How do you assess the present status of the construction equipment sector and the growth prospects of CE financing?
Construction equipment segment in India has been going through a turbulent phase since last 12 months and issues have become pronounced more in the last six months. On a calendar year basis, the market has dipped by 10-15 per cent, primarily on account of slowdown in allocation of new contracts, various statutory clearances on execution side, funds flow, governance and environmental issues in mining segment and real estate slowdown.
However, we cannot deny the growth potential and industry will revive soon, to be back at 15-20 per cent YoY growth once the political paralysis and governance clouds diffuse.
What has been the impact of devaluation of currency and high cost of funding on the CE financing segment?
Devaluation of currency has certainly put a strain on contractors and financial institutions who had partially hedged ECBs. It also impacted many manufacturers who had lower indigenisation and high imported parts dependence. Industry being down and competition being fierce, it hasn't been possible to pass on the cost to buyers and hence, has added stress on the profitability of such manufacturers.
We at SEFC however, have purely local currency borrowing and thus, are insulated from FX fluctuations. However, in the last three quarters, the cost of funds has steadily increased for all FIs and one can observe a strain on all balance sheets wherein stagnated or lower PATs are reported. High interest cost has also dissuaded many customers from fresh asset acquisitions and has been one of the reasons why replacement requirement of assets have reduced.
How do you evaluate your performance in the last two quarters?
In the last two quarters, we have grown both on asset size and net profits keeping losses under control and progress as per plan. For this financial year, we will nearly double our net profit and also increase asset size by 65 per cent over the previous year.
When do you expect the recovery to happen?
Very recently, the government has started to stimulate the growth by awarding new road contracts and also working on expediting land acquisitions and environmental clearances. But the effect will take some time to percolate. In my view, we should see upward movement of markets towards the tail end of this calendar year or early in the next quarter. While CPI inflation is still high, reduction in interest rates will have to wait but may start pouring in by late next quarter. These two elements together should revive the segment back to the expected growth trajectory; however, deregulation of diesel or increase in its cost may create a negative impact.
At present, which are the segments where financing is happening more?
The industry is evenly spread between contracting, hiring, urban infra development and the missing sector is mining. Therefore, financing is largely spread between these three to four segments. However, individual financial institute will have varying exposures depending upon their strategy, target customer segment and geography.
How strong is Shriram Finance in the FTU segment and what are the major challenges SEFC faces there?
We are certainly one of the largest FTU segment financers in the CE industry and nearly 65 per cent of our book holds FTU and small customers. This originates from our parent company's philosophy of empowering small customers and entrepreneurs. Challenges in this segment are that it requires wide distribution network and collection centres to be close to customer. We have more than 150 business points and more than 550 collection points across the country and this helps us to address this segment effectively.
Brief us on SF's core competencies and strength.
Fastest response time, large distribution and collection network, coupled with high risk appetite and complete geographic, customer and asset classes inclusion gives us an edge over the competition in retail segment financing.
In case of recovery of assets, the regulatory framework is tilted in favour of the borrower. What is your take on this?
It is true for every product that regulatory framework is tilted in favour of borrower. A borrower is a consumer and hence has to have consumer rights; we at SEFC believe that a customer has to be nurtured and treated well. His requirements demand support as he is an emerging entrepreneur. However, in few cases where the defaults are because of intentions and frauds, the law should also support the lender so that the investor's interest as a tax-payer is protected.
Do you view leasing as a better option?
I feel loans are a better option as they provide depreciation benefit to customer and are not subject to state-wise varied tax regulations. Leasing is bit complex and most of the time, an unviable option in India unless there is a compulsive need for a borrower to have off balance-sheet asset acquisition.
What is the scenario regarding used equipment financing?
Used construction equipment finance is bit risky as most of the assets are not registered at the RTO and hence actual ownership cannot be ascertained. Collateral documents such as invoice and insurance are weak and the probability of duplication is very high. In the absence of RTO registration, a sale or sublease during finance tenor is a possibility and traceability of assets is tough. While the segment looks attractive on pricing and LTV, a minor snag in due-diligence of asset/documents/customer may lead to much higher losses.
NBFCs do not enjoy a level playing field compared to banks? What is your take on this?
NBFCs borrow from banks and through various instruments and therefore, have a relatively higher cost of fund. At the same time, NBFCs cater to much larger geographic spread with higher risk appetite and mostly to under-banked customers which increase the operating expenses. Also, NBFCs are not privileged to have recovery under SARFAESI act which makes them lacking on recovery. However, most NBFCs in this segment show reasonably good financial results and growth which is on account of better operational efficiency and risk management.
How do you view the future of the CE financing segment?
The future is certainly good as infrastructure development in India cannot be ignored by any political outfit and hence will always remain a core investment area. Dependence of GDP and IIP on infrastructure and mining is high and while the envisaged $1 trillion investment in the next five years may fall short, even three quarters of the same should be good enough to see a growth of 15-20 per cent YoY.