03 June 2020

Industry Focus: Equipment Finance

Green Growth Pastures

Going by the current infrastructural developments and government’s much needed thrust to infuse vigour into the growth dynamics, there seems to be exciting time ahead for the equipment leasing and finance industry. The massive industry is set to change with latent demand from borrowers and vendors in the marketplace.

Acting as stimulus towards demand and acquiring new customers, construction equipment financing has been shaping up well in India unlike early days. Financing accounts for about 80 per cent of the equipment purchased. For imported machinery, it's even higher, with 90 per cent of equipment purchased being financed.

Over the next few years, the ECE financing industry is expected to grow by a CAGR of about 22 per cent . Major financing happens through loans, owing to the huge costs associated with it, leasing comes across as a distant second option. About 80 per cent of ECE users opting for finance are micro, small, and medium-sized enterprises. With ticket sizes varying from Rs.20 lakh for a backhoe loader purchased by an individual user to Rs.20 crores for a construction firm's bulk equipment purchase, the variety of players offering equipment financing has increased substantially. The competitive landscape now consists of banks such as HDFC Bank and Kotak Mahindra Group, NBFCs such as Srei Infrastructure Finance and Magma Fincorp, leasing companies such as ORYX India and Srei BNP Paribas, external commercial lenders, and cross-border leasing firms. NBFCs handle 75 - 80 per cent of ECE financing.

Globally, rental is a well-established and a preferred way to finance because of its simplicity and cost-effectiveness. However, India's rental ECE market is underdeveloped compared with other developed and emerging economies. India's market is highly fragmented with organised players such as Quippo Rentals and Sanghvi Movers accounting for only 30 per cent of the market. The unorganised sector consists of about 10,000 players, each with small fleets of two to 50 machines. These players typically offer equipment only from Indian manufacturers without having any dedicated maintenance team. All these point towards challenges clutching the growth potential of construction equipment in India.


Challenges of Equipment Financing

For companies to improve equipment financing in India, four challenges need to be addressed:

Lack of easy access: Owing to the lack of in-house financing arms with OEMs, companies select engaging in short-term tie-ups with banks or NBFCs. First-time users, although forming about 30 per cent of the customer base, face high-margin money requirements of 20 – 25 per cent , compared with just 5 – 10 per cent for repeat customers, which dampens equipment demand, as per a recent study by ATKearney.

Challenges in collection: Most finance users are micro, small, and medium-sized enterprises that depend on third-party payments, which can lead to collection delays and defaults. As a result, the average number of days of sale outstanding can reach 150 for organised rental players. Further, most of the financing business is handled by NBFCs, which face significant recovery challenges because of a lack of adequate regulatory support.

Unfavourable regulations: Indirect taxation on construction equipment in India is 21 - 38 per cent , higher than France and Germany's 20 per cent and Indonesia's 12 – 17 per cent , according to a CII report. Further, lease transactions are subject to dual taxation: a value-added tax (VAT) and a service tax.

An array of entry taxes and lifetime Regional Transport Office (RTO) taxes imposed by various states make moving construction equipment between states unviable. In addition, the 15 per cent depreciation rate for construction equipment assets (compared with 30 per cent for commercial vehicles) is too low compared to the falling asset life as a result of rapid technological progress and equipment obsolescence. Moreover, for interest paid to NBFCs on loans for equipment financing, tax is deducted at the source, which is not the case with banks. In addition, external commercial borrowing as a source of funds is available only when purchasing imported equipment; it is not available for domestic equipment, highlights ATKearney report.

Low rental penetration: Organised players with large rental fleets are in limited numbers in India because they lack the capital to expand. Organised players also face huge pricing competition from the unorganised segment, where players are involved in off-the-book cash transactions and can therefore offer much lower rates. Used equipment and the secondary sales market are also highly underdeveloped in India because of an absence of established trading platforms and a lack of buyback schemes from OEMs. Above all, ownership still remains the preferred option for Indian users.


Challenging the shortcomings

For companies to tide over challenges, they need to work on these essential aspects:

OEM-supported financing: OEMs should incorporate in-house financing arms or forge long-term relationships with banks or NBFCs that can reach small contractors. Some OEMs in India already have exclusive contracts with NBFCs, but much more could be done: First-time users could be offered buyback schemes or a co-borrowing option to give them easy access and better financing terms. OEMs such as Atlas Copco (a Swedish manufacturer) and some large financing players in the United States offer equipment buyback as part of their financing options. OEMs could also collaborate with third parties or other OEMs to provide channels for equipment exchanges.

Uniform tax regulations: Standardised tax laws across states can significantly boost equipment purchases, rentals, and resale. National registration of construction equipment can eliminate the need to pay multiple lifetime RTO taxes. With the implementation of GST rate, this scenario should change for good.

More efficient collections: The usage of telematics systems with GPS services need to be harnessed to track equipment and improve collections. Global OEMs provide such systems with their equipment, and some of these offerings are already in India. Providing further policy support to NBFCs for payment collection, regulations will empower NBFCs to move against defaulters and claim tax benefits against bad loans, as banks do.

Developing the rental ecosystem: Creating equipment safety and environmental regulations on par with the global construction equipment industry, along with training skilled manpower for construction equipment, will enable large organised rental players to improve their value proposition against the cost-competitiveness of smaller unorganised players. This will help attract more customers to larger rental players and improve rental penetration. In the developed economies of the United States, Japan, and Europe, large rental players offer the latest equipment with an average fleet age of only two to four years, and they ensure that the equipment complies with regulations. They also provide lower maintenance costs and offer operators from a pool of qualified manpower. Says DK Vyas, CEO, SREI BNP Paribas

“There have been some reforms in the recent past which have helped the infrastructure sector to become more fluid in its functioning and the present government has done a commendable job to plug the fundamental deficiencies.”



Going ahead, we would witness many revolutionary trends shaping up in the equipment financing space. Some of them are:

Integration holds the key: Take an example of automotive sales, whenever you purchase a car, the dealer just doesn’t inform you about the models, colours and trim packages available, but also about the financing options and the EMIs as well. Specifically, for any deal to come through, sales and financing need to be integrated. Today, businesses are looking for the same service and financing options from equipment sellers.

Automation will take centerstage: Equipment financing companies to need to quickly take the automation route to sustain and survive in this tech-led market. They need to make the entire process foolproof and transparent to effectively manage payment terms and other important services associated with financing.

There will be rise of next ‘Uber’: We are moving over to rental space very fast, though not at pace of our global counterparts. Yet the transformation is significant. Pretty soon, we would witness the next Uber in the making in construction equipment space as well. Major reason riding this growth is the entry of millennials in the business. Millennials will use automation and customisation to ensure no borrower is left behind, pushing for creative financing structures to get more small business owners the equipment they need. Equipment finance companies that embrace this mentality will succeed; those who don’t, will falter.

Innovation is thy name of adversity: Customer demand for greater flexibility and convenience will augment the use of non-standard financing agreements. Shifts in customer preferences for managed services (bundling equipment, services, supplies and software), pay-per-use leases and alternative financing will spur equipment finance companies to find innovative ways to fill the demand. These deals would complement standard lease options rather than replacing them.



With the growth of the rental market picking up in India and specially in tier II and tier III towns, good times ahoy for construction equipment in India. The ‘pay-as-use’ model is witnessing growth momentum as it substantially reduces costly breakdowns and eliminates storage costs.

In this context, a recent study points out that the global construction equipment finance market to grow at a CAGR of 9.9 per cent during the period 2016-2020. Technavio’s market research analyst highlights that since many construction companies have to choose between buying or leasing equipment or putting their funds into projects, lending companies offer them options to lease equipment. As renting helps construction companies to save in taxation and also allows them to pledge the equipment as collateral, it is increasingly being preferred over buying a new equipment as operators are exempt from depreciation charges.

The APAC region has the biggest market share in the construction equipment finance market and is expected to generate close to $118 billion by 2020. In this region, the enormous demand for rental equipment will boost the market demand for financing companies over the next few years.

Due to the availability of equipment financing, construction companies can easily find cost-effective loans. Online financing is another upcoming option available to customers, which would ultimately help them use available working capital efficiently. The scenario in the construction equipment financing market is quite complicated as many construction companies have money tied up with debtors in inventory and receivables. Cash flow management plays a very crucial role, and companies are looking for ways to increase cash flow. In this market, the lenders and borrowers work together to find viable solutions, which in turn will help to spur the prospects for market growth. All in all, it’s a fortune cookie for construction equipment companies in India. Says Ramesh Iyer, VC and MD, Mahindra & Mahindra Financial Services Ltd

“The feedback from our customers indicates that there is heightened activity in infrastructure and construction projects. The government’s path-breaking initiatives such as Make in India, 100 smart cities and a liberalised FDI regime will further boost both these interrelated sectors. Infrastructure financing in de-marketed projects is the need of the hour. For instance, in the road sector, the government is already in the process of awarding 25,000 km of national highway projects in 2016- 17, as against 10,000 km awarded in 2015-16. This will drive demand for financing of construction equipment.”

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