05 June 2020

Equipment Finance

Severe funds crunch

 

 

Currently irony of construction equipment finance is that, while infra projects are being rolled out on a fast track boosting demand for equipment, contractors are facing a severe funds crunch to purchase new equipment. Contractors are in a tight spot because all contracts are awarded on basis of their equipment bank and they have no capital to buy new equipment....finds Satish Chavan

 

 

Fast Facts

 

  • Severe funds crunch
  • Cost up 200 basis points
  • CAGR of 20-21 %
  • Positive impact of GST

 

 

 

“The construction equipment sector was growing around 20 per cent prior to the IL&FS crisis. The growth has now slowed down to 10 per cent,” says Arvind Garg,  Ex - President, Indian Construction Equipment Manufacturers’ Association. “Almost 90-95 per cent of construction equipment are financed. NBFCs are the largest players in this sector with about 70-75 per cent share of financing,” he said. He pointed out that lenders themselves were now facing liquidity challenges, so they have become cautious about lending. Even for those who are getting finance, the cost has risen by at least 200 basis points.

 

However, Garg assured that all the stakeholders are working closely to overcome this crisis and the same will be eased by March if there is no stress in the system or other NBFCs.The construction equipment makers are working closely with the NBFCs to tailor products till confidence builds up.

 

Problems in equipment finance began with the collapse of Infrastructure Leasing & Financial Services(IL&FS) and its subsidiaries who have defaulted on many debt instruments in the past few months due to insufficient

funds.

 

 

Funding Fundas

 

According to a report by Feedback Consulting, the construction equipment finance industry is expected to grow at a CAGR of 20-21 % for the next three years until fiscal 2021. As the Infrastructure sector in booming, the Equipment finance business is also growing rapidly across India. Before purchasing any equipment you will have to decide whether you want to purchase goods from available cash flow or finance them. The government of India is working hard towards enhancing India’s attractiveness as a new investment hub in the world. Huge investments are diverted in the Infrastructure sector to sustain the growth momentum and create employment.

 

A budget and extra-budgetary expenditure of `5.97 trillion was finalized for 2018-19 as against an estimated expenditure of `4.94 trillion in 2017-18, an increase of 21 %. Sectors such as railways, and roads and highways, and housing and urban affairs have witnessed increased year-on-year (y-o-y) budget allocations for FY’18–‘19 by 22 %, 10 %, and 57 % respectively. The demand for construction equipment is estimated to multi-folds in coming years, thus the demand for financing companies is also expected to rise.

 

With the current announced projects which mostly have started from the third quarter of Fiscal 2018, demand will continue for the earthmoving equipment industry, which will have a share between 68-70 % of the overall CME finance market. Banks and NBFCs are expected to have an equal share in the CME finance industry for the next one to two years with the equipment leasing industry expected to grow at a CAGR of 15-16 % until Fiscal 2020.

 

 

Business Models

 

The equipment finance market in India can be segmented into four business models. Third party financiers like NBFCs which offer leasing largely as an alternate means of financing. Second segment is emerging Asset Life Cycle Management (ALCM) companies such as Rentworks and OPC Asset Solutions which offer operating lease structures with interest in residual value. Third type are captive leasing and financing arms of leading OEM companies to facilitate the parent’s product sales through financing and leasing support and take the residual value  risk on their balance sheet.  In this category, there are companies that are registered as NBFCs and also companies that function as an operating lease company. The fourth type are rental operators such as Quippo, GMMCO (for Caterpillar), and Gemini Equipment and Rentals (GEAR), which provide equipment on rental for periods ranging from few weeks to years to end customers.

 

Major NBFC players in the market include SREI Equipment Finance, Sundaram Finance, Shriram Equipment Finance Company Ltd, Bajaj Financial Services, Magma Fincorp Ltd, L&T Finance Ltd, GE Finance etc, and among banks HDFC Bank’s Construction Equipment Finance is a major player. At the OEM end most have their own equipment financing division or have tied up with major banks and NBFCs, such as Sany has tied up with L&T Finance. ACE, and Volvo CE, etc. also have equipment financing arrangements with banks and NBFCs. Other equipment finance majors include: Essel Finance, HDB Financial Services, GE Capital India, Cholamandalam Investment and Finance Company Limited, Magma Fincorp Ltd, HDFC Bank, Reliance Commercial Finance, Tata Capital Financial Services Limited, Aditya Birla Finance Limited, Volvo Financial Services (India) Private Limited, Hinduja Leyland Finance Ltd, Mahindra Finance, Citicorp Finance (India) Limited, Frontier Capital Limited, and Balaji Credit Services Pvt Ltd.

 

 

Regulatory impediments

 

These challenges are at two levels. First the government should expedite clearance of all pending projects so that it imparts a growth impetus to the construction sector. Lack of overall growth in the construction sector has been constricting growth of equipment finance sector. Renewed growth in project execution will generate demand for new equipment, and consequently for equipment finance. The second and more fundamental level is of policy and regulatory issues. The government and RBI need to ease the capital requirement or provisioning norms for NBFCs which cater to un-banked customers in rural segments and hence needs to be treated accordingly. A tighter provisioning norm will only dissuade NBFCs from taking risk on small and needy customers and there will be concentration at mid and large end of customers in larger cities and towns.

 

Also, the market for simple finance leases may slow down further with the impending introduction of new Direct Tax Code and would get limited to special situations where the lessor has a need to resort to leasing as a structure to better secure his ownership rights on the equipment as compared to debt financing or hire-purchase transactions. However, robust demand drivers for operating leases are falling in place. Leasing of construction equipment is expected to rise with introduction of large ticket size sophisticated equipments from international OEMs and significant demand for capital investments across all infrastructure sectors.

 

With introduction of GST, inter-state mobility of the machineries has been very easy. Thus, this is the ideal time to promote cost-effective methods of utilization of these assets like renting and leasing.

 

 

Major equipment finance NBFCs

 

Srei and BoB to co-lend through iQuippo platform

Loans to benefit B2B, B2C segments through product cross-selling

Srei Equipment Finance Limited (“SEFL”), a wholly-owned subsidiary of Srei Infrastructure Finance Limited (“Srei”), and Bank of Baroda, India’s second largest public sector bank, today announced a strategic alliance to offer joint loans for infrastructure equipment under a co-lending arrangement.

 

iQuippo, a Kanoria Foundation initiative, will facilitate sourcing of loans under this program. The partnership will allow SEFL and Bank of Baroda to collaborate, co-operate and widen their respective markets and customer base. The partners, through this strategic alliance, will be able to leverage each other’s customers and cross-sell their products. The offerings would include both business to business (“B2B”) and business to customer (“B2C”) propositions.

 

The two partners will also use the platform of iQuippo, a unique digital marketplace, for loan origination, loan dues collection, auction of equipment, valuation of equipment and several other facilities provided by the platform. With over 70,000 customers and over $400 Million loans disbursed through iQuippo, SEFL and Bank of Baroda will jointly offer loans and other services for construction and mining equipment (“CME”), tippers, IT and allied equipment, medical and allied equipment, and farm equipment. Commenting on the partnership,

 

Sunil Kanoria, Vice Chairman, Srei, said: “Bank of Baroda has a strong track record, brand appeal and experience in customer services, which will be complemented by Srei’s knowledge, experience and strong partnerships in the equipment finance space. The alliance will create value for both businesses and customers, and continue our leadership position in the equipment financing business.”

 

 

 

 

 

Anant Raj Kanoria, CEO, iQuippo, said: “we are very excited to add the second largest bank in India to our list of partners. Bank of Baroda with its reach and network will be able to leverage our risk engine and digital process to on board new segment of customers especially in the SME and MSME space. Also with Bank of Baroda’s uniqueness we will be able to service strategic clients and fleet owners who would be able to take advantage of the bank’s differentiated product offering. We will assist our partner with the strength of technology to offer seamless services to our customers at the touch of a button, while ensuring efficiency and transparency in the process.”

 

 

 

 

 

Devendra Kumar Vyas, Managing Director, Srei Equipment Finance Limited, added: “The combined strengths of Srei Equipment Finance and Bank of Baroda will prove to be extremely beneficial for our customers together. Apart from access to affordable financing, they will be able to explore a wide range of innovative banking products. This partnership will also complement the expansion plans of Bank of Baroda with access to new customer segments as well as geographies.”

 

 

 

 

 

 

 

P.S. Jayakumar, Managing Director and CEO, Bank of Baroda said, “Given that the increase in mechanisation is critical to timely and cost efficient to large infrastructure and housing projects, there is a strong need for robust financing of equipment. We are delighted to partner with Srei and through this and other efforts, contribute to the development of the equipment finance industry and further the Make In India program for construction equipment.”

 

 

 

 

 

In its wide product portfolio, YES BANK offers business loans for a range of fields to facilitate the business goals of owners and entrepreneurs. One particular loan of note is the Construction Equipment Loan for the requirements of the construction equipment and material handling space. With years of experience and banking know-how, YES BANK is the bank for your business banking needs.

 

Leasing Virtues

 

A “true” lease can offer low cost financing because the lessor takes advantage of tax benefits in the form of reduced payments. If the lessee cannot currently use tax depreciation to offset taxable income due to current operating losses, loss carry-forwards or alternative minimum tax, depreciation benefits may be effectively lost forever if the lessee purchases rather than leases.

 

An equipment lease/finance transaction can be executed in less time than traditional financing alternatives. Leasing doesn’t require the cash outlay for a large equipment purchase and can be used to overcome budget limitations. Existing cash position and lines of credit remain free and liquid for other working capital needs that have higher ROE and or ROA metrics.

 

Leasing provides 100 per cent financing while a typical equipment loan requires initial down payment. Most ‘soft’ costs incurred in acquiring equipment can be financed by the lease which include delivery charges, interest charges on advance payments, sales or use taxes, installation and training costs. Such costs are not usually financed under alternative methods of equipment financing. Tax advantages - A lease can be structured either on or off balance sheet. As an expense, lease payments reduce tax liability and can be structured to qualify as an operating lease for financial reporting purposes. The choice depends on your accounting objective and other cost trade-offs.  Always consult your tax advisor for tax advantages available with leasing. Leasing permits regular upgrades to reduce obsolescence risk with equipment life cycle management.

 

“The advent of GST, the higher growth trajectory of the Indian economy and the starting up of stalled projects is expected to push up demand for specialized construction and material handling equipment to complement the warehouse and logistic needs for faster movement of goods and for efficient supply chain practices.Given India’s infrastructural deficiencies and the need to build the same, construction equipment financing is only slated to grow in the years to come as majority of construction equipment and commercial vehicles are acquired under some sort of financing or leasing plans. In many senses India is likely to witness integrated logistic players handling commercial vehicles as well as material handling and construction equipment.

 

Both segments are very specialized businesses that require specialized credit assessment and portfolio management skills with understanding of the asset types, uses, primary and secondary market and resources to manage equipment and the lending portfolio. Repossession and redeployment of such assets will pose a challenge to any financing Institution unless close linkages with Manufacturers, Resellers, agents and contractor community exists.

 

Managing such portfolios will require considerable research and understanding of the user segment, Macro and Micro economy and impacts, Industry sectors and Risk management techniques and tools.”

 

 

Once you opt for ‘YES BANK’s Construction Equipment Loan,’ you are in for the best terms at attractive interest rates. You also receive financing facilities for equipment from global manufacturers, including JCB, Telcon, L&T Komatsu, Caterpillar, Volvo, Escorts, Case, Schwing Stetter, Hyundai, Terex, Ace, Liugong, Greaves, Putzmeister, Atlas Copco, Apollo and more. Under YES BANK’s Construction Equipment Loan, contractors and builders receive funding for the purchase of new construction equipment needed for activities such as mining, material handling, earth moving and so on. Moreover, the loan covers existing construction equipment owners, mine owners, contractors, builders, port owners, and others operating construction machinery.

 

The eligibility criteria for Construction Equipment Loans from YES BANK are as follows:

 

Individuals / Partnership Firms / Companies (both private and public) / Trusts (only private trusts) / Limited Liability Partnerships / Proprietary Concerns with more than two years of business experience. These include Captive customers, hirers, contractors, and mine owners Financier Status - YES BANK enjoys preferred financier status with all Indian as well as global manufacturers of construction equipment.

 

Loans up to 90% - When you opt for a YES BANK Construction Equipment Loan, it covers up to 90% of the equipment price. For instance, if your equipment costs Rs 1,00,000, then your YES BANK Construction Equipment Loan covers Rs 90,000 of that expenditure.

 

Flexible Solutions – A common complaint among borrowers is the lack of flexibility in terms of financing. With YES BANK, you can take advantage of flexible financing solutions which are customised to meet your requirements.

A few other important features of a Construction Equipment Loan from YES BANK include:

 

Simple Documentation: There is no complicated documentation with a YES BANK loan. All you need to do is fill out the application, sign an agreement and submit the requisite proofs and documents.

 

60 Month Repayment Period: The repayment tenure of the YES BANK Construction Equipment Loan lasts up to 60 months, providing entrepreneurs and business owners a significant amount of time to repay their debt.

 

Quick Response: YES BANK prides itself on its customer service. With experienced personnel who are there to answer your every query, you are sure to get a speedy and prompt response for all your banking questions and needs.

 

Reach: With 32 locations offering Construction Equipment Loans, YES BANK offers a wide area of operations to ensure that you do not compromise on your banking and finance needs.

 

Relationship Managers: Apart from the attractive interest rates and repayment tenures, you also get access to an experienced team of relationship managers, who understand your concerns, listen to your queries and welcome your feedback.

 

Volvo CE knows business finance, its team of experts are dedicated to helping you succeed. With flexible financial solutions, it can help grow your business. From a single unit to an entire fleet, new or used, we’ll customize a solution to meet your needs, with tailor-made payment options to match your business needs. They are quick to respond and easy to do business with, Volvo Financial Services.

 

Magma offers construction equipment loans ranging from 80%-100% of the asset value depending on customer grading. Loans to all profiles of customers including First Time users  and First time buyers. Loan up to 65% basis KYC documents on select assets. It caters to customers in a radius of 200 Km from its nearest location. Its reach and distribution allows it to cover entire length and breadth of the states and union territories.

 

 

 

CAT’s Game Changer

 

Caterpillar Financial Services India Pvt. Ltd. (Cat Financial India), a wholly owned subsidiary of Caterpillar Inc., announced the launch of its India operations effective July 1, 2019. Headquartered in Bangalore, Cat Financial India, along with Caterpillar’s two Indian dealers, Gmmco Ltd and Gainwell Commosales Pvt Ltd, will support customers in India by offering a one stop solution for customized financial services for a range of Cat products.

 

Cat Financial India will enable Caterpillar India dealers to provide financial solutions in a responsive and timely manner to meet customer’s needs and support them in expanding their business opportunities.

 

“Our new office presence in India not only helps support Caterpillar growth in an emerging region, but also creates a competitive edge and opportunity to provide highly differentiated financial services for our customers that leverage data and technology to make their experience inclusive, seamless and transparent,” said Shelley Barrett, Asia Pacific Vice President, Caterpillar Financial Services

The Bangalore office marks the presence of 41st Cat Financial location globally.

 

CAT financial plans include:

 

  • Installment loans that enable customers to make a down payment or trade-in, acquire equipment, and structure payments over time.
  • Operating leases that let customers use equipment with options at lease end to return it, extend the lease, or purchase the equipment.
  • Finance leases that give customers the option to own equipment under lease.
  • Working capital loans that allow customers to use their Cat equipment as collateral to obtain financing for other business needs.
  • Governmental lease-purchase plans that offer low interest rates and flexible terms in the U.S. to qualified state and local government agencies.
  • Risk management solutions, such as Equipment Protection Plan for machines and Extended Service Coverage for commercial engines. Work with customers to structure payment plans that meet their specific business needs - including monthly, quarterly, annual, and seasonal payments.

 

Serve end-users by:

 

• Understanding and having expertise on Cat® products and the markets they serve • Offering a wide array of financial plans, flexible payment schedules, and competitive rates • Providing convenient, one-stop shopping with fast credit turnaround and user-friendly documentation

 

Support Dealers by:

 

• Serving as a consistent, dependable source of financing and extended protection for all markets and customers • Being dedicated to serving their needs and maintaining a focus on Cat products • Providing business systems to process transactions more quickly and efficiently

 

Assist Caterpillar by:

 

• Providing financial merchandising programs to promote machine and engine sales • Offering value-added products and services to dealers and end-users • Enhancing relationships and recognition with dealers and end-users through coverage and service.

 




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