Construction Equipment Financing Sector: Despite Odds Staying Afloat
Instead of being bogged down by the economic stupor, CE Financiers are reinventing their strategies to maintain profitability
Perhaps, what makes Construction and Infrastructure unique is the symbiotic nature of these sectors wherein fortunes of all the stakeholders are intertwined. If one flourishes, the others also reap rewards, and if one faces hardships, the others also flounder. For the past couple of years or so, the sentiment in construction and allied activities has been low and it has impacted Construction Equipment (CE) Manufacturers, who have found it difficult to keep the order books full; Contractors and Developers, whose projects have been inordinately delayed; and CE Financiers, who have had a tough time in dealing with cash-strapped borrowers. In order to maintain profitability, financiers – NBFCs and banks-had resorted to a very cautious approach wherein new clientele was not established and loan rates were increased to mitigate higher credit risks.
Nevertheless, fast tracking of stalled projects through the Cabinet Committee on Investment, redrafting policy and framework for Mining, and devising new modalities for the Roads and Highways sector are some positive moves from the Centre that will wipe out impediments in the country's growth plans. CE Financiers have welcomed these developments and are coming up with new financing schemes that are in sync with the situation. In the following pages, leading CE Financiers shed light on their approach as they get candid with S.D. Khan.
The Cabinet Committee on Investment has cleared infrastructure projects worth Rs.1.84 lakh crores. Moreover, the Ministry of Roads and Highways has fixed a target of awarding projects of 7,000 km in this fiscal. How does this augur for the CE Financing Sector?
Mr. GC Rangan
Mr. GC Rangan, Chief Operating Officer, L&T Finance Ltd: Planned government expenses play a pivotal role in driving the CE Industry. Investment in Roads, Ports and Irrigation Sectors in particular (apart from Mining) gives a big thrust to the CE volumes. Moreover, average size of infrastructure projects is getting larger and increasing shortage of manual labour is expected to bring the CE Industry back on the growth trajectory in the long run. Action by the Government on pending policy decisions and actual release of funds in the development projects is the fillip eagerly awaited by the CE Industry. To be more specific, the surge in Infrastructure and Road projects would drive Earthmoving, Concrete and Road Construction categories of CE. This will also give respite to CE Industry reeling under pressure both on owning cost side on account of increased manufacturing costs of equipments and on operating cost side with rising fuel prices post deregulation of diesel. Needless to say, once the demand for CE is back on track, the surge would trickle down to the CE Finance Industry as well. Release of funds would help timely repayment of loans both by developers and contractors, thereby releasing pressure on Credit Loss front. This can help reduce risk perception and hence increase availability of finance for the CE customers at lower rates. Current tight liquidity condition and increased borrowing cost of financial services has raised the loan rates for the end customers beyond comfort range.
Mr. Anil Bhavnani
Mr.Anil Bhavnani, Business Head & Senior Vice President, HDFC Bank: Yes, the projects cleared include 18 in the Power Sector with investment of about Rs.85,000 crore and 18 others in sectors like Road, Railways, Petroleum and Natural Gas with an objective to get investment cycle restarted. Definitely this will be a boost for the CE Industry, banks, and financial Institutions participating in this space. However, there are a few bottlenecks in Road/Mining/Infra project investment which need to get addressed on urgent basis before the "Model Code of Conduct" sets in. NHAI needs to get the environmental issues/Right of Way Issues resolved so that road contractors can execute projects timely. Similarly, Mining ban is severely impacting the country's trade. Mining needs to start in order to kick start the economy. Also, a Single Window Clearance concept should get implemented so that projects get implemented in an orderly and timely manner.
Mr. Sunil Gupta
Mr.Sunil Gupta, Vice President & National Sales Head, Construction Equipment & Strategic Construction Equipment, Magma Fincorp Ltd: The Goverment has started taking corrective steps in order to revive the Infrastructure Sector and economy. The Government has recently cleared 28 Infra Projects worth Rs.1.1 Lakh crores which include 18 Power projects and 4 Highways project. It is also planning to kick-start a number of new infrastructure projects including 8 new airports and 2 new sea-ports in the coming months to boost economic growth. Railway projects worth Rs.2 lakh crores will also be cleared in a time bound manner. AAI has been directed to award 50 low cost airports in 11 states during the current financial year. All these measures look extremely promising for Infrastructure Segment as well as economy and CE Industry.
Despite the Centre's various attempts at fast tracking infrastructural growth, the financial condition of the economy is in doldrums. Contractors and developers are facing liquidity crunch. How is this situation affecting your approach to finance CE as contractors might defer their installments?
Mr. G.C. Rangan: Financial Services sector is facing difficulties on both cost side and collection (income) side. On the one end, borrowing costs have shot up due to tightening of liquidity on account of RBI's stand on monetary policy. On the other, with pending decision on investment proposals and non release of funds by the Government for various infrastructure projects, developers and contractors are unable to pay the installments on time. A combination of two has forced many of the NBFCs to either slow down on funding customers in the CE Industry or to increase loan rates to cover for increased risk. To counter this, we are being more cautious in funding non-standard equipments and players. Credit appraisals are being done more on case to case basis instead of applying generic norms for entire segment of customers. We are also helping CE customers by offering them refinance on free assets, thus helping them meet working capital needs. We are trying to maximize from the vast domain expertise built over years by our sales and credit team in identifying right set of customers and assets to finance. The steps have already started showing some positive results, though overall condition of the CE Finance Industry remains challenging.
Mr. Anil Bhavnani: The best barometer of a country's economic standing is its GDP. As a thumb rule our credit growth is little over 3 times of the GDP. With a lower GDP growth, we also have lowered our expected credit growth. Given the current Government's fiscal situation, it will be prudent to reduce Unplanned Expenditure so that Fiscal Deficit is under control. Thus, the Government then needs to ensure that it creates an environment which is conducive for the Private Sector to take the burden of capital investment and maintain growth rates. Keeping the market scenario in mind, we are also adapting the cautious approach towards funding the equipments.
Mr.Sunil Gupta: While a number of steps have been taken, the situiation on the ground has not really improved as yet. Less than 1000 Km of the planned 8000 Km of Road projects have been awarded during FY 12-13 under BOT. The Government failed to find any takers for BOT projects. Current pace of road construction is just 5 km per day against 20 km. There are delays in project execution due to bottlenecks around land acquisition and environmental and forest clearances. A large number of projects are stuck and delayed. The Infra companiess have made significant investments which are not generating any revenues and cash-flows. This has made lenders wary of lending to Infra companies and it's a disturbing trend. Banks and investors are shying away from the Infra Sector. This is leading to drying up of funds and liquidity crunch in this sector. More and more large companies are defaulting in repayments approaching for CDR. The situation is very precarious today.
What new and innovative financing schemes have you come up with in these volatility stricken times?
Mr. G.C. Rangan: Utilizing our domain experience gained over the years, we have worked out customized schemes, specific to business seasonality and customer segments. We have also developed special schemes jointly with manufacturers we have close association with. Financial offerings with moratorium and option of structured repayment in line with income cycle of the customer, attractive loan to value (LTV) and rates against suitable risk mitigation have been designed. Moreover, we keep on coming with festive season or event specific (such as EXCON) schemes, at times in collaboration with manufacturers. These offerings are designed to meet customer expectations in a mutually beneficial way. We have increased focus on offering financial assistance towards procurement of used construction equipment, refinance on un-encumbered owned assets and top-up to meet working capital requirements of CE customers. Moreover, trusting our knowledge of CE Industry and assets, we have designed few loan offerings with slightly increased tenure for term loans on standard assets. This helps keep installment amounts in check, thus driving numbers. We are supplementing all these offerings for end customer with trade advance and working capital offerings for dealers and manufacturers, as their business models have also been impacted by liquidity crunch in the economy.
Mr. Anil Bhavnani: At present, we are running one of the highest numbers of Joint Promotional Schemes with all the key manufacturers. We understand customers' need and thereby provide solutions both for immediate and long term finance. As a leading bank in Infrastructure and Construction Finance Industry, we offer a bouquet of innovative banking products under one roof to Infrastructure and Construction Segment customers. We believe in providing complete banking solutions to our customers through our 3000+ branches and distribution network, and this has been our USP for years.
Mr.Sunil Gupta: We are mainly a retail finance company with significance presence in semi-urban and rural India. Our focus has been mainly on first time buyers and small contractors. These customers are still managing to get work orders and are able to sustain. However, the operating costs have gone up and machine deployment has declined thereby reducing the cash-flows of customers. We have rolled out products with extended tenor, lower EMI, and higher moratorium to match the cash-flows of our customers.
In the last one and a half years or so, the CE market has contracted by 10 - 12%. How has it impacted your business? Foreseeing the Government's emphasis on Mining, Power, and Roads Sector, how do you see the coming year?
Mr. G.C. Rangan: The contraction of CE market is a fall-out of pending policy decisions and delaying actual release of funds in approved mining and infrastructure projects by the Government. Reduced liquidity has generally resulted in increased borrowing costs for the financiers and increased rates for the end customers. This, along with increased costs of CE models, deregulation of diesel prices and stagnant rentals, has affected asset viability and economics. This has reduced demand for purchase of new CE models, thus reducing the pie many financiers vie for. Moreover, with developers and contractors struggling to get work orders and payments in time, the loan repayments have been delayed by many. Thus, it's a two front challenge for financiers, both on cost and income (collection) side. Faced with all these challenges, our numbers have also dropped in CE in line with industry de-growth. We are tackling the challenges on collection and recovery through a dedicated team and effort. To counter for increased borrowing costs, we are emphasizing on refinance and used vehicle finance, where market operates at higher rates. The efforts have already started showing some positive results for us, but industry as a whole is far from being back on track. It's good that the Government is re-emphasizing on Mining, Power and Roads, but till actual funds trickle down to benefit developers and contractors, scenario is unlikely to change much. At the same time, a good monsoon could help revive demand a bit in a few pockets where CE sales is driven by Agri-Sector. Considering this, we expect some recovery to start taking place from Q4 of FY13-14, but the CE industry would take some more time and we expect it would be back on growth trajectory post Q2 of FY14-15, once general elections takes place.
Mr. Anil Bhavnani: As a business model, HDFC Bank has not been a large player in the Infrastructure Sector but has been historically funding contractors who have been infrastructure enablers. We are a dominant player in this segment and enjoy one of the highest market share in CE space amongst banks. It has been a difficult year for CE manufacturers with numbers shrinking. Traditionally we see much better demand in the second half of the year and we expect a stronger demand with the onset of a good monsoon. As and when the demand picks up, the banks will participate in the India Growth Story.
Mr.Sunil Gupta: The CE market has declined by approximately 15% in the H1. This is the 2nd consecutive year of decline. Compared to FY 11-12, the market has shrunk by almost 30%. We have been able to maintain our volumes due to our strategy of going retail and expanding in semi urban and rural markets. We currently operate from 200+ branches. Our strong distribution and collection infrastructure has helped us retain our volumes and market share. Yes, the steps and measures taken by the Government are very positive but the implementation may take time. Also , the situation may not improve until elections are over and new Government takes over.
Perhaps, what makes Construction and Infrastructure unique is the symbiotic nature of these sectors wherein fortunes of all the stakeholders are intertwined. If one flourishes, the others also reap rewards, and if one faces hardships, the others also flounder. For the past couple of years or so, the sentiment in construction and allied activities has been low and it has impacted Construction Equipment (CE) Manufacturers, who have found it difficult to keep the order books full; Contractors and Developers, whose projects have been inordinately delayed; and CE Financiers, who have had a tough time in dealing with cash-strapped borrowers. In order to maintain profitability, financiers – NBFCs and banks-had resorted to a very cautious approach wherein new clientele was not established and loan rates were increased to mitigate higher credit risks.
Nevertheless, fast tracking of stalled projects through the Cabinet Committee on Investment, redrafting policy and framework for Mining, and devising new modalities for the Roads and Highways sector are some positive moves from the Centre that will wipe out impediments in the country's growth plans. CE Financiers have welcomed these developments and are coming up with new financing schemes that are in sync with the situation. In the following pages, leading CE Financiers shed light on their approach as they get candid with S.D. Khan.
The Cabinet Committee on Investment has cleared infrastructure projects worth Rs.1.84 lakh crores. Moreover, the Ministry of Roads and Highways has fixed a target of awarding projects of 7,000 km in this fiscal. How does this augur for the CE Financing Sector?
Mr. GC Rangan
Mr. Anil Bhavnani
Mr. Sunil Gupta
Despite the Centre's various attempts at fast tracking infrastructural growth, the financial condition of the economy is in doldrums. Contractors and developers are facing liquidity crunch. How is this situation affecting your approach to finance CE as contractors might defer their installments?
Mr. G.C. Rangan: Financial Services sector is facing difficulties on both cost side and collection (income) side. On the one end, borrowing costs have shot up due to tightening of liquidity on account of RBI's stand on monetary policy. On the other, with pending decision on investment proposals and non release of funds by the Government for various infrastructure projects, developers and contractors are unable to pay the installments on time. A combination of two has forced many of the NBFCs to either slow down on funding customers in the CE Industry or to increase loan rates to cover for increased risk. To counter this, we are being more cautious in funding non-standard equipments and players. Credit appraisals are being done more on case to case basis instead of applying generic norms for entire segment of customers. We are also helping CE customers by offering them refinance on free assets, thus helping them meet working capital needs. We are trying to maximize from the vast domain expertise built over years by our sales and credit team in identifying right set of customers and assets to finance. The steps have already started showing some positive results, though overall condition of the CE Finance Industry remains challenging.
Mr. Anil Bhavnani: The best barometer of a country's economic standing is its GDP. As a thumb rule our credit growth is little over 3 times of the GDP. With a lower GDP growth, we also have lowered our expected credit growth. Given the current Government's fiscal situation, it will be prudent to reduce Unplanned Expenditure so that Fiscal Deficit is under control. Thus, the Government then needs to ensure that it creates an environment which is conducive for the Private Sector to take the burden of capital investment and maintain growth rates. Keeping the market scenario in mind, we are also adapting the cautious approach towards funding the equipments.
Mr.Sunil Gupta: While a number of steps have been taken, the situiation on the ground has not really improved as yet. Less than 1000 Km of the planned 8000 Km of Road projects have been awarded during FY 12-13 under BOT. The Government failed to find any takers for BOT projects. Current pace of road construction is just 5 km per day against 20 km. There are delays in project execution due to bottlenecks around land acquisition and environmental and forest clearances. A large number of projects are stuck and delayed. The Infra companiess have made significant investments which are not generating any revenues and cash-flows. This has made lenders wary of lending to Infra companies and it's a disturbing trend. Banks and investors are shying away from the Infra Sector. This is leading to drying up of funds and liquidity crunch in this sector. More and more large companies are defaulting in repayments approaching for CDR. The situation is very precarious today.
What new and innovative financing schemes have you come up with in these volatility stricken times?
Mr. G.C. Rangan: Utilizing our domain experience gained over the years, we have worked out customized schemes, specific to business seasonality and customer segments. We have also developed special schemes jointly with manufacturers we have close association with. Financial offerings with moratorium and option of structured repayment in line with income cycle of the customer, attractive loan to value (LTV) and rates against suitable risk mitigation have been designed. Moreover, we keep on coming with festive season or event specific (such as EXCON) schemes, at times in collaboration with manufacturers. These offerings are designed to meet customer expectations in a mutually beneficial way. We have increased focus on offering financial assistance towards procurement of used construction equipment, refinance on un-encumbered owned assets and top-up to meet working capital requirements of CE customers. Moreover, trusting our knowledge of CE Industry and assets, we have designed few loan offerings with slightly increased tenure for term loans on standard assets. This helps keep installment amounts in check, thus driving numbers. We are supplementing all these offerings for end customer with trade advance and working capital offerings for dealers and manufacturers, as their business models have also been impacted by liquidity crunch in the economy.
Mr. Anil Bhavnani: At present, we are running one of the highest numbers of Joint Promotional Schemes with all the key manufacturers. We understand customers' need and thereby provide solutions both for immediate and long term finance. As a leading bank in Infrastructure and Construction Finance Industry, we offer a bouquet of innovative banking products under one roof to Infrastructure and Construction Segment customers. We believe in providing complete banking solutions to our customers through our 3000+ branches and distribution network, and this has been our USP for years.
Mr.Sunil Gupta: We are mainly a retail finance company with significance presence in semi-urban and rural India. Our focus has been mainly on first time buyers and small contractors. These customers are still managing to get work orders and are able to sustain. However, the operating costs have gone up and machine deployment has declined thereby reducing the cash-flows of customers. We have rolled out products with extended tenor, lower EMI, and higher moratorium to match the cash-flows of our customers.
In the last one and a half years or so, the CE market has contracted by 10 - 12%. How has it impacted your business? Foreseeing the Government's emphasis on Mining, Power, and Roads Sector, how do you see the coming year?
Mr. G.C. Rangan: The contraction of CE market is a fall-out of pending policy decisions and delaying actual release of funds in approved mining and infrastructure projects by the Government. Reduced liquidity has generally resulted in increased borrowing costs for the financiers and increased rates for the end customers. This, along with increased costs of CE models, deregulation of diesel prices and stagnant rentals, has affected asset viability and economics. This has reduced demand for purchase of new CE models, thus reducing the pie many financiers vie for. Moreover, with developers and contractors struggling to get work orders and payments in time, the loan repayments have been delayed by many. Thus, it's a two front challenge for financiers, both on cost and income (collection) side. Faced with all these challenges, our numbers have also dropped in CE in line with industry de-growth. We are tackling the challenges on collection and recovery through a dedicated team and effort. To counter for increased borrowing costs, we are emphasizing on refinance and used vehicle finance, where market operates at higher rates. The efforts have already started showing some positive results for us, but industry as a whole is far from being back on track. It's good that the Government is re-emphasizing on Mining, Power and Roads, but till actual funds trickle down to benefit developers and contractors, scenario is unlikely to change much. At the same time, a good monsoon could help revive demand a bit in a few pockets where CE sales is driven by Agri-Sector. Considering this, we expect some recovery to start taking place from Q4 of FY13-14, but the CE industry would take some more time and we expect it would be back on growth trajectory post Q2 of FY14-15, once general elections takes place.
Mr. Anil Bhavnani: As a business model, HDFC Bank has not been a large player in the Infrastructure Sector but has been historically funding contractors who have been infrastructure enablers. We are a dominant player in this segment and enjoy one of the highest market share in CE space amongst banks. It has been a difficult year for CE manufacturers with numbers shrinking. Traditionally we see much better demand in the second half of the year and we expect a stronger demand with the onset of a good monsoon. As and when the demand picks up, the banks will participate in the India Growth Story.
Mr.Sunil Gupta: The CE market has declined by approximately 15% in the H1. This is the 2nd consecutive year of decline. Compared to FY 11-12, the market has shrunk by almost 30%. We have been able to maintain our volumes due to our strategy of going retail and expanding in semi urban and rural markets. We currently operate from 200+ branches. Our strong distribution and collection infrastructure has helped us retain our volumes and market share. Yes, the steps and measures taken by the Government are very positive but the implementation may take time. Also , the situation may not improve until elections are over and new Government takes over.
NBM&CW November 2013
