Global investors are willing to put their money in, but they want clarity in terms of policy and regulations and need to be assured that there would be no flip-flop; they need transparency in terms of tax incidence and they need a level playing field, says DK Vyas, CEO, Srei Equipment Finance. Excerpts from the interview...
There has been a lot of positive vibes from the industry after the new government has taken control. However, has it really started ´trickling down´ to the equipment financing segment?
Eight months in office, the Central Government has done well to improve the business sentiment. Several measures aimed at easing the way of doing business have been taken. Things have started looking up for the infrastructure sector too. August 2014 onwards, the sales of commercial vehicles and heavy commercial vehicles have been rising, which are usually the early indications of a pick-up in demand in infrastructure. This augurs well for the infrastructure equipment financing business as well. I am now looking forward to the forthcoming Union Budget where I expect some clear direction from the Government on how it plans to go about infrastructure creation.
The forthcoming budget is expected to be an enabler rather than announcing big ticket projects. What is your take on this? What is your wish list from the forthcoming budget?
On the contrary, I feel it would be much more than an enabler budget. I am expecting the announcement of a few infrastructure schemes where the states will be provided greater autonomy to implement and Centre´s role will be more of a facilitator and financier. Ideally, such schemes should have a ´carrot and stick´ element built into it so that projects get implemented on time. On the infrastructure financing front, I would like to see a policy push for reviving leasing in India. It is the most cost-effective financing instrument for high-value infrastructure assets. Keeping in mind that majority of the builders and contractors in the infrastructure space being price-sensitive, cost-conscious small and medium players, leasing would be the ideal instrument for them to grow their business. Outright owning of such assets involves high sunk cost and also exposes such players to rapid technological obsolescence. Thus, unless a contractor has a series of projects lined up, going for outright purchase of the asset makes little logical sense.
RBI has cut repo rate by 25 basis points. Is there any telling impact on the financing segment?
Not really at the present moment, but it marks the turn of the interest rate cycle and during the next fiscal, if the macroeconomic parameters continue to remain as they are - especially if there is no global shock as such - I foresee another 50-75 basis point cut in policy rates. That would indeed help in reviving the investment appetite.
What are the major challenges in today´s context?
One of the major problems I sense at the moment is that even if policy rates are reduced quickly, banks will not be in a position to extend finance to infrastructure projects all that easily. They are presently saddled with high NPAs, especially in case of public sector banks. In addition, in conformance with BASEL III norms, they would need to set aside funds. Thus, their lending capacity is bound to come down. In this backdrop, there is a serious need to explore funding channels beyond banks.
Dedicated infrastructure financing vehicles are needed. The Infrastructure Debt Funds need to be activated. Specialist NBFCs like Infrastructure Finance Companies (NBFC-IFCs) and Asset Finance Companies (NBFC-AFCs) need to be empowered and facilitated so that they can become active in infrastructure financing. Also, government must consider exploring options on how to channelize part of the long-term resources available with Insurance Funds and Pension Funds into infrastructure. In addition, access to foreign long term funding sources also needs to be eased.
I keep interacting with foreign investors, and I am quite convinced that there is plenty of interest about India. The investor community did start losing interest in the India story during the last 2-3 years, but ever since the new government has come to power, they have again started to track every development in India. They are willing to put their money in, but want clarity in terms of policy and regulations, and need to be assured that there would be no flip-flop, they need transparency in terms of tax incidence and they need a level playing field.
As regards, the challenges faced by CE financiers, we too need clarity in terms of taxation structure. We eagerly look forward to the rolling out of a uniform GST as that would bring in clarity on the indirect tax front. We get to hear that the GST which is likely to be implemented from April 1, 2016, can have differential tax-rates for certain items. I sincerely hope that the Centre and state governments are able to reach a consensus on ironing out such issues so that a uniform GST is rolled out. From the resource mobilization point of view, the external commercial borrowing (ECB) window for NBFC-AFCs needs to be further widened. Keeping in mind the growing base of domestic equipment manufacturing, NBFC-AFCs should be allowed to use ECB for financing of domestic equipment as well and not for imported equipment only, as the case is now. Also, NBFC-AFCs are presently allowed to use the ECB only for leasing. Given the problems with leasing which I have already explained before, the ECB should be allowed to be used for loan financing too. RBI has recently indicated that regulations for NBFCs are to become more stringent and more in line with banks. When it comes to asset recovery, banks are definitely more empowered than NBFCs. NBFCs should also be empowered to avail services of SARFAESI and DRTs.
What is the scenario, especially when it comes to financing first time buyers?
Once a big project is awarded to a project developer, work is sub-contracted to a number of small and medium players, many of whom are first time users (FTUs) with no prior project execution experience. Naturally, they have very little idea on what type of equipment would suit their purpose or what mode of procurement (like loan, lease, rent) they should opt for. To our customers, apart from being a conduit for credit delivery, we also provide them valuable tips and guidance, especially to the FTUs, on what mode of asset and what type of financing would suit them keeping in mind the kind of project they are undertaking, their order-book position and for how long they would be needing the asset. This ability to provide the right guidance to our customers and customized solutions provides us the edge over our competition. This also helps in building a very loyal customer-base. A satisfied customer is the best brand ambassador. I am slightly old fashioned and have immense faith in word-of-mouth marketing. This has done wonders for our business and such is our brand pull today that we have a customer base of around 35,000, with over 40 per cent of them being repeat customers.
In today´s scenario, what are the major parameters that you look into when financing equipment?
In the present circumstances, the major parameters that we look into before deciding on disbursement are the quality of the asset, project status and the projected cash flow, client profile - his track record and experience, what the client can offer as collateral, what is his present order-book position, his references and their track-records, etc. In fact, the credentials of the company which has sub-contracted the job are also looked into. In addition, the infrastructure sector he is operating in and the state where the site of the project is are also factors that are taken into consideration.
Which client segments are coming for finance in the given scenario and what are the challenges there?
Our client segments have not changed majorly but we have consciously worked towards increasing our retail clients and have enhanced out equipment finance portfolio in IT, healthcare, material handling, agriculture and pre-owned. We also continue to support our strategic customers as we are confident that the cycles would improve.
How do you cope up with NPAs? What are your strategies to counter this?
As you are aware, we are present in the complete spectrum of equipment finance in construction and mining equipment, IT equipment, healthcare equipment, agriculture equipment, material handling equipment and pre-owned equipment. Over the years, we have developed the expertise to finance more of standard assets which not only creates production efficiencies for our clients, but also helps us in maintaining our portfolio quality. Further, our consultative approach with our customers also helps us to minimise our NPAs. We also keep a close watch on our non-standard asset portfolio and work together with our customers, OEMs, vendors etc in ensuring productive returns.
What was your loan disbursement in 2014 and what is the expected target in 2015?
Given the challenges of the market, we have been growing at 5-10 per cent in different verticals.
How do you look at the future scenario?
I am optimistic about a pick-up in demand. I expect FY16 to be far better than the previous couple of years. Our key strengths essentially revolve around a relationship-cum-partnership model with manufacturers and our customers. We have tie-ups with over 50 OEMs in India and abroad. In a growing economy like ours, more players are expected to start operations. We, with our 25 years´ experience and grassroot level understanding of the client needs, are better positioned to partner these OEMs in establishing their presence in India. Our market share of around 33 per cent makes us the market leader in the field of infrastructure financing. Besides consolidating and expanding our position there, we are very serious about establishing market leadership in the new verticals that we have entered.
The Way Forward
What CE Financiers Look Forward