The important features of the Leasing module of Oracle FLEXCUBE are discussed in depth in this chapter.
A Lease can be defined as a contract where a party being the owner (lessor) of an asset (leased asset) provides the asset for use by the lessee at a consideration (rental), either fixed or dependent on any variables, for a certain period (lease period), either fixed or flexible, with an understanding that at the end of such period, the asset, subject to the embedded options of the lease, will either be returned to the lessor or disposed off as per the lessor’s instructions.
Leasing is nothing more than a method of paying for the use of an asset over a specified period of time. Though it seems very similar to the concept of renting, they are very different.
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There are two parties to a lease: the owner called the lessor and the user called the lessee. The lessor is the person who owns the asset and gives it on lease. The lessee takes the asset on lease and uses it for the period of the lease. Ownership is no pre-condition for leasing. Technically, in order to be a lessor, one does not have to own the asset; one has to have the right to use the asset. Thus, a lessee can be a lessor for a sub-lessee, unless the parent lessor has restricted the right to sub-lease.
The subject of the lease is the asset, article or property to be leased. The asset may be anything – an automobile, land, factory, or consumer durable. Only tangible assets can be leased, you cannot lease intangible assets, since one of the prime elements of a lease is handing over possession, along with the right to use. Hence, intangible assets are assigned, whereas tangible assets may be leased.
The concept of leasing will have the following limitations:
The term of lease, or lease period, is the period for which the agreement of the lease shall be in operation. As an essential element in a lease is redelivery of the asset by the lessee at the end of the lease period, it is necessary to have a period of lease. During this certain period, the lessee may be given a right of cancellation, and beyond this period, the lessee may be given a right of renewal, but essentially, a lease should not amount to a sale, i.e. the asset should not be given permanently to the lessee.
Leases can be broadly classified into two:
In a Financial Lease, though the device used is leasing, the purpose and effect is virtually financing – leasing for the purpose of financing. However the generic differences between a lease and a lease mentioned earlier still remain. The lessor will provide the money needed by the lessee to buy an asset; in return the payments by the lessee will be in the form of lease rentals. The lease amount is the amount that has been financed. A Financial Lease is a ‘lease look-alike’. This lease should be treated like a lease with the lease amount as the principal and a interest charged.
It is a non-financial lease. Any other lease other than a financial lease is an operating lease. In a financial lease, the lessor does not operate the asset he leases; he merely finances it. The word ‘operating lease’ is not applied to indicate that the lessor ‘operating’ the asset, but only as a contra-distinction to Financial Leases. Therefore, any lease where the lessor takes a risk other than a plain financial risk is an operating lease. This lease should be treated like a lease with no principal and the entire lease amount as a special interest that is paid in installments.
The lease rental represents the consideration for the lease transaction. This is the amount that the lessee pays the lessor.
If it is a Financial Lease Transaction, the rentals will simply be the recovery of the lessor’s principal, and a certain rate of return on outstanding principal, i.e. the rentals can be seen as bundled principal repayment and interest.
If it is an Operating Lease Transaction, the rental might include several elements depending upon the costs and risks borne by the lessor, such as:
Down Payment is the upfront payment made by the lessee at the beginning of the lease. This is a surrogate for the margin or borrower contribution in case of lease transaction. In the case of financial lease, the down payment will be entirely towards the principal and in the case of operational lease; the entire payment will be an income.
Simply put, ‘Residual Value’ means the value of the leased equipment at the end of the lease term. If the lease contains a buy out option to buy the asset at the residual amount at the end of the lease, this is the price at which the lessee can buy the asset from the lessor at the end of the lease.
It is common practice to have residual amount for Financial Leases, but it is also possible for Operational Leases to have residual amount.
A Product is a specific service, or scheme, that you offer your customers. A Leasing product is a specific Leasing scheme that is offered to customers.
While setting up the module, the bank or the Leasing Company can define the various leasing schemes that it offers as products. For each product, it can also define ‘attributes’, or in other words, the terms and conditions. When a user at the bank or leasing company actually processes a lease, it can be associated with a product. The lease acquires the terms defined for the product that it involves. However, you can allow a user to change the inherited attributes of a lease, while processing, to suit a special customer.
When defining a scheme as a product, the bank can specify the following details:
The product is defined only once. Therefore, you need not specify the basic details, every time a lease is entered into Oracle FLEXCUBE. This feature drastically reduces processing time, thus allowing a bank to focus on and take advantage of, the opportunities in the market.
In Oracle FLEXCUBE, it is possible to define multiple interest and charges. That is, you can specify the interest and charge that you would like to levy at the different events in the lifecycle of a lease.
Interest can be calculated based on a rate, or a flat amount. Interest rates may be:
You can define tier and slab structures to compute charges. You can also define a minimum and a maximum charge, as well as a compensation for defaulted schedules.
The default interest calculation basis is 30 (Euro)/ 360.
The repayment schedules for interest can be defined, for each transaction. Depending on the mode of payment, the interest will be liquidated either automatically or manually, according to the schedule defined.
Accrual of Interest
The frequency of interest accrual, whether daily, monthly, quarterly, half-yearly, or annual, can be specified for a product during set up. This specification will apply, to the accruable components of all leases involving the product.
The system accrues interest whenever you make a backdated rate change. An accrual, to the extent of a repayment, is automatically carried out at the time of repayment.
The module supports amendments and payments for previous accrual periods. Subsequent accruals will correct any adjustments that are to be made due to these actions.
The Lease module allows you to accrue interest at the product level. Rather than accrue interest for each lease involving a product, and then update the ledgers of the accrued interest individually, the bank can accrue interest for each contract involving the product, and pass a consolidated entry to the ledgers.
Using the Lease module, you can define flexible schedules for the payment of principle, interest, commission and fees. Schedules for the payment of the various components can be defined individually, or otherwise. The schedules would be amortized based on reducing balances.
A bank using this module can define a grace period for the products it offers. This specification would apply to all contracts involving the product. A compensation profit will be applied in case of default in payment, on expiry of the grace period. Compensation will not be applied if the payment is made during the grace period. In case the payment is not made, the compensation will be calculated from the day the payment is outstanding.
The Lease module of Oracle FLEXCUBE, allows you to define the various status, into which overdue lease should move. The module allows a bank to define:
Movement of a lease from one status to another can be either automatic, or manual. Lease, both regular and past due, can be tracked, automatically, across several user-defined status.
Oracle FLEXCUBE supports the processing of a Withholding and an Expense type of tax.
Tax can be computed based on either the liquidation amount or the schedule amount. The bank can define tax rates as slabs or tiers and define a minimum and maximum tax amount that could apply. The bank could bear the tax (Expense) or charge the customer for it (withholding).
A lease contract goes through different stages in its lifecycle. These stages are referred to as events in Oracle FLEXCUBE. Events can be defined as Booking, Amendment, Liquidation, etc.
Once a lease contract is initiated, Oracle FLEXCUBE automatically processes all the events defined for it starting from initiation until liquidation. It processes the following automatically:
In addition, you can automatically track overdue contracts and classify them into various statuses. For each status, you can specify preferences like whether accruals should be stopped, reversed, or, if the lease should be transferred to a different asset account.
You can levy compensation on premature payments. This compensation can be specified both in terms of a percentage and as a flat amount.
Amendments (changes to the Maturity Date, the Principal amount, the Interest Rate, Interest spreads, Residual Amount etc.) are possible on any lease contract, product, or group of contracts. These amendments can take effect as of back-value or future dates.
The zero-based interest accrual methodology ensures that interest accruals are recalculated and adjusted for back-valued amendments.
Subsidized residual amount can be changed during VAMI if subsidized residual amount is checked at the product level. Down payment of a lease can be changed during VAMI if there is an increase in amount financed.