Equipment Financing in India: Evolving Scenario

Based on the current trends and opinion of the industry leaders, the Indian construction equipment market is expected to remain flat for the current year. The growth if any would depend on the policy changes and corrective measures which need to be accorded top priority by the government.
Infrastructure segment has been witnessing a major slowdown due to various issues around Land acquisition and environmental clearances.  Mining and real estate segments are also facing difficult times. The interest rates are at an all time high and have not softened over a long time.  Almost every second BOT project is facing delays due to land acquisition and environmental clearances which is resulting into delays in financial closures. All these factors have severely impacted the growth in the Equipment financing over last couple of years. The economic slowdown in the leading world economies has only added to the woes of the segment. The infra companies are finding it very difficult to raise fresh capital and debt for the projects. Suddenly, the infra has become an untouchable word for the lenders.
Despite all the challenges, the overall equipment sales have grown by 10 per cent-12 per cent approximately during FY 11-12.  The demand has come mainly from rural and semi-urban areas primarily from irrigation, small road projects and various government schemes like PMGSY etc.  For the first quarter of current financial year, backhoe loaders have grown by 3 per cent and excavators have grown by 9 per cent. However, the same have declined by 7 per cent and 14 per cent in July 12 and by  16 per cent and 23 per cent in Aug 12 on Y-o-Y basis which a cause of concern. The numbers for Sept 12 are expected to be in the same range. Overall, Q2 has seen significant decline in equipment sales. It is evident that the equipment sales have been slowing down.  The backhoe loaders and excavators contribute nearly 60 per cent to total equipment market in India and reflect the trends of CE financing.
Based on the current trends and opinion of the industry leaders, the Indian construction equipment market is expected to remain flat for the current year. The growth if any would depend on the policy changes and corrective measures which need to be accorded top priority by the government.  The land acquisition issues and environmental issues coupled with high interest cost have put a stop on various large infra projects. 
The above scenario paints a bleak picture for the equipment financing in India.  Slowdown in the demand doesn’t augur well for the lenders. Large infra companies are tight on liquidity. Not only it impacts the growth, the delinquency also shows a tendency to increase.  There have been increasing defaults in the segment by the large players. Some of the players are envisaging CDR and reschedulements. It’s a tight rope walk for the lenders and the times ahead are going to be very challenging. Some of the equipment financiers have started tightening underwriting norms and have lowered their targets for the current fiscal. 
At the same time, the planned $1 trillion investment in infrastructure in the 12th Five Year Plan is a big positive.  The Union Budget for FY 2012-13 has a lot of potential for Infrastructure sector. More stress has been given to enhance and develop rural India. Setting up of infra-investment fund of Rs 50,000 crore, tax-free bonds for Rs 60,000 crore, allocation of Rs 25,360 crore for the Road Transport and Highways Ministry, ECB for capital expenditure on the maintenance etc. are good measures.
The sudden wave of reforms by the new finance minister is like a cloud burst. The government initiated a slew of reforms including fuel price hike, FDI in retail and disinvestment.  The policy makers have finally set down to work after months of flip flop. The sentiments have started turning positive. Foreign investors are slowly coming back. The FDI in retail will lead to huge investment in development of backend infrastructure like warehouses.
There is an added push in clearance of key infra projects. The Ministry of Forest and Environment (MoEF ) has recently cleared about 80 files relating to road projects out of 347 road projects which are stuck up. The highways ministry has sought some relaxation in issuance of green clearances for NH projects to hasten construction work. At present, environment clearance comes only after forest clearances are obtained for the entire stretch.
The government is now working on the Land Acquisition Bill and is expected to set up GoM this month to examine bill provisions. The 12th Five Year Plan will also be released this month. The government will be under pressure to take measures to put the infra on road to recovery.
While the government is expected to roll out more reforms soon, the key issue is implementation on the ground. If policy issues are addressed and initiatives are implemented, it will give a boost to the segment and equipment financing in India.
Author:Sunil Gupta, National Sales Head – CE, SME and Auto Lease, Magma Fincorp Limited

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