ICEMA's third annual conclave was held on 15th March '22 at Hotel Taj President in Mumbai to discuss various topics such as finding solutions for financing construction equipment to accelerate India's infrastructure development; the opportunities and challenges in infrastructure development vis a vis the CE Industry; the issues faced by MSMEs and Infra developers; innovative solutions for CE financing; challenges faced by Banks and NBFCs; and the evolving ecosystem of equipment rental, leasing, and insurance.
The event was attended by key stakeholders from the Infrastructure and Construction Equipment industry, leading Banks and NBFCs, Fintech and Insurance companies, and policy makers. The industry leaders and experts discussed the country's demand for infra development, funding challenges being faced by developers and construction equipment buyers, and deliberated on potential avenues for funding and solutions that could help address the existing financial gaps.
Delivering the inaugural address, chief guest K V Kamath, Chairman, National Bank for Financing Infrastructure and Development (NaBFID), informed that a policy framework has been set up to provide innovative financing solutions and opportunities. “For the Construction Equipment industry, which requires long-term financing, NaBFID has plans to fund both the public and private players, especially the large aggregators,” he told the gathering.
Acknowledging the fact that banks are reluctant to fund the CE industry, he added that the lags however are getting shorter and there are fewer debts now on large corporates. “Construction Equipment users who rely heavily on finance, have limited access to funding, which is limiting the growth potential of the CE industry. However, banks are cleaning up their balance sheets now and will soon step up their funding once good opportunities come up,” he stated.
Dimitrov Krishnan, President ICEMA & MD of Volvo CE India, said that given the projected growth in the country's infra development, it is imperative to strengthen the financial ecosystem of the country, which will enable financing of the CE users to take infra development forward.
According to V Vivekananda, Vice President, ICEMA & MD of Caterpillar India, the complex structure of the Indian CE industry requires that financiers look beyond end-user financing and create innovative solutions for value chain partner financing, working capital financing, and human capital development financing. “The biggest challenge for MSMEs is access to finance, which will need to be addressed quickly,” he said.
“A major catalyst for the construction industry, construction equipment requires policy interventions to prevent India from not meeting its infrastructure targets and consequently undermining its aspiration for a $5 trillion economy. The industry needs alternative financing and business models, advanced training facilities, and can be a significant source of jobs for skilled workers,” said Atul Dhawan, Chairperson, Deloitte India.
Rajeshwar Burla, Group Head, Corporate Ratings, ICRA, was of the view that financial regulations have to be made investment-friendly and new finance systems like FinTech will have to be adopted extensively. He also stressed on developing the green energy sector and focusing more on real estate developments. “India is the 2nd largest solar energy producer so we must look at green power generation, which has a quicker site preparation time, higher acceptability by the private sector, and faster execution. The real estate sector also needs a major focus. It is a hyper connected world today, and nobody wants to wait for 10 years after booking a flat. All this will require revamping of the construction industry. To meet demand, there will have to be relaxations in certain policies and a sharing of risks,” he said.
T R Bharathan, Chief Advisor, Puzzolana Machinery Fabricators, who has worked as a financer and also as an OEM, was of the view that even idling machines can be put to use to generate revenue. “There is a concept of peak level demand and normal demand for every equipment. The customer buys an equipment for immediate use, but not all equipment will run simultaneously in a project, which means that there are times when equipment lies idle at the site. However, one can extract some revenue from these idle machines as well; for instance, if there is a delay in any project, the banks could step in and allot the idle equipment to another contractor for a short duration of time or till the project resumes work.”
According to him, such a solution would be feasible if executed properly, and would require some functional knowledge of projects and machines by the banks. “But the fact is that financers are mostly unaware of the usage and critical applications of construction machines. If financers recruited people who have worked in equipment manufacturing units, they will be better able to discuss financing and other issues with customers and find the right solutions,” he suggested.
According to Sachin Pillai, MD & CEO, Hinduja Leyland Finance, OEMs can support financers in three ways: “They can help bring transparency in the system and help finance companies know the exact cost of the machines, so that we can calculate the risks well. Next, the OEMs can help by providing data, based on the machines' telematics, on the location of machines, hours of operation, fuel consumption, cash flow, idle hours, etc. as this will help us guage and manage the customer's ability to pay. Thirdly, OEMs can help us reduce the losses that we incur in selling the asset by assisting us in getting a higher resale value, or by taking it back.”
“One must understand the customer's capability to pay back,” said Ramesh Iyer, Vice Chairman & MD, Mahindra and Mahindra Financial Services. “The customer, financer and the manufacturer must play a partnership role. The manufacturer cannot just sell an equipment; he must also see to its maintenance. Often, when a project is delayed, the customer puts the blame on the failure of the equipment.” He also suggested that OEMs should sell their equipment to customers who have sound experience and a good reputation in the construction industry, along with good financial health, so that banks would be more open to providing financial support to the equipment buyers.
Arvind Garg, Executive VP & Head - Construction & Mining Machinery Business at L&T, also emphasized on transparency. He said, “Good financial packages must be developed to not only sell the product but also provide the necessary support to customers. This will build confidence in the NBFCs that the OEMs are taking care of their machines.”
He said that there has to be transparency in the system; if financers provided data of customers who are not being able to pay, the OEMs could then look into the matter and diagnose whether it is really the equipment that is not performing as per the expected target or are they simply laying the blame on the supplier / OEM. Providing warranty and genuine spare parts will also help in building trust between OEMs and financers.
Sarosh Amaria, MD, Tata Capital Financial Services raised the concept of total leasing, which is very underpenetrated in the sector. “In India, the customer fears that he will not get his machine back in case he defaults in making timely payments. But as bankers, we should be able to generate comfort in the minds of the customers that after 3-4 years we will be open to run a second lease. As financers, we can make money only after the secondary and tertiary leasing. We must make leasing attractive in the construction industry by aligning our customer dealings with ICEMA and the OEMs, and also raise awareness of leasing amongst the equipment buyers.”
ICEMA along with Deloitte released a report “Innovative Financing Solutions: Accelerating India's Infrastructure Development” at the event. As per the report, India's Construction Equipment industry is expected to be on a growth trajectory on the back of the Government of India's plans to invest US$1.4 trillion between FY20 and FY25 and an environment enabled by the structural reforms. However, the Indian CE industry's growth is being stymied by challenges such as rising input prices, availability of skilled/trained manpower, and access to finance. Both the borrowers as well as the financiers face several challenges in financing the sector. Restricted access to finance arising out of limited options and inadequate penetration of alternative financing solutions being one of them. Demand for Construction Equipment Financing (CEF) is linked to performance and growth prospects of the construction industry; this is largely driven by investments in end-use sectors, such as mining, urban infrastructure, roads, ports, irrigation, power, real estate, steel, cement, and automobiles.
To enable the CE industry to play a critical role in infrastructure development, the finance ecosystem of the country needs to be strengthened. For instance, the government could consider according the CE industry a “priority sector” status for lending, which will help enhance access to finance for construction companies and contractors.The CE financing industry has been making efforts to enhance access to finance with several disruptive innovations (outlined in the report). The adoption of alternative financing methods led by increasing financial and digital literacy has provided an enabling environment for innovative models to emerge.
The Indian government has been developing and implementing policies to support the creation of world-class infrastructure within the country. This includes building power plants, bridges, dams, roads, and other urban development projects. The CE industry's growth is directly related to proposed infrastructure development and investments in new projects. The construction sector has also made concerted efforts to automate its processes, resulting in higher demand for equipment.
ICEMA together with various stakeholders across the value chain is working towards building a robust financial ecosystem for the CE industry in India. The Association represents over 70 OEMs of construction equipment with manufacturing facilities in India, and also select component manufacturers, distributors, banks, insurance and financial companies servicing the country's construction equipment segment. To serve the requirements and safeguarding the interests of the smaller industries and associations, ICEMA also represents MSMEs, affiliated associations, academia, R&D institutions, and other key players in the CE ecosystem.