The way forward is to intensify the dialogue process with the government authorities at various levels and make them realise that the faulty policies are costing India dear, writes DK Vyas.Amongst the BRIC peers, India’s per-capita income is the least and this indicates that the scope for growth is immense in India. While discussing equipment financing in India, the focus has to be on the Indian infrastructure and construction equipment (ICE) industry as these constitute a high-value asset class and one sector witnessing phenomenal growth. However, besides ICE, I foresee growing demand in the equipment asset class in multiple sectors like IT, healthcare, rural infrastructure and logistics, which is quite typical for any emerging economy. However, for the sake of convenience, I will restrict myself to the ICE sector.With 50 per cent of the planned investment of $1 trillion in infrastructure during the 12th Five Year Plan (2012-17) expected to come from the private sector, this is likely to boost up demand for infrastructure equipment financing. In India, outright procurement of high-value infrastructure equipment is usually a government practice. Most private parties get almost 80 per cent of the asset value financed. Thus, equipment financing is poised for robust growth.The ICE industry has experienced vibrant growth since 2003-04. According to KPMG 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. This industry is witnessing both the growth of the domestic base of infrastructure equipment manufacturing and also large number of global majors are also setting up manufacturing bases in India. While the long-term growth of the ICE market in India is guaranteed, this sector is likely to witness some moderation in the short to medium term due to a confluence of multiple macroeconomic problems, both at home and abroad. But these are temporary problems, we may have to be patient for a few quarters, but ultimately growth will happen.Going forward, I foresee a huge demand for mining equipment. There is a growing mismatch of demand and supply of power in India – in fact we are staring at an impending power crisis.Coal fuelled power plants account for nearly 55 per cent of India’s total power generation capacity and coal also accounts for almost 80 per cent of India’s mining activities. At present, there is some policy confusion on allotment of coal blocks. But this will eventually get resolved and there will be an emphasis on use of state-of-the-art technology in order to scale up productivity.Products for the Indian customerIndia is a land of entrepreneurs. Even in the infrastructure sector, the entire length and breadth of the country is dotted by numerous small-time entrepreneurs providing services like construction, transportation, etc. These players constitute the backbone of the India growth story and the bigger project developers usually sub-contract project execution work in parcels to these players. Such players are extremely price and value sensitive. Keeping this in mind, I feel financial instruments like leasing and rentals are tailor-made for their needs and can be extremely beneficial to them. After all, leasing has proved to be the most potent and cost-effective form of capital creation worldwide. Also, keeping in mind the fast pace of technological progress and the shrinking utility life of machines (upgraded version of each machine making the last one almost redundant), I feel equipment renting has huge potential in India, especially if a customer has to use any machine for a limited period. Used equipment also has tremendous potential. But the financing penetration for used machines is very small. There exists no proper trading platform for used equipment.Self depreciating assets like ICE need to be acquired on debt/lease and have to amortised over one or more projects depending on the nature of equipment and the duration/cost of projects. Depending on the order book position of the contractor, he has to take a call on whether he would like to own the machine or lease it or even take it on rent for a specified duration. I feel going forward these trends will emerge and become more prominent as the users become more aware of the attendant benefits. Once a trading platform for used machines is in place, this sector will also become more organised.The financing channelWhile big project developers sub-contract work to the small and medium scale entrepreneurs, the latter do not enjoy access to institutional financing (like banks). Thus, it is the NBFCs which cater to the credit needs of such players. The NBFCs have grass-roots knowledge of the credit needs of these players and have a fair idea of their capability. NBFCs take a call on extending credit to these players based on the track record of these players, their order books, their likely cash flow, etc. NBFCs’ decision-making process is usually faster than that of banks. In addition, many specialised NBFCs in this field are capable of guiding the customers in terms of educating them on the type of machines they need and also advise them on what mode of procurement would suit them best. However, NBFCs need a level playing field vis-à-vis banks in order to perform their duties better.Existing challengesThe ICE industry faces several challenges in terms of taxation issues as well as regulatory issues. Most heavy equipment are not registered and are without all-India permits. Inter-state movements of this equipment become a nightmare for operators. We anticipate that with the Introduction of GST, some of these may hindrances may come down.Putting in place a proper registration procedure for infrastructure equipment is key to an orderly growth of used equipment market as this can help in calculation of residual value of used equipment.The prime life of each equipment 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 equipment 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.In India, leasing suffers from an identity crisis. 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.In addition, with NBFCs being the principal vehicles for ICE financing in India, the challenges faced by the NBFCs also act as dampeners to the healthy growth of ICE industry in India. NBFCs do not enjoy a level playing field vis-à-vis banks and other financial institutions, especially when it comes to issues like making provisions for bad loans, while recovering assets once a loan goes bad or paying taxes on sticky advances. 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.Certainly the ICE industry and consequently the ICE financing industry have huge potential in India. I see the current year to end up with a growth of around 15 per cent and the next year to be at least by 30 per cent. But there are certain roadblocks that have to be overcome. The way forward to resolve these issues is to intensify the dialogue process with the government authorities at various levels and make them realise that the faulty policies are costing India dear. Also the customers need to be educated on choice of equipment type, mode of procurement, etc. that suit their purpose best. With the scaling up of the ICE industry, users’ awareness will also grow on these facets. Once the users, manufacturers and financiers join hands, it would become all the more easier to convince the government in bringing in the necessary policy and regulatory changes.