Lease Financing in the Indian Context

Two important considerations in capital budgeting are the cost or economic value aspect and the liquidity aspect. The periods associated with “tight money” tend to increase the relative importance of the liquidity aspect. On the other hand, "tight monetary policy" and increase in interest rates aimed at curbing inflation may result in higher cost of external debt financing and also in constraints on the availability of funds from external sources. Thus, in such periods, an industry may be faced with the problem of liquidity, which will cast importance on other aspects of investment decisions. One possible solution to the liquidity problem seems to be a financial lease of the required asset. This strategy had been adopted by firms in USA to source the necessary funds at times of "tight money" periods. Any change in the Indian context in granting depreciation benefits to the lesser can disrupt industrial growth significantly, especially at times of liquidity crunch, and lead to higher cost of external debt financing.