Application of markov chains to management of leasing

Abstract

The paper presents application of Markov Chains to management of leasing. The paper demonstrates that, despite low percentage of bad debts, there could be a significant reduction in the returns earned by a lessor because of delays in payment. Since a lessor typically operates with a very small spread between returns earned and the cost of funds, a reduction in returns could jeopardise the very viability of the business. Markov Chains could be useful in assessing the impact on the rate of return because of the quality of accounts a lessor has, as reflected by the prevailing transition probability matrix. The model could in addition be used for assessing working capital needs, arriving at the age distribution of accounts and predicting the incidence of bad debts.