Bounce back
“Demand has picked up well; so much so that on a year-on-year basis, it has exceeded last year’s corresponding month volumes from July onwards,” says Vinod Chauhan, Senior Executive Vice-President, Kotak Mahindra Bank.

The construction equipment business after August 2020 has been very good, more or less at pre-COVID-19 levels, according to A G Sriram, Country Head, Construction Equipment and Commercial Vehicles, IndusInd Bank. “Our monthly volume was Rs 550 crore before COVID-19; in the past three months, our monthly business was worth Rs 500 crore.”

Demand for funds has been doing well since July, shares Suseendran SS, Head - Equipment Finance, GMMCO, a business division that finances Caterpillar machines. “Demand is back to pre-COVID levels because machinery sales have picked up.”

“We started to see an increase in demand for construction equipment from Q2 onwards largely owing to improvement in the execution of existing orders, as new project announcements have been significantly impacted during the year,” says Saurabh Bhalerao, Associate Director, BFSI Research, CARE Ratings.

“Q3 of FY 2021 witnessed increased activities in infrastructure projects, resulting in demand for loans,” agrees Vinod YB, Senior Technical Consultant - Hydraulics & Construction Equipment, Rao's Consulting Services.

Sectoral drivers

“We have seen strong demand for equipment across categories and regions,” says Chauhan. He attributes the healthy demand for equipment finance to huge government investments in roads, railways, mining and irrigation, and some strong retail demand to the rural side of the economy.

“The major segments driving demand appear to be road construction, mining and rural development projects,” observes Bhalerao.

“The Caterpillar machines we sell for mining usually do not need finance because they are capital procurements: the rest go to retail clients engaged with road projects, quarries and institutional building projects,” shares Suseendran.

“We are witnessing steady demand for equipment finance from sectors such as packaging and the healthcare industry,” says Sarosh Amaria, Managing Director, Tata Capital Financial Services.

Interest rates

Low interest rates are also a key catalyst for the resurgence of demand for equipment finance, according to Chauhan. “Interest rates are almost at historically low levels.”

Interest rates on construction equipment finance have more or less remained constant for quite some time, in the range of 8-10 per cent, observes Piyush Gupta, Managing Director, Capital Markets & Investment Services, Colliers International (India). However, he does not see any impact of these low interest rates on the demand for construction equipment finance. “Loan sizes and their number depend on the profile of borrowers,” he says. “The turnaround time for a reputed large contractor with [strong] accounts receivable and payment collection is much faster than a small contractor with [possibly] uncertain payment collections, which in turn impact loan repayment.”

Vinod believes low interest rates will be of paramount importance to propel aggressive growth in the construction equipment industry in 2021. Last year, the Indian construction equipment industry faced challenges and a slowdown on account of new emission norms, delays in environmental clearances, the COVID outbreak and the countrywide lockdown, he says. “This has resulted in the piling up of huge inventories with OEMs and dealers, which has, in turn, increased their liability towards inventory carrying costs, interest and insurance. On the other hand, the rental industry is also outweighing financiers’ reach to potential buyers and that has further created an impact on new construction equipment. Low interest rates will be crucial to make 2021 a gamechanger for the industry.”

Money supply

Demand for finance is alright but what about supply of money? Collections play a major role in making available finance to service this need. How have collections and, consequently, disbursements been moving?

Collections impacted in Q1 owing to customers seeking moratoriums on loans have improved month on month with the gradual increase in project execution and release of funds by sponsors, particularly government-initiated projects, shares Bhalerao. Consequently, funds available with non-banking financial companies (NBFCs), especially bigger NBFCs with a relatively stronger credit profile, increased. Supportive initiatives by the Reserve Bank of India (RBI) helped too.

Disbursements gradually picked up starting August 2020 as the collection trend indicated the state of customer cash flows, according to Bhalerao. The risk-return relationship and collection framework largely govern credit costs.

“Normally about 1 per cent of customers default on their loans; our default rates post COVID are even lower than that," shares Sriram. Repossessed assets are sold through auctions.

Preferred clients/projects

In general, projects with a strong sponsor with a prompt payment history and a satisfactory execution track record of the contractor find it easier to achieve financial closure for equipment finance, observes Muklania.

At Tata Capital Financial Services, the preference is for projects with consistent cash flow visibility over the term of the loan and customers whose projects are based on strong fundamentals, irrespective of the sectors that they come from. “Most IndusInd Bank loans are to retail customers engaged outside of metros, where we get the quality of customers we look for and the interest rate we are comfortable with,” shares Sriram. “We evaluate the balance sheets and cash flows of prospective customers. We look for customers that are not over-leveraged. We avoid companies that delay subcontractor payments beyond 90 days.”

Sriram is more confident of financing equipment for coal mining where the cash flows are more consistent, NHAI projects and equipment for projects in certain state governments, apart from retail customers engaged in equipment rentals.

“While we fund all categories of customers [first-time operators to large construction companies] and projects, projects by the Central Government as well as those funded by central government agencies and agencies like the World Bank are preferred, especially for larger exposures on equipment and working capital funding,” says Chauhan.

Potential challenges

One-time restructuring allows banks to restructure loans of borrowers regular in their repayments and who did not have more than 30 days overdue as on March 1, 2020, without downgrading their asset classification to a non-performing asset (NPA).

Will this help the industry?
As the construction equipment financing industry is very granular, Gupta does not see any significant impact of one-time restructuring. Besides, such restructuring is beneficial mainly for large corporates and bigger contractors.

Industry voices point to the dissimilar rules on one-time restructuring for banks and NBFCs—while NBFCs can restructure their customers’ loans, they are not allowed to avail the restructuring mechanism from their lenders, primarily banks. In contrast, banks have been extended one-time restructuring for both their assets and liabilities. These rules appear to have been framed to suit a few large-sized and government NBFCs but they have raised concerns for standalone NBFCs needy of liquidity.

Certain NBFCs facing liquidity challenges who cannot avail one-time restructuring shall face challenges, observes Gupta. This is a cause for concern because NBFCs have been major capital providers for the real-estate industry in the past six to seven years.

With the one-time restructuring window offering the option to restructure loans with cash-flow mismatches and limit credit cost being available to NBFCs for its assets but not for its liabilities as per a RBI circular issued in August 2020, an asset-liability mismatch could follow if a significant number of restructuring proposals is received, observes Mamta Muklania, Associate Director, CARE Ratings. “The ensuing limited availability of funds, heightened liquidity focus and issues with respect to asset quality in the past may keep disbursements in check.”

Not surprisingly, NBFCs are gradually tightening credit appraisal norms, including stricter evaluation of the cash flow from the project; the loan to value for the equipment may also reduce, continues Muklania. “NBFCs have also been entering into co-lending tie-ups with banks to maintain their customer base while reducing both capital requirement and exposure. Banks, by virtue of regulations, have stricter governance and tend to attract the stronger players in the industry with relatively stable cash flows and a longer credit history.”

“Financing by NBFCs has been less aggressive after the outbreak of the pandemic because they have been facing their own challenges,” observes Suseendran. “This has been good for us.”

Good tidings

Equipment finance is resurging, and rightly so, according to Sandeep Mathur, Brand Leader, CASE India, as it offers dealers as well as customers many advantages such as cutting down on equipment acquisition cost, protection from market fluctuations, elimination of storage and transportation issues, etc. The biggest blessing of the pandemic was that it brought forth the importance of a well-placed equipment finance sector to unburden customers in tough circumstances.


Finance for used equipment
Both banks and non-banking financial companies (NBFCs) provide used construction equipment finance. However, the valuation, due diligence, depreciation and other details associated with used assets mean that the application takes a longer time to process and has a higher interest rate attached to it as against a new asset, roughly 2-3 per cent higher, explains Piyush Gupta, Managing Director, Capital Markets & Investment Services, Colliers International (India).


“Loans for used equipment are subject to our internal assessment of the asset and evaluation reports filed for the customer,” shares A G Sriram, Country Head, Construction Equipment and Commercial Vehicles, IndusInd Bank.


The higher risk associated with used equipment has led some financiers to restrict the availability of such finance.

“We like to be sure about the quality of equipment we finance; so, the only used equipment we finance is our own company’s equipment offered on rent, which after some years is refurbished and offered for sale as used equipment,” shares Suseendran SS, Head - Equipment Finance, GMMCO


Loans: Dealing directly with financiers vs. going through the vendor

With a focus on customer service, many construction equipment vendors have entered into agreements with banks and non-banking financial companies (NBFCs) to facilitate loans for their customers.


For instance, DICV has signed MoUs with banks and NBFCs across the country. “We work with both classes of financiers to offer customers financial flexibility and a range of viable, competitive financing solutions,” explains Rajaram Krishnamurthy, Vice-President - Marketing and Sales and Customer Service, DICV. “This engagement is an outcome of BharatBenz’s customer-centric approach; its commitment to give customers a seamless, hassle-free buying experience from the product inquiry to the final purchase. We not only believe in understanding precise product requirements but also in helping our customers to avail and benefit the best finance schemes.”


Loans from a tied-up bank are easier and faster to get.


“Availing a loan from a bank directly takes around three to four weeks from the initial date of application whereas with a tied-up bank, the same process can be done in two to three weeks,” observes Piyush Gupta, Managing Director, Capital Markets & Investment Services, Colliers International (India).


Some vendors have associated companies offering equipment finance.


“Our financial arm CNHi Capital provides a comprehensive range of services, including wholesale and retail equipment financing support for customers,” shares Sandeep Mathur, Brand Leader, CASE India. “We deploy finance professionals called ‘Capital Mitras’ at dealer outlets who function as financial advisors to customers and educate them on various financing-related issues, such as kinds of finance, six-monthly instalments/quartet instalments, suitable schemes, etc, and help them in their decision-making journey.”


Construction equipment finance is being provided in the form of new asset finance, refinance, working capital demand/term loans, top-up loans, structured finance, letters of credit for imported machines, etc. Beyond these methods, Gupta sees leasing construction equipment as a better alternative to buying, as it enables the deployment of construction equipment without the burden of large costs or long-term investments. Leasing is one of the cheapest and best options for construction companies to free up their line of credit.


NBFCs vs. banks

The share of non-banking financial companies (NBFCs) is about 40-45 per cent of what banks offer to infra projects for construction equipment, observes Vinod YB, Senior Technical Consultant - Hydraulics & Construction Equipment, Rao’s Consulting Services. He believes institutional borrowers generally approach NBFCs because of their easy reach, competitive interest rates and value-added service.


NBFCs are forecasting rapid growth in the next few quarters; to that end, the majority of them are expanding their network and working on attractive packages for their borrowers, he adds.