , India: Key Issue – Tax Regime Service Tax on Full Rental Complex Sales Tax Regime Particularly when lessor and lessee in different States Inadequate Understanding by Tax Authorities Differential treatment of depreciation for tax and accounting purposes

AGRI REVOLUTION - Financing the Agricultural Value Chain, Mumbai, India March , Concluding Thoughts Improving the Policy Environment? Legal – Financial Leasing Law Tax – Level Playing Field Regulatory Potential Initiatives? Training for lessors and regulators Public Awareness