NDS Chari, Head – KAM and Partnerships, Srei Equipment Finance Pvt Ltd, shares his insights on the changing face of equipment finance and the dynamic financing trends being witnessed in the construction equipment market
While infrastructure is a billion dollar industry, equipment finance is not far behind at a 100 million dollar industry, wherein India shone till a couple of years ago. The opportunities and a favorable market atmosphere had drawn capital equipment manufacturers the world over to the country. Meanwhile, banks, non-banking financial company (NBFCs) and similar financial institutions were busy in forging mergers, and competed with each other to sustain the market sphere. However, with the slowing down of the market, infrastructure sector has started contributing to the nonperforming assets (NPAs) of these banks.
Bane to Boon
Though the situation has resulted in a decline in the sale of construction equipments (CE), a new trend has emerged in the equipment finance market. The new scenario has opened opportunities by creating a paradigm shift in the consumer preferences from price sensitive buyers to more value focused buyers demanding quality.
Most large corporate players in the infrastructure sector today opt for selling their unutilized inventory. While the purchase of new equipments has almost vanished nowadays, there is a huge availability of cheap pre-owned equipments in the market. The hiring and sub-contracting community looks upon this situation as a boon, as these equipments have shorter payback periods, leading to quicker profitability. Also, the situation witnesses a relatively low amount of actual capital investments being flown towards the market sphere.
The low capital investment has resulted in known brands like Larsen & Tubro, Telcon, and JCB competing with each other, while those that entered the country during the boom period have yet to establish themselves. They have almost become a third choice for the buyers. This has resulted in the financing community increasing the LTV in the current high interest rate regime.
The days of a new finance scheme being launched daily are over. However, ironically, financiers are today looking for original equipment manufacturers (OEM) that not only provide good resale value, but also will support them in difficult days by creating a loss pool during repossession and sale of equipments. Similarly, the buyers are not just looking for financiers who fund them cheap, but also fund them for a longer period and can tolerate delayed payments.. In addition, financiers today are more interested in creating cash flows to the borrowers from their unutilized assets rather than funding new clients, as more often they need to choose a first time buyer for new equipments. They expose themselves to higher risks and raise the risk of lower return from such buyers. This operational trend is expected to ultimately create loyalty of financiers for the buyers.
EPC Prefers Hiring
The inclination of large engineering, procurement and construction (EPC) players towards hiring, to save project cost with some cash inhand advantage is the other major trend being observed today. Players in this segment are still chasing the large corporate by offering attractive hiring rates. Hiring in India is generally on very short-term wet leases like 12 months, on yearly renewable basis. Today, such hirers have access to these pre-owned assets, while large EPC contractors do not own these equipments as they do not want to worry about its maintenance. This trend will ultimately result into more buying by hirers rather than the actual users like in western markets.
Similarly, the requirement of mining industry which normally supplements and compliments the demand of construction industry is also declining. Due to this situation, players possessing surplus equipments are looking for opportunities even beyond the shores. In such cases, the players are usually looking for attractive finance options overseas and faster payback of the capital invested.
Partnerships & Mergers
The challenges involved on the collection front in the equipment finance today have also led to the emergence of innovative partnerships and tie-ups between equipment manufacturers and the financiers. Financiers are increasingly joining hands with OEMs and are creating a ringfenced entity to have exclusive workforce to do joint sales and collections.
Furthermore, OEMs can join the financiers by providing sophisticated electronic devices in locating the assets all times, and also create loss pools with the financiers, to be utilized in case of unexpected collection issues and defaults. These pools can rescue the financier to some extent, especially when the repossessed machines are sold below the outstanding dues.
The borrowers, who were demanding fixed rates for borrowing of construction equipments, are slowly realizing the need to shift to floating rate. The borrowers are now gradually looking towards long term finance options, when the interest rates for lending are on a higher scale. Furthermore, during such situation, the floating rate is giving them an opportunity to reduce the cost of borrowing in tune with the prevalent borrowing rates on a time-to-time basis.
All these challenges and lull in the construction equipment market is throwing up hurdles, which has ultimately resulted in the emergence of new trends culminating in innovations and partnerships to create value for stakeholders.
The views expressed above are the personal views of the author; the organization to which the author belongs viz SREI BNP may or may not directly or indirectly subscribe to his views. The author can be reached through his email firstname.lastname@example.org