(for foreign enterprises), investment projects or plans using the CTTC method.
- Economic profile : The tenant provides documents on business and financial situation such as: balance sheet, business production plan, financial reports of the last 2 years.
- Lease application : includes financial lease request, agreement with supplier on selecting leased assets, along with documents on leased assets, if any.
After receiving the financial leasing documents, CTTC Company will appraise and re-appraise the feasibility and effectiveness of the project, debt repayment ability, choose payment method and apply risk prevention measures.
+ Actual investigation : The lessor investigates the reputation of the project developer, contacts the project owner to collect actual information about the project owner himself, requests clarification of unclear issues in the project documents, classifies the project to clarify the reality and feasibility of the data in the project's technical and economic arguments.
+ Analysis of the lessee's financial capacity : Based on the audited financial statements of the most recent year such as: balance sheet, cash flow statement, profit and loss statement..., the lessor analyzes the lessee's financial capacity through the following parameters: financial safety ratio, solvency ratio, capital turnover ratio, profitability ratio...
+ Analysis of rental equipment : In the CTTC activity, the lessee participates in the negotiation process to purchase equipment, but the CTTC company still has to consider the risks caused by the equipment. These analyses are considered in the following aspects: the legal status of the supplier, the reasonableness of the equipment, the price of the equipment and the impact of the equipment on the environment.
After review, if the CTTC company approves the leasing finance, it will proceed according to the specific conditions agreed upon by the parties in the CTTC contract. The basic terms here are:
- Assets are selected by the lessee together with the supplier.
- Agreement on the lease term. This is the period of time during which the lessee has the right to use and must pay rent to the lessor.
- The rental interest rate is agreed between the lessee and the lessor. The rental interest rate can be fixed or change according to the market interest rate.
- Method of calculating rent, rental payment period.
1.2. Conducting sponsorship
Assets for hire purchase financing not yet available:
CTTC Company acts as a consultant for the lessee and helps the lessee negotiate with manufacturers or suppliers of machinery and equipment so that they can reach an agreement on: type of machinery and equipment, technology, price, and delivery terms.
Assets used for leasing financing that CTTC Company already has:
These assets are usually transferred by the “parent” bank in the form of capital or recovered by the CTTC company from the lessee. When finding a partner with the right demand for those types of assets, the CTTC company will proceed to finance directly without needing a third party to provide.
1.3. Rent collection and property inspection
The lease term begins when the lessee receives the property and the right to use the property until the termination of the CTTC contract. The lease term is divided into rental payment periods: monthly, quarterly, yearly depending on the agreement with the lessee. The lessee must be responsible for paying the rent in full and on time as agreed in the lease-purchase contract. If the lessee violates the payment of rent, the CTTC company will impose a late penalty or proceed to reclaim the leased property before the due date. In some cases, the lessee can request an extension of the lease.
Rent payment: the tenant is a reputable customer but their production and business may encounter difficulties for a period of time due to objective obstacles and they are able to pay the rent at the next time.
Periodically or suddenly, the leasing company needs to conduct inspections of the lessee's use of the property to see the purpose of use and maintenance of the property. The inspectors can be technical staff of the leasing company or technical experts hired by the leasing company, depending on the provisions of the lease-purchase contract.
2. Distinguish financial leasing from some other banking activities
2.1. Finance lease vs. Operating lease
To classify and identify types of asset lease contracts: operating lease or finance lease, the International Accounting Standards Board (IASA) has set out the following common standards:
Is ownership of the asset transferred at the end of the contract? If so, it is a CTTC transaction, if not, it is an operating lease.
Does the contract include an option to purchase the leased asset at the end of the contract at a nominal price? If so, it is a CTTC transaction; if not, it is an operating lease.
Does the lease term represent a major portion of the asset's useful life? Typically, if it is more than 2/3 of the asset's useful life, it is a leasing transaction, otherwise it is an operating lease.
Is the net present value of all minimum lease payments due to the tenant equal to or greater than the fair market value of the asset at the inception of the lease? If yes, it is a leasing transaction; if no, it is an operating lease.
Both the CTTC and operating lease methods separate ownership and usage rights. Ownership belongs to the lessor, the lessee only has the right to use.
In which, it can be understood that CTTC is a medium and long-term form, while operating lease is a short-term form of credit.
These two methods can be distinguished more clearly through the following table:
Table 1. Comparison of CTTC and operating lease
TT
Criteria compare | Financial leasing | Operating lease | |
1 | Lease term | Leases are for a period longer than the useful life of the asset. Typically 2/3 of the time. usefulness of property | The lease term is short, representing a small percentage of the asset's useful life. |
2 | Contract recovery rate | The total rental amount of an asset specified in the CTTC contract must be at least equivalent to the value of that asset at the time of signing. contract. | The total rental amount specified in the operating lease is much smaller than the asset value. product |
3 | Right to cancel contract | No cancellation allowed. contract. | Right of Cancellation contract. |
4 | Risk | Tenant assumes all risk of damage. | The lessor bears all risks of damage, except in cases of risk due to the fault of the lessee. tenant |
5 | Expense | Tenant is responsible for all operating costs, maintenance, insurance and property taxes. | The lessor is responsible for all operating, maintenance, insurance and property tax costs. product |
6 | Supply of finance rental property | Usually ordered by the tenant, delivery and use | Usually given by people hire supply |
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Transfer of ownership or sale of property | In the lease contract, the two parties agree to transfer ownership or resell the property at the end of the contract. | The contract does not include any agreement to transfer ownership or resell the property after the contract ends. copper. |
2.2. Financial leasing and medium and long-term bank credit
The nature of CTTC is also a form of medium and long-term credit. CTTC has all the characteristics of credit such as repayment, term, and interest.
However, there are differences between CTTC and medium and long-term bank credit. The differences can be seen in the table below:
Table 2. Comparison of CTTC with medium and long-term bank credit
Criteria
Financial leasing | Medium and long term bank credit | |
Form Sponsorship | In kind | In money |
Ownership | Occupied by the lessor until when the lessee's right to purchase is exercised. | The borrower occupies from the beginning. |
Mortgage | No collateral required | Must have collateral |
The parties join | 2 parties or 3 parties (lessee, lessor) rent and supplier) | Only 2 parties (bank) and borrowers) |
IV. FACTORS AFFECTING FINANCIAL LEASING ACTIVITIES
1. Legal environment
The legal environment plays an important role in creating a legal corridor for the birth, existence and development of financial leasing activities. Due to the nature of financial leasing activities, they are subject to the regulation of many sources of law such as: Law on credit institutions, Tax law, Enterprise law, Law on
Accounting and many guiding decrees and circulars require the legal system to be complete and consistent so that this activity has a favorable environment to develop.
In particular, during the WTO integration period, Vietnam will welcome foreign financial leasing companies to participate in the domestic financial market, which requires regulations in legal documents to be consistent with international standards to attract foreign investors and to be consistent with the domestic situation. Therefore, the impact of the legal environment on financial leasing activities is increasingly stronger and more clearly demonstrated.
2. Economic environment
In the process of business operations, financial leasing companies are greatly influenced by the economic environment. A healthy and stable economy always helps businesses to expand production and business, and conversely, a volatile economy always causes business risks. In general, economic growth and the dynamic development of business types have a significant impact on the formation and development of financial instruments, financial institutions and the financial leasing market. The economic environment includes all external conditions affecting leasing activities such as the market, interest rates, infrastructure, scientific and technological progress, and the state's economic and financial policies. The health of the leasing industry is closely related to the general state of the economy. The volume of leasing transactions originates from the need to invest in new machinery and equipment, the relative shortage of capital, the competitiveness of enterprises, etc. Moreover, in the current period, technological factors and rapid scientific and technical fluctuations directly affect the market price of leased assets, posing many difficult challenges, forcing financial leasing companies to rise up to survive in the new economic environment.
3. Mechanism of action
The diversity of transaction methods, flexibility and a wide range of leased assets, adapted to the needs of the lessee, will be the factors that make the financial leasing market vibrant. The profitability of most leasing activities depends on achieving small but stable operating revenues on large portfolios. Accordingly, relatively small changes related to leasing operating costs (bad debts, interest expenses and administrative management costs) can affect profits. At the same time, an unprofitable capital portfolio taking into account the cost of purchasing assets, bad debts and management costs can quickly reduce the company's capital and threaten the company's operations. Financial leasing activities have many characteristics such as: unsecured loans or partially secured loans of current asset value rarely provide a reasonable level of security. There is no standard for the rate of non-collectible debt in leasing activities. Because the quality of portfolios can vary between different extremes, some large value portfolios have loss rates, while some small value portfolios have problems with rates as high as 15 to 20%. Therefore, in the management and operation, financial leasing companies must manage, analyze credit, monitor... At the same time, financial leasing companies need to establish a network of reputable equipment suppliers to improve the company's operational efficiency. This will help financial leasing companies limit risks such as leasing fictitious assets, overstating asset values, possible collusion with suppliers...
V. THE ROLE OF FINANCIAL LEASING ACTIVITIES
1. Role in the economy
CTTC is a form of medium and long-term credit that meets the capital needs of the economy.
All production and business sectors in the economy want to develop, the first factor needed is investment capital. And CTTC has really
Promote efficiency in creating basic investment capital for enterprises. CTTC activities create capital diversity for the economy, increasing the level of competition in the operations of financial institutions. Thereby not only increasing capital for the economy but also improving the efficiency of capital use in the economy.
CTTC contributes to promoting innovation in technology, equipment, and scientific and technical improvements.
In addition to bank loans, through CTTC, machinery and equipment with advanced technology are brought into businesses, contributing to improving the level of production in many fields.
Thanks to the CTTC service, instead of borrowing capital to directly import new technology, enterprises can directly rent modern technology from CTTC companies through leasing services, contributing to improving the overall technological level of society even though enterprises have limited investment capital. At the same time, the CTTC service also helps domestic machinery manufacturers through the introduction of a leasing system to support the equipment sales activities of suppliers (goods sellers). Thus, CTTC also has the effect of promoting and supporting the modernization of industry.
Thanks to the financial company's network, assets and technology are transferred everywhere, reducing the gap in technical and technological levels between regions.
CTTC contributes to diversifying the operations of financial institutions .
The emergence of financial companies has contributed to diversifying the operations of financial institutions, including not only general trading banks but also financial institutions providing specialized financial services with diverse types, serving many customers, providing capital for production in many forms, breaking the monopoly of banks in providing medium and long-term capital for the economy, creating a level of