A full-fledged loan alternative: how the law on financial leasing will help business

The door to market growth is opened by the regulation of the rights and interests of lessors and lessees in the new law on leasing.

All last year, the leasing market lived in anticipation of the adoption of the Law on Financial Leasing. It was adopted by the deputies of the Verkhovna Rada on February 4, 2020. In general – February 4, 2021. Before that – more than one year of preparation.

Even the deputy head of the NBU Dmytro Sologub called the appearance of a new law on leasing an event that the leasing industry has been waiting for for many years. Note that the National Bank became a regulator of the leasing market only on July 1, 2020. However, leasing in the National Bank is already called a full-fledged alternative to credit. First of all – for business. “An entrepreneur can quickly get to use agricultural machinery, industrial or other necessary equipment,” – said there.

The full use of such a tool as “leasing”, from the point of view of today’s regulator of this market, has long been hindered by the imperfect legal field, lack of awareness of entrepreneurs and citizens about leasing, as well as limited opportunities to attract financing by leasing companies.
It should be noted that the previous version of the law on financial leasing has been in force since 2004 and in recent years has not been able to solve many of the problems that have accumulated in the industry at the legislative level. This often complicated the relationship between lessors and lessees and hampered the development of leasing itself.

The subject of leasing was a particularly controversial issue in leasing – the lessor’s risks here were very high. The new law is designed to regulate the procedure for the lessee to acquire ownership of the leased property at the end of the term, and establishes the procedure for terminating the financial leasing agreement in the event of significant overdue lease payments.

Now, according to Oleksiy Meretsky, a member of the Association of Ukrainian Banks (AUB), if the agreement between the lessor and the lessee is declared invalid at the legislative level, the leased asset will be returned to the lessor immediately. Delay in returning the leased object to the debtor, according to the new law, free, as it was before, will not be. The debtor will pour out “in a penny”.

The subject of leasing, according to the new law on leasing, will be owned by the company. “Accordingly, the risks of losing the leased asset will be less, which will have a positive impact on attracting investors,” – says Alexei Meretsky.

The law also defines the possibility of subleasing the leased asset and regulates the rules for such transfer.
In addition, the relevant regulations eliminate differences in the form in which the financial leasing agreement should be concluded and harmonize the requirements of the law with the requirements of the legislation on financial monitoring.
The new law on leasing at AUBG is also expected to assist in expanding the opportunities for business entities to use financial leasing operations to upgrade fixed assets, increase gross product production and the tax base to further fill the state budget.

At the same time, despite the positive aspects of the new law, leasing market participants note that the law on financial leasing could be better if MPs listened more to market players. “Unfortunately, the deputies did not listen to all the amendments and explanations given by leasing companies through our UOL association. This is a problem when there are people on the committees who have nothing to do with the financial markets and have little idea what the specifics are, ”said Serhiy Vaskov, managing partner of the ESKA Capital leasing company.

Meanwhile, if you look at the financial results of the leasing market for 2020, they look impressive even before the adoption of the new law on leasing. According to the Association of Lessors of Ukraine, the total leasing portfolio, despite the pandemic and economic downturn, in 2020 grew by 61% and amounted to 25.4 billion hryvnia. “The figure has grown due to organic growth and a third – due to an increase in the number of members,” – said the Association of Lessors.
It should be noted that lessor companies and banks, which are members of the Association of Lessors, make up approximately 80% of the Ukrainian leasing market.

OTP Leasing, ULF-Finance and Ukrgasbank became the leaders of the sphere last year. Their combined share was 59% of the portfolio of members of the organized market. The same participants also topped the top three in terms of the volume of new deals, where their total share was 60% of the total.

The most successful for the industry in the Association of Lessors called the IV quarter of 2020 – the value of new transactions for this period amounted to 6.9 billion hryvnia and increased by 12% compared to the III quarter of 2020, and 50% – compared to the same period in 2019 year.

According to Oleksiy Meretsky, only the level of leasing penetration in the segment of passenger cars in 2020 was 13%, commercial – 11.6%, while in the previous two years it was 9% and 8.6%, respectively.
The key market segments, according to the Association of Lessors, were wheeled vehicles – 51% and agricultural machinery – 28%. In third place is railway equipment – 8%. Special machinery and other equipment 7% and 6% respectively.

Given all the indicators, the leasing market in 2020 was one of the most stable segments of the non-banking market of Ukraine, which recovered its position after falling in the spring and summer and significantly increased in volume.

However, the leasing market has room to grow. “On average in Europe, leasing finances 28% of new transport and equipment. This means that Ukraine has the potential for further growth at least twice. Leasing in Ukraine accounts for only 3-4% of investments in fixed assets. In Europe, a similar figure – about 30%. One can only imagine the potential of the leasing market for legal entities in our country, “says Oleksiy Meretsky.

The new state program of financial leasing and mortgages at 5% per annum should further promote the development of the leasing market in 2021. Its appearance is promised by Prime Minister Denis Shmygal in the first half of the year.
The National Bank also promises to open new opportunities for the development of the leasing market in its draft new law on financial services and financial companies.

The regulator also intends to change the regulation of leasing companies. The NBU notes that today in the leasing market there are “parallel measurements”. Some lessors are financial companies that must meet capital requirements, agree on the acquisition of a substantial interest, submit financial statements to the regulator, and so on. The rest are ordinary legal entities, to which there are much less requirements. “The National Bank will offer the same requirements for entering the market and work in general for all players without exception,” – said the regulator.

The NBU promises a similar approach to the requirements for ownership structure, licensing and registration of participants, remote surveillance, corporate governance, risk management, market behavior, etc. At the same time, the regulator promises to take into account the risk-based approach. “After all, lessors do not bear the risk of the lender and work at their own expense,” – said the NBU.

Sources of financing of leasing companies NBU also proposes to expand. They want to be allowed to raise funds from affiliates, funds on subordinated debt, including from individuals and legal entities that are qualified investors, as well as through issues of debt securities.

Note that so far leasing companies have limited opportunities to raise funds. The main sources are advance payments, bank loans and equity.