DK Vyas,CEO, Srei BNP Paribas. 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 the ICE market in India. A proper risk management system, floating interest rate financing and customised offering have been major growth factors for us, says DK Vyas, CEO, Srei BNP Paribas. Excerpts from the interview. Unexpected twists and turns, unabated inflationary pressures and continuing policy paralysis, How do you assess the present status of the CE sector and CE financing? I will not completely agree on that 'policy paralysis' point as during the last couple of months, things have started moving. The government's intent is clear it wants to push through reforms. But challenges remain. Declining GDP growth reflects a marked slowdown in domestic demand. The government has little fiscal headspace and thus is unable to stimulate growth by undertaking investment in the infrastructure sector. The Land Bill is not yet through land has emerged as a very contentious and sensitive issue throughout the nation and the future of any new infrastructure project will be dependent on how the land issue is dealt with. Interest rate remains high, as the inflation figure lingers at a 7 per cent plus range. Thus, private sector is also reluctant to invest in creating fresh capacity. RBI's inflation-control policy has kept the policy rates high. However, before the end of this fiscal, we expect a policy rate cut of at least 50 basis points if inflation figures continue a downward trend in the subsequent months. Frankly speaking, I do not foresee any marked improvement in demand at least till March 2013, because even if policy rates are lowered in January, the impact on investment comes with a lag. The $1 trillion investment that was planned for infrastructure for 12th Five Year Plan (2012-17) has been recently scaled down to $800 billion. This will impact the growth of infrastructure and construction equipment (ICE) segment, too. But I feel this slowdown will be temporary. Indian economy's macro-fundamentals still remain strong and this is one economy where a lot of its resources, be it natural or manpower, remain underutilised. Its per capita income also remains very low compared to other emerging economies. Thus, this economy is bound to grow. The infrastructure sector in India is poised to grow manifold as this is an infrastructure-starved nation. That we managed to achieve 9 per cent plus growth with such serious infrastructure limitations is a miracle in itself. Therefore, the ICE segment is bound to grow too. The horizon that needs to be taken into consideration here is a decade. The ICE industry has experienced vibrant growth since 2003-04. According to industry estimates, the industry has registered a CAGR of about 18 per cent since 2006, and is currently at about $3.3 billion with volumes in the vicinity of 70,000 units per annum in the organised market. The same KPMG report predicts this industry to grow to about 20 billion by 2020. What is Srei's core focus? 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. 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. Given the current scenario, what is Srei's strategy to sustain growth? We have been in this field for 23 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. With small and medium enterprises being the majority of our customers and a large percentage of them being First Times Users (FTUs), we have to do a lot of hand-holding. We cannot restrict our role to just that of a financier, we take on the role of an asset provider. Our services span the entire value chain in infrastructure, and at SREI BNP we cater to the entire value chain from procurement to deployment to disposal. SREI BNP acts as a guide to its retail clients by advising them on what kind of asset would be ideal for the projects that they have undertaken. The right advice in making the correct choice of assets and the ideal tenure of financing work wonders for our customers, especially FTUs. This has, over the years, facilitated in building a strong customer loyalty which is reflected in that fact that 60 per cent of our financing is to repeat customers. What trends in are peaking the financing of construction equipment? Overall we see a slowdown in demand for new equipment. The deployment avenues are lower compared to the overall availability. The rental rates for equipment are also depressed for the same reasons. Concreting has a high correlation to real estate, urban infra, etc, and there too, new projects are slow to come. The demand for mining has also been slow due to a ban on mining in Goa, Karnataka and Orissa, the three states which were high on iron ore mining. The lack of clarity on private coal blocks is also making things difficult. Contract mining for Coal India and other private blocks are still doing reasonable well, but this alone cannot sustain things. Hence, unless the policy measures announced get implemented, and overall rates come down, I do not see growth returning soon. What has Srei's overall performance been like, so far in 2012? While the top line growth is hard to come by, we will be more or less meeting our bottom line numbers. We hope to have a flat top line and an overall portfolio growth of 7-10 per cent this financial year. We have started other lines of business like farm equipment, refinance on per owned vehicles and equipment which has helped sustain the bottom line. In case of recovery of assets, the regulatory framework is in favour of the borrower. What is your take on this? With the regulatory framework tilted heavily in favour of borrowers, this creates incentives for willful defaults. With most borrowers working in government/quasi-government projects, repossession of assets in case of defaults becomes even more challenging for NBFCs which are the principal vehicles for ICE financing in India. NBFCs do not enjoy a level playing field vis-à-vis banks and other financial institutions, especially when it comes to imposing taxes on sticky advances, making provisions for bad loans or offering sops and while recovering assets once a loan goes bad. The way forward to resolve this issue is to intensify the dialogue process with government authorities at various levels and make them realise that the faulty policies are costing India dear. At the same time, each NBFC must act prudently and conduct thorough due-diligence checks on customer profiles before each disbursement. Maintaining credit quality and minimising NPAs is extremely important at this stage. What is the scenario regarding used equipment financing? The used equipment market holds tremendous potential, especially for a nation like ours. The average customer in India is very much price and value- conscious. Thus, used equipment is ideally placed to provide them value-for-money service. The used construction equipment market usually grows following a drop in sales in the new construction equipment segment. The present economic slowdown is an ideal scenario for a surge in demand for used equipment. We have already rolled out products in these segments early this fiscal. We have plans to provide loan against hypothecation of used equipment for working capital requirements. What does the leasing scene look like? In India, leasing suffers from an identity crisis. Keeping in mind the profile of a typical Indian ICE customer, leasing and rentals can be extremely beneficial to suit their needs. After all, leasing has proved to be the most potent and cost-effective form of capital creation worldwide. There is a clear lack of understanding about the benefits of leasing at our policy-making levels and here leasing is treated both as a 'good' and as a 'service' and taxed multiple times thereby reducing its efficacy and leading to low penetration in Indian markets. Some policy level changes made for securitisation, etc, have created fresh bottlenecks for refinancing. This has further impacted ICE financing. What is your take on equipment rentals? Keeping in mind the fast pace of technological progress and the shrinking utility life of machines (upgraded version of each machine makes the last one almost redundant), equipment renting has huge potential in India, especially if a customer has to use any machine for a limited period. Presently, the rental penetration is only 7-8 per cent in India compared to a figure of 50-80 per cent in developed economies. We intend to develop this segment by educating the users on the benefits of renting vis-à-vis owning. In India, there is a mindset bias towards owning even if it implies early obsolescence of the equipment prior to completion of its life-cycle. There is a need to overcome this. We are sure that with the growth of the ICE industry, the rationale behind renting will dawn on users and rental penetration will also grow. Industry needs government to understand all these points. This is why we are in constant dialogue with the government. Only once the government is convinced, can we expect the necessary regulatory changes. It is a continuous process and we need to be patient in our approach. Our perseverance will ultimately pay off. Of course, we have a very long time horizon to look at here. By ushering in the changes gradually, we can pave the way for a fantastic growth path for both the ICE industry and the ICE financing industry in India. CHALLENGES ICE financing industry faces several challenges in terms of taxation issues as well as regulatory issues. NBFCs are constrained in terms of asset recovery, imposition of taxes on sticky advances, making provisions for bad loans or offering sops, etc. Lack of registration of ICE assets is a major impediment. Most heavy ICEs are not registered. These are without all-India permits. Inter-state movements of this equipment become a nightmare for operators. With the introduction of GST, some of these may hindrances may reduce. Prime life of any ICE is around 3-4 years. With rapid technological progress, the equipment life-cycle is progressively getting shorter. In this backdrop, a depreciation rate of only 15 per cent per annum for an ICE asset acts as a huge deterrent for a healthy growth of the industry. The depreciation rate should be increased to 30 per cent per annum, at least.