In banking and finance, banks often deal with leasing transactions, especially in the context of asset financing. When a bank gives an asset on lease to a customer, the legal relationship created is that of lessor and lessee. This relationship is important for JAIIB and CAIIB exams because it involves concepts of ownership, possession, rights, liabilities, and risk, which are frequently tested in objective and case-based questions.
The lessor–lessee relationship is mainly governed by the Transfer of Property Act, 1882, and general principles of contract law.
Meaning of Lessor and Lessee
A lease is a legal arrangement where one person allows another person to use an asset for a specified period in return for consideration, known as rent or lease rentals.
- The lessor is the owner of the asset who gives the asset on lease.
- The lessee is the person who takes the asset on lease and pays periodic rent.
In banking:
- Bank / Financial Institution = Lessor
- Customer / Borrower = Lessee
When Does the Lessor–Lessee Relationship Arise in Banking?
This relationship arises when a bank or financial institution purchases an asset and leases it to a customer instead of giving a loan for its purchase. The ownership of the asset remains with the bank, while the customer gets the right to use it.
Common examples include:
- Leasing of machinery and equipment
- Vehicle leasing
- Infrastructure asset leasing
- Finance lease and operating lease arrangements
This method is often used when banks want to retain ownership of the asset as security.
Essential Elements of a Lease
For a valid lease to exist, the following elements must be present:
- There must be an identifiable asset
- Ownership remains with the lessor
- Right to use the asset is transferred to the lessee
- Lease period must be defined
- Consideration (lease rent) must be paid
These points are important for MCQs.
Rights and Duties of the Lessor (Bank)
When a bank acts as a lessor, it has certain duties. The bank must give the lessee peaceful possession of the asset and ensure that the lessee can use it without interference during the lease period, provided lease conditions are followed.
The lessor also has the right to:
- Receive lease rentals on time
- Inspect the asset
- Terminate the lease in case of default
- Take back possession of the asset after lease expiry or default
Ownership-related risks generally remain with the lessor unless otherwise agreed.
Rights and Duties of the Lessee (Customer)
The lessee has the right to use the asset for the agreed purpose during the lease period. However, the lessee must:
- Pay lease rentals regularly
- Use the asset with reasonable care
- Not misuse or damage the asset
- Return the asset after lease expiry
- Follow all terms of the lease agreement
Failure to comply can result in termination of the lease.
Types of Lease (Important for CAIIB)
Finance Lease
In a finance lease, the lease period covers most of the economic life of the asset. The lessee bears maintenance, insurance, and risk, even though ownership remains with the lessor. This lease is similar to loan financing and is often tested in exams.
Operating Lease
In an operating lease, the lease period is shorter, and the lessor bears major risks and maintenance responsibilities. The asset can be leased to multiple users over its life.
Difference Between Lease and Loan
In a lease:
- Ownership remains with the bank
- Customer pays rent
- Asset can be repossessed easily
- Bank bears ownership risk
In a loan:
- Ownership passes to customer
- Customer pays EMIs
- Asset is hypothecated
- Bank has only a security interest
This comparison is frequently asked.
Termination of Lessor–Lessee Relationship
The relationship ends when:
- Lease period expires
- Lessee defaults on rent
- Terms of lease are violated
- Mutual agreement to terminate
- Asset becomes unusable or destroyed
On termination, the lessee must return the asset to the lessor.