Granting licences to NBFCs would be a game changer

“NBFCs which are into ICE financing, if provided bank licenses, will be able to conduct their functions even better and can promote inclusive growth in the true sense of the term,” comments D. K. Vyas, CEO, Srei BNP Paribas
Being one of the major players in the equipment finance industry, how do see the ongoing delays in infra space? The moderation in the growth of our GDP during the last couple of years has impacted the growth of ICE industry too. Everyone in the economy has started feeling the pinch of the regulatory delays that are affecting infrastructure projects. The inflation problem that has been bothering our policy-makers is essentially due to supply-side bottlenecks which can only be addressed through speedy infrastructure creation. Thus, my firm belief is that there will be a renewed impetus to infrastructure creation, both by the incumbent government in the last few months of its tenure, as well as by the incoming government. I expect growth to pick up in FY15, especially from the third quarter onwards, when the monsoons will be over and a new government has settled down at the centre.
In equipment finance, how do you look at the current performance of NBFCs vis-à-vis banks? Is the current monetary policy conducive for NBFCs in equipment finance or do you expect norms to be eased further?To answer this question, I need to first explain the scenario. An investment of $ 1 trillion was envisaged for infrastructure during the 12th Five-Year Plan (2012-17). The first 2 years of the Plan are nearly over, and we are far behind the target. The $ 1 trillion target looks too optimistic now. If we manage $ 750-800 billion investments in infrastructure during the Plan period, that would be quite an achievement. Thus, there is a lot of catching up to do in the last 3 years of the Plan and that would definitely augur well for the infrastructure and construction equipment (ICE) industry. Going forward, infrastructure and urbanisation will be the two principal demand drivers for ICE demand. Anticipating this demand that will be unleashed, the domestic base for ICE manufacturing has been steadily growing. In addition, many global original equipment manufacturers (OEMs) are also setting up manufacturing bases in India; some are even bringing in their financing arms to India. Thus, long-term growth of the ICE market in India is guaranteed, despite some moderation in the short to medium term.
With 50 per cent of this investment expected to come from the private sector, this will translate into brisk business for the ICE financing industry as well. ICE are high-value assets and in India outright procurement of ICE is usually a government practice. Most private parties get almost 80 per cent of the asset value financed.
The Indian infrastructure sector comprises of thousands of small-time entrepreneurs providing services like construction, transportation, etc. and operating in the remotest corners of the country. It is a usual practice that once a big project is awarded to a project developer, the same work is sub-contracted in parcels to these smaller players. These players, who are extremely price and value sensitive, then acquire ICE assets on debt/lease for executing their contracts.
The small-time entrepreneurs essentially rely on NBFCs for their credit needs as they usually are unable to access institutional financing like banks. These NBFCs, familiar with the businesses of these players and having a decent understanding of their needs and also their capability, take a call on extending credit to these players based on their track records, their order books, their likely cash flow and a host of other factors. In addition, many of these NBFCs even guide their customers in terms of educating them on the type of machines that would suit their needs, the tenure for which they would need those and also what mode of procurement would be ideal for them. Such advice by NBFCs is a huge value addition for such players, especially first time users (FTUs).
However, despite being the principal vehicles for credit intermediation towards the multitude of smaller players, NBFCs suffer from some inherent disadvantages vis-à-vis banks and other financial institutions, especially when it comes to issues like making provisions for bad loans, or while recovering assets once a loan goes bad or paying taxes on sticky advances. With the regulatory framework tilted heavily towards borrowers, this creates incentives for wilful defaults. Even in terms of sourcing funds through external commercial borrowings (ECBs), NBFC-AFCs are more constrained vis-à-vis others in terms of end-use of such funds.
RBI is to give out new bank licenses. I strongly feel that NBFCs which are into ICE financing, if provided bank licenses, will be able to conduct their functions even better and can promote inclusive growth in the true sense of the term.
You are there in this space for last 24 years and today many new players are venturing in to the market. What’s your take on this? At about $ 4 billion with volumes in the vicinity of 80,000 units per annum in the organised market, the ICE industry in India is still at a nascent phase. As per a study reputed consultancy firm by A T Kearney, the ICE industry is expected to attain a size of over $ 20 billion by 2020. Thus, there is plenty of room for more. This sector needs to multiply many times and thus it can accommodate more number of players. Keeping in mind the positive impact the growth of this sector has on the economy overall, more players need to be encouraged and government should provide fiscal incentives.
Given the not-so-rosy demand-supply scenario, what has been Srei’s core focus on providing value addition to its customers? To counter competition and to grow in difficult times, we inherently rely on our strengths. We, at SREI BNP, follow a growth model that essentially revolves around relationship and partnership building, be it with our manufacturer partners, or with our customers. This is our forte. We have tie-ups with over 50 manufacturers based in India and abroad and a client base of over 30,000, 60 per cent of whom are repeat customers. At any given point we have several schemes and programmes running which are tailor-made to suit particular demand-supply scenarios. Some of our schemes have been path-breaking innovations in the field of ICE financing in India.
A proper risk management system, floating interest rate financing and customised offerings have been major growth drivers for us. We have been in this field for over 24 years now and in ICE financing we are the market leaders. Ever since we forged a partnership with BNP Paribas, we have not only consolidated our leadership position, but also started expanding out asset portfolio by expanding into verticals like IT, healthcare, logistics and rural infrastructure. This foraying into asset classes other than ICE has helped in countering the economic slowdown. In times of slowdown, the volume game definitely comes handy.
Our pan-India presence and in-depth knowledge of the Indian market make us a preferred player for any equipment manufacturer (Indian or foreign) who is eyeing a share of the ICE market in India.
How do you think you can build a competitive edge?The Indian ICE industry is on a learning curve. To build the competitive edge, I feel that ICE financiers and OEMs must work together in explaining to the government authorities the advantages of leasing, the need for a rationalised tax structure for both ICE and ICE financing, the regulatory bottlenecks that need to be addressed, why registration for ICE assets is necessary etc. Once government is able to see the long-term advantages, policy changes will automatically follow and this will ensure an orderly growth of the industry. Users’ awareness is another area that financiers and OEMs need to work on. Educating users on the benefits of leasing, renting and use of used equipment will only ensure exponential growth in the future.
"To counter competition and to grow in difficult times, we inherently rely on our strengths. We, at SREI BNP, follow a growth model that essentially revolves around relationship and partnership building, be it with our manufacturer partners, or with our customers"

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