Hire-purchase means purchase on an installment plan. The credit involved in the installment plan is provided by financial Institutions. Hire-purchase facilities are needed mostly by small buyers of equipment, weather engaged in farming, fishing, or manufacturing, small transport operations for purchase of vehicles (new or old) and their spare parts and households for purchase of consumer durables such as bicycles, cars, electric fans, sewing machines, refrigerators, TV sets etc. In all these cases, purchase of durable goods is involved. The goods themselves serve as security until the loan is fully cleared. Small buyers may find it difficult to buy the durable goods by ready cash. Durable goods give a flow of income or service over a number of years over which the purchasers may like to make payment. Therefore, they are encouraged to buy them if installment credit on reasonable forms is available. For encouraging small entrepreneurs to set up shop and existing small producers (farmers and others) to use modern tools and implements, Hire-purchase credit can play an important role.At present the Hire-purchase form of credit is provided by private Hire-purchase Financial Institutions, commercial banks and State Finance Corporations (SFCs). The last mentioned two institutions have in this field only recently. In India the facilities for the provision of Hire-purchase credit are limited and undeveloped. Three major types of financial institutions operate in this field: commercial banks, SFCs and national small industries corporations (NSIC) and Hire-purchase finance companies. The bulk of the Hire-purchase credit goes to the road transport industry for the purchase of vehicles (new and old) and their spare-parts.
According to a number of studies on the subject, there is considerable demand for Hire-purchase credit and there is good scope both for organized banking system and private Hire-purchase agencies to enter this field. The important features of the Hire-purchase financial institutions in India are:
- They are better developed and organized in the southern region than in other areas.
- There are a large number of individuals and partnerships in this field.
- Many small Hire-purchase agencies indulge in such undesirable practices as changing exorbitant rates of interest, forcible repossession of the vehicles financed, etc.
- The demand for hire purchase credit exceeds considerably the supply of the funds for the same.
The private Hire-purchase companies are organizationally weak. A large number of them are too small in size and financially weak. It is necessary to strengthen them by setting up through amalgamations and mergers. Big units will be financially strong, they can be easily controlled and regulated. They will not resort to unfair practices as the small units normally do. Towards this end, the Banking Commission has made the following recommendations:
- All hire purchase finance units should compulsorily licensed and the licensing authority should be given the power to revoke the license incase of unsatisfactory functioning and unhealthy practices.
- The Government should prescribe permissible equity debt ratio and liquidity ratio for hire purchase companies and they should be higher for smaller units and lower for bigger units.
- The hire purchase finance agencies should be classified in to approved and non-approved categories and the approved agencies should be entitled to refinance facilities from the banking system and their lending operations should be covered under the Credit Guarantee Scheme.
- The leading commercial banks may form a few hire purchase companies or they may promote subsidiary hire purchase finance companies. The commission particularly favoured the idea of local commercial and urban co-operative banks to take more interest in the field of Hire-purchase.