Economics/1. Banks and Banking

PhD, docent Kabachenko D.V., Kovalenko A.S.

National Mining University, Ukraine

The use of leasing as a tool to improve the efficiency of the credit activities of banks

As shows the practice of recent years, accompanied by world financial crisis, increasing number of enterprises and individuals in Europe prefer leasing as one of the most profitable and attractive forms of lending. As known, leasing is the form of financial activity which means the relationship between the lessor and the lessee, in which client instructs the firm to purchase certain property at the expense of this firm with a subsequent transfer of the property to the client with the agreed payment percent.

From the position of leasing companies, the benefit is: 

– Receipt of the agreed interest; 

– Maintenance of a purchased property with the possibility of its subsequent use in financial transactions called an "operating leasing", which does not provide for the transfer of the subject of lease after the payment of all interest to these companies.

At the same time, the financial resources of most leasing companies formed by 60-90% through bank loans. This fact clearly shows the dependence of these firms from banks. We can highlight certain interests that leasing companies are hoping to satisfy from such cooperation. These include:   

– Getting large and long-term credit loans at reasonable interest rates;   

– The ability to quickly increase the size and timing of services provided by the ongoing financial support of banks;   

– Get the maximum acceleration of getting each loan under various lines of credit;   

– To attract new customers from the customer base of partner banks;   

– Strengthening own position on the financial market as a result of co-operation with reliable, well-known banks.

The competition in the financial market, forcing banks to take an active expansion of providing operations, what contributed to the launching of their own leasing operations. In addition, as noted above, banks also control independent leasing companies by providing loans to them. And, by lending to these firms, banks are indirectly funding the lessees in the form of trade credit. Based on this, we can conclude that banks also have their own interests in using of leasing as a form of loans to their clients:

– To get reliable and profitable customer base in the form of leasing companies;   

– Cash flow in the form of loans to be paid for any credit interest;   

– The possibility of developing various new lines of credit, aimed at a wide variety of subjects of leasing;   

– Attracting new customers for the retail business from the lessors and lessees;

– The establishment of partnerships with various insurance companies, which serve leasing companies.

Basing on considered above interests of both sides, we can describe the basic scheme of cooperation in the financial market: at the bank, which managers intend to improve its financial performance, a new kind of credit is developing and implementing - granting of loans to leasing companies. Also, to increase the range of services and attract more customers, it is possible to create several credit lines to be used for various subjects of leasing, such as special equipment, automobile leasing, stead, etc.

Then, after finding stakeholders, leaders of these organizations conclude a number of contracts which govern their relationship, reflect the detailed loan conditions and requirements that the bank will bring not only to the leasing company itself, but also to its direct customers - lessees.

It should be noted that, due to the financial crisis of recent years, these requirements are much tougher, and only after the conclusion of all agreements that take into account the risks and force majeure [1], both parties begin a mutually beneficial cooperation based on the satisfaction of the above interests.   

It should be noted that banks have three variants of using leasing for improving their own financial performance:

1) Providing profitable large credit lines to leasing companies for building their financial capital.

2) Introduction of leasing in the spectrum of own bank’s operations.

3) Opening by the bank its own leasing subsidiary.   

Leasing as a form of services, provided by the bank, is a very profitable option for attracting new client base and profits [2]. At first, it opens up the possibility for the bank's management to attract new customer segment - legal entities, and for the owners - to introduce a new kind of business to his company – the corporate business (related with service entities).

Since many people are interested in obtaining certain property to rent at interest, the standard consumer credit products are not able to meet their demands. At this stage, the action takes an alternative - leasing services. After such innovation, banks will get next possibilities:  

– To engage for cooperation insurance companies in order to conduct leasing transactions. At first, it will increase bank’s customer base. At second, it will increase the range of banking services, enabling the introduction of new products in the retail business, which will be directly related to insurance, such as credit for cars, real estate, consumer products, etc.

– To carry out financial transactions in foreign currency (dollars, euros, etc.) in the European countries that have their own currency. For example, in Ukraine, in connection with the resolution of the National Bank of Ukraine, all the representatives of the banking structure in the financial market have the right to lend to individuals and legal entities exclusively in local currency (UAH). However, this condition is not beneficial for a number of businesses [3].

Since the experts predict a fall in the UAH exchange rate in the period of the coming crisis, Ukrainian companies that keep fixed assets in foreign currency, and companies with foreign capital, are bearing large expenses, while exchanging foreign currency for any financial transactions.

Also, the existence of services to receive certain property to rent with possibility, of using foreign currency, is a crucial factor for establishing a partnership between banks and foreign companies that operate in other countries with own national currency. Projected increase in the number of serving through such innovations enterprises is driven by the existence of certain restrictions for commercial firms to obtain loans in some European countries.

If we consider Ukraine as an example, according to the decision of the National Bank of Ukraine, all companies which share of state and municipal property is more than 25% cannot use commercial loans. It is connected to the moratorium on the alienation of assets of such companies. However, this limitation does not exist in the implementation of the leasing transaction, because the leased asset is owned by the lessor (in our case by the bank) until the last payment and in the case of using an operating lease - do not pass to the lessee at all.

The positive effect on the bank's activities by including leasing in the range of services was supported by the rating of Ukrainian leasing companies for the year 2012, conducted by the Association «Ukrainian Union of Lessors» together with Gosinfuslug (See Table 1.). This rating indicates that the first three leading position in the Ukrainian market of leasing companies is taken by the banks that have successfully introduced this service in their proposals:

Table 1

Highest Rated Ukrainian leasing companies*

Leasing company (bank)	The portfolio of contracts at the beginning of 2012	the value of assets leased in 2011
VTB Leasing Ukraine	5 746 980 UAH	2 414 470 UAH
RayffayzenLizing Aval	1 879 990 UAH	1 039 510 UAH
UniCreditLizing	1 646 100 UAH	1 276 600 UAH

* The rating of Ukrainian leasing companies for the year 2012, the Association «Ukrainian Union of Lessors», Gosinfuslug.

There is also a third option of leasing services to improve the financial performance of the bank - to create its own leasing subsidiary. With this approach, the bank has full control of this company; receives direct income from financial transactions, what increases their own customer base and customer base of the subsidiary which recommend leasing to its immediate customers and ensure reliable, high-quality service in their own organization; gets an opportunity to work with numerous insurance firms.

Thus, the bank earns a place in the market of competitors (independent leasing companies), because it is more attractive for organizations involved in insurance, to have partners in the face of large and reliable banks than the individual leasing companies which build their financial capital by obtaining credits and do not have real possibility of guaranteeing the successful cooperation.

At the same time, under the law of some countries, banks are not always able to benefit from this cooperation. For example, in Russia, there is a limit on bank lending to each leasing company. Thus, Russian banks can lend to a single borrower in an amount not to exceed 25% of the equity of the credit institution. Consequently, there is a necessity to look for other ways to make more profit for the bank from such cooperation.

When it comes to lending to leasing subsidiary by the parent bank, we can offer the following solutions to this problem: 

– Splitting the company into smaller and, therefore, getting the opportunity to lend to each of them, and, as a result, save the number of clients;

– Access to the stock market in order to trade securities of its subsidiaries; 

– The bank may act as a financial adviser and assistant in the organization to attract foreign funding for its subsidiary and other leasing companies.

So, we have considered the main proposals for banks to obtain additional income and improve their financial performance through the use of various forms of leasing. To this end, we have analyzed the situation in the financial market of Ukraine and the Russian Federation in the article. The study identified three main forms of leasing: 

– Lending the activities of independent leasing companies; 

– Inclusion of leasing in the range of services offered directly by the bank; 

– Creation one or several leasing subsidiary by the parent bank.

Any of these options, depending on the objectives, financial capacity and will of banks owners, could bring additional revenue, expand the sphere of activity, attract new flows of interested customers and establish partnerships with various insurance companies and other firms. Despite the restrictions imposed by legislations, the authors have presented a number of proposals for getting benefits of such financial transactions, considering these restrictions.

In conclusion, we can note that consequently, by the growing popularity of leasing in most European countries, most of Ukrainian banks are going to face the need to actively work towards the provision of leasing services in the near future, which will enable them to attract additional customers segment and generate more revenue from the use of leasing as a forms of bank lending.

Literature:

1. Пономаренко П.И., Кабаченко Д.В. Оценка и методы снижения риска в кредитной политике банков // Науковий вісник НГУ. – 2003. – № 3. – С. 20-31.

2. Кабаченко Д.В., Білецька К.М. Розробка шляхів поліпшення системи стимулювання залучення вкладів та підвищення ефективності обслуговування клієнтів банку // IV международна научна практична конференция «Поглед върху световната наука - 2010». Том 1. Икономики. София. «Бял ГРАД-БГ» ООД, 2010. – С. 69-73.

3. Kovalenko A.S. Leasing - as an effective form of lending sustainable development of Ukrainian enterprises in the period of financial crisis // Proceedings of the International Conference «Sustainable development of enterprises, regions and countries». Vol. 2. Section «Financial and credit system and sustainable development», 2012. – Р. 206-208.