Equipment financing: An evolving scenario
While the government is expected to roll out more reforms soon, the key issue is implementation on the ground. If policy issues are addressed and initiatives are implemented, it will give a boost to the equipment financing in India, writes Sunil Gupta.

Infrastructure segment has been witnessing a major slowdown due to various issues around land acquisition and environmental clearances. Mining and real estate segments are also facing difficult times. The interest rates are at an all-time high and have not softened over a long time. Almost every second BOT projects is facing a delay due to land acquisition and environmental clearances which is resulting in delay of financial closures. All these factors have severely impacted the growth in the equipment financing over the last couple of years. The economic slowdown in the leading world economies has only added to the woes of the segment. The infra companies are finding it very difficult to raise fresh capital and debt for the projects. Suddenly, infra has become an untouchable area for lenders.

Despite all the challenges, the overall equipment sales have grown by 10-12 per cent approximately, during FY 11-12. The demand has come mainly from rural and semi-urban areas, primarily from irrigation, small road projects and various government schemes like PMGSY. For the first quarter of the current financial year, backhoe loaders have grown by 3 per cent while excavators by 9 per cent. However, the same have declined by 7 per cent and 14 per cent in July 2012 and by 16 per cent and 23 per cent in August 2012 on YoY basis, which is a cause of concern. The numbers for September 2012 are expected to be in the same range. Overall, Q2 has seen significant decline in equipment sales. It`s evident that equipment sales have been slowing down. Backhoe loaders and excavators contribute nearly 60 per cent to the total equipment market in India and reflect the trends of CE financing.

Based on the current trends and opinion of industry leaders, the Indian construction equipment market is expected to remain flat for the current year. The growth, if any, would depend on the policy changes and corrective measures which need to be accorded top priority by the government. The land acquisition and environmental issues, coupled with high interest costs, have put a stop to various large infra projects.

The above scenario paints a bleak picture for equipment financing in India. Slowdown in the demand doesn't augur well for the lenders; large infra companies are tight on liquidity. Not only does it impact the growth, delinquency also shows a tendency to rise. There have been increasing defaults in the segment by large players. Some of the players are envisaging CDR and reschedulements. It's a tight ropewalk for the lenders and the times ahead are going to be very challenging. Some equipment financiers have started tightening underwriting norms and have lowered their targets for the current fiscal.

At the same time, the planned $1-trillion investment in infrastructure in the 13th Plan is a big positive. The Union Budget for FY 2012-13 has a lot of potential for the infrastructure sector. More stress has been given to enhance and develop rural India. The setting up of infra-investment fund of Rs 50,000 crore, tax-free bonds for Rs 60,000 crore, allocation of Rs 25,360 crore for the Road Transport and Highways Ministry, ECB for capital expenditure on the maintenance, are all good measures.

The sudden wave of reforms by the new Finance Minister is like a cloudburst. The government initiated a slew of reforms including fuel price hike, FDI in retail and disinvestment. The policy makers have finally got down to work after months of flip-flops. The market sentiment has started turning positive. Foreign investors are slowly coming back. The FDI in retail will lead to huge investment in development of backend infrastructure like warehouses.

There is an added push in clearance of key infra projects. The ministry of forest and environment (MoEF ) has recently cleared about 80 files relating to road projects, out of 347 road projects which are stuck. The highways ministry has sought some relaxation in issuance of green clearances for NH projects to hasten construction work. At present, environment clearance comes only after forest clearances are obtained for the entire stretch.

The government is now working on the Land Acquisition Bill and is expected to set up a GOM this month to examine bill provisions. The 12th Five Year Plan will also be released this month. The government will be under pressure to take measures to put the infra on road to recovery.

While the government is expected to roll out more reforms, the key issue is implementation on the ground. If policy issues are addressed and initiatives are implemented, it will give a boost to the segment and equipment financing in India.