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Auto-Vehicles Lease Agreements in Perspective.

Byline: Majid Khan Jadoon

Prior to embarking to pen down this write-up, let me promptly declare that the purpose of this Article is NOT to redicule any entity or institution, whatsoever.

The aim is to pin-point certain deficiencies in the hope that the concerned Authorities may, perhaps, give some thought to this most important matter of Public interest and take action to rationalize and streamline the conduct of the Business, which will benefit the concerned Parties generally and the Insurance Industry and Professionals, particularly.

By virtue of my being a Professional Insurance Surveyor and Loss Adjuster for the last about half-a-century of my Professional-life, as well as after interactions and practically experiencing assorted problems with the Lessors/Lessees and Banks/Financees during the pursuance of my Profession, I thought of expressing my view-points, vis-a-vis Auto Vehicles Lease/Finance Agreements. There are two different Types of Agreements governing the acquisition of Auto Vehicles by the desirous Lessees/Financees, viz:

a) Bank Financing of Auto Vehicles

b) Leasing of Auto Vehicles.

It is a universal truth that Trade and Industry are the back-bone of any Country's Economy, whereto Banks and Financial Institutions would supply the life-sustaining blood and soul in the form of financing the same. In the modern financial scenario, major industries and large projects in particular and small Industries in general, owe their establishment, existence and functioning to the regular supply of monetary funds provided to them by Banks and Financial Institutions. However, prior to providing funds, Banks and Financial Institutions would ensure security of their money being advanced to the Borrowers/Lessees. These Securities are obtained in the form of Co-laterals of Real Estates or Sovereign-guarantees, where-against Loans are disburssed to the Borrowers/Lessees.

Like-wise effective means of Communication, i.e. the Transportation of Raw-materials as well as Finished Goods, is akin and equally important to keep the wheels of Industries/Businesses running. Thus, without the supply of the means of Transportation, the smooth and continuous flow of Goods and Services would be impossible which can be provided by fast Transportation system. Lest I get diverted from the subject, let me revert and say that the subject of financing is an enormously vast field. I would, however, confine myself only to the field of Auto Vehicles Leasing/Financing which has caught my imagination, positive as well as negative, whilst ponderover the various aspects of this Business.

Let me very briefly explain the definitions of the afore-mentioned 2Types of Auto-Vehicles Finance and Lease Agreements.

Auto Vehicles are leased out to desirous customers by Lessors/ Banks and accordingly an Auto Lease/Finance Agreement, comprising of the terms and conditions of the Contract of Lease/Finance is formally executed in-between the Lessors and Lessees, or the Banks/Financees.

In case of Bank/Financ, the Financees would pay 30% of the Market Price of the Auto Vehicle and 70% would be provided by the Bank.

After the Financee has paid his share of 30%, the Bank would hand-over a Pay Order of the Complete Cost Price of the Vehicle in favour of the concerned Auto Vehicle Dealers.

In alike case, the Financee would get the Vehicle Registered in his own name/HPA the Bank and the Original File of the pertinent Documents of the Vehicle would be retained by the Bank, while the necessary Vehicleutilization Documents would be handed-over to the Financee.

Thereafter, the Financee would continue to pay the monthly Installments, inclusive of the Interest and on completion of the Finance Period and Exhaustion of the entire Installments, the Bank would handover the Original File of the AutoVehicle to the Financee and thus, the Agreement would get concluded.

Contrary to the Auto-finance Agreement, in an Auto Lease Agreement, the acquisition of the Auto-Vehicles would be entirely financed by the Lessors themselves which too would be registered in their Name. However, possession of the Vehicles would be given to the Lessees on Rental-basis and the Leasses would pay the Rentals as mutually agreed by the Parties. On completion of the period of the Lease Agreement, the Agreement may either be Renewed for another term or the same would culminate and the Leased Vehicles would be returned to the Lessors.

In case, however, if the Lease Agreement would have been provided with the condition of the Subjectmatter to be provided to the Lessessees' Owner-ship at the exhaustion of the Lease Agreement, then the Agreed Installments too would be inclusive of the Costs of the Vehicle. Accordingly, on the exhaustion of the Lease Agreement, as well as completion of the due Payment to the Lessors, the Vehicle would be transferred to the Ownership of the Lessees.

A Lease/Finance Agreements consist of assorted terms and conditions, spread-over numerous Clauses of the same, usually, very finely printed. As such, to read and thoroughly understand the Contents of these Lease/Finance Agreements is an uphill task, even for certain educated persons, while comprehending of the Technical and Legal implications as well as the Legalities of the same are the forte of Legal Experts only.

As such, only few of the Lessees/Financees would even attempt to thoroughly go through the same and almost all the Lessees/Financees would hardly bother to read it, because the most technical/legal wording thereof would fall beyond their comprehension. The Lessors/Banks would always get all the Pages of the Agreement signed by the Lessees/Financees, whereby they get bounded to fulfill each and every demand of the Lessors/Banks and have to submit their wishes.

More-over, in our country, Lessees/Financees are mostly uneducated and/or under-educated people, especially in English, therefore, they would hardly comprehend the Technicalities/Legalities of the wording of the Auto-Lease/Finance Agreements, drafted and fine-tuned by the Legally Expert Advisors of the Banks'/Lessors. The wording and phrasing of alike Agreements are constructed by the Banks'/Lessors' Legal Advisors in such a manner that the Provisions thereof would mostly translate in favour of the Banks/Lessors in all scenarios. This has been observed by my careful and thorough study of an Auto Vehicle Finance Agreement, wherein it appeared almost impossible to hold the Bank liable for a valid contention/interpretation of Lessee/Financee. Besides, during the entire Lease-period, the concerned Bank would continue to derive absolutely Cost-free Profits from the Financees, and yet, would also get the Vehicle registered in their own name, without including the Name of the Financees within the Registration Book.

At times, this would drove the Financees into troubles, when during Police Snap-checking, the Authorities would question the Financees Ownership of the Vehicle, Registered in Name of the Bankers only and, therefore, due to Non-inclusion of the Financees' Name in the Vehicle's Registration Book, they would also question the Financees possession of the same, accompanied by many more related questions as well.

Further, only a day's delay in payment of the Installment is diverted to the Financees, as "Per Day Late Payment Charges", which the Lessees/Finances have to additionally bear as well, because of alike Clause within the Finance Agreement, despite being ambiguously worded too. No Grace Period Clause for Payment of the Installment can be found within the Agreements and in this way, the Financees' are further subjected to more and more financial burden and retrieval of money therefrom in the name of Late Payment Surcharge.

Obviously, any Financee might be sick, entangled in certain social problems, may be out of Town, and/or may be hospitalized etc. etc. and shall not be able to give attention to Payment of the Vehicle's Installment during alike scenarios.

Therefore, it is most important that Grace-period Clause for Late Payment of installment for, say, at least one week, must be incorporated in alike Finance Agreements.

More-over, the Vehicle is required to be Insured with an Insurer of the Bank's choice and the entire premium is to be borne by the Financees during the whole Finance-period.

Without going into details of all other negatives placed at the door of the Lessees/Financees within the Lease/Finance Agreements, I would express my view-point about only the Insurance aspect of the Leased/Financed Auto-Vehicles which, in my opinion, pertains to the greatest injustice being perpetrated on the Lessees/Financees at the hands of the Lessors/Banks.

After the Conclusion of the Autovehicle Lease/Finance Agreement, the Lessee/Financees are required to pay, in cash, a specific amount of the Market-price of the Vehicle, i.e. 10% or 20% or 30%, which is called Down Payment, while the balance is invested by the Bankers/Lessors.

Thus, the Annual Insurance Premium, say, standing at Rs.100,000/=, or whatever, is to be entirely paid by Lessees/Financees in one go. Accordingly, on yearly Renewals of the Insurance Policy, the total Annual Premium would be born by the Lessees/Financees.

Thus, the Lessors/Banks would enjoy an entirely Free Insurance Coverage of the Component of their Financial Stake in the Leased/Financed Vehicle during the entire period of Lease/Finance Agreement, during the while period, through-out the whole/period of Lease/Finance Agreement.

In my opinion, this is an absolutely unjustified practice. Because at the initial stages, the Lessors'/Banks' Stake in the Cost of the Vehicle is considerably greater than that of the Lessee/Financee and, therefore, the Cost of Insurance Premium ought to be accordingly apportioned inbetween the Lessors and the Lessee/Financees.

For example, for a Lease/Finance Agreement of 3-years duration, the Lessors'/Banks' Stack in the Vehicle's Cost would stand at, Say:2,000,000/=, while that of the Lessee/Financee would be mostly confined to the Down-payment, i.e. much less than that of the Lessors/Banks.

Therefore, the Lessors'/Banks' Share of the Insurance Premium ought to be much higher than that of the Lessee/Finance and the same must be proportionately borne by both the Parties.

Accordingly, with the continuous minimization, year by year, of the Lessors'/Bank's Share of the Stake in the Vehicle, due to regular payment of Installments by the Lessee/Financee, the Lessors'/Bank's Component of the Insurance Premium too would decrease and that of the Lessessed/Financee would increase which too, must be accordingly spportioned amongst them, year by year, until the expiry of the Lease/Finance Agreement

Similarly, with the continuous Payment of Installments for year-by year, the Lessors'/Bank's Stake of Interest in the Vehicle would decrease and that of the Lessee/Financee would increase, which would ultimately exhaust in favour of the Lessee/Financee.

In this manner, the quantum of Insurance Premium must also be accordingly decreasing for the Lessors/Banks which must be accordingly paid by both the Parties, till the exhaustion of the Lease Period. But without any regard to the aforementioned factual Scenario, the Lessees/Financees are compelled to continuously pay the entire premium through-out the whole period of the Lease/Finance Agreement and the Lessors/Banks enjoy free Insurance coverage of their Stake of the Financial Share in the Vehicle.

This practice must be done away with and the State Bank of Pakistan must intervene in the matter to safe-guard the interests of the concerned people. This injustice is regularly applied to all the Lessees/Financees in our country and, either due to lack of knowledge and understanding the point or avoidance of taking the troubles to initiate this Right of the concerned people, they do not protest to the State Bank of Pakistan and quietly keep-on bearing the Charges through-out the whole period of the Lease/Finance Agreement, to the pleasure of the Lessors/Banks

More-over, the Bankers/Lessers would also trample over the Lessees'/Financees' Right of choosing their own Insurers, despite the fact that the same Insurers would also be on the Approved Pannel of the Banks/Lessors.

Thus, the employees of the Banks/Lessors would get the full benefits of the commission on Insurance premiums and deprive the Lessee's/Financees Insurance Representatives therefrom.

At the time of a Claim, the Bankers/Lessers would avoid to sign/stamp the Insurance Claim Form, on one or another pretext, and thus discourage the Lessesses/Financees from pursuing their genuine Claims against the Underwriters, under their relative Policy of Insurance.

Therefore, in my opinion, it is of particular importance that the SECP and the State Bank of Pakistan ought to look into the matter seriously to stream-line the Contracts of Lease/Finance Agreements, keeping in view the genuine interests of both the Parties which will accrue to the public taking interest in taking out Insurances, not only for their Auto Vehicles, but also numerous NonMotor Classes of Insurance as well. This, in my opinion, shall play a great role in promoting the Insurance Industry by the multiplication of their premiums and fattening of the Underwriters' pools, for further investment and development of the country.

Before ending this Article, I would suggest that the SECP and The State Bank of Pakistan form a Joint Committee and thus Prepare a Draft Lease/Bank Finance Agreement for Vehicles and circulate the same to all Banks/Financial Institutions to implement the same accordingly.
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Publication:Insurance Journal (Karachi)
Date:Sep 30, 2018
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