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Despite hardening interest rates, the prospects for equipment financiers are still looking up, finds CharubahriAs chain reactions go, this is a predictable and happy one. The demand for construction equipment is soaring in keeping with the frenetic pace of construction activity in the country. And, in turn, this need for top-of-the-line equipment is brightening the prospects of equipment financiers. The state of the industryFor starters, business appears to be good. As Nirav Shah, Country Head, Emerging Corporates Group & Infrastructure Finance Group, HDFC Bank, tells us, The annual turnover of the equipment financing industry is in the range of Rs 22,000 to Rs 24,000 crore. It grew at an annual rate of 25 to 30 per cent in the previous fiscal, led by the backhoe loader segment that clocked 30,000 units last year taking the countrywide tally to over 2 lakh. India has overtaken China to become the largest backhoe loader market in the world. In our portfolio, the per capita machine ownership is more than two machines. Demand for new equipment outstrips that for second-hand equipment. Some of our latest schemes include offers for free insurance, attractive interest rates and a monsoon special offering higher moratorium on the principal for the initial months.Meanwhile, Pratap Paode, CEO, Shriram Equipment Finance Company Ltd, estimates the construction equipment finance industry to be currently worth Rs 20,000 crore annually. Growth has hovered around a steady 20 to 22 per cent in the past five years, barring 2008-09 when it dipped by half, he says, adding pointedly, The current year is also likely to be somewhat of an aberration. We have seen a bit of stagnation as a result of which growth may not exceed 8 to 10 per cent. A host of factors such as the slower pace of new contracts being awarded, execution issues and higher cost of borrowing owing to increased interest rates are to blame. Nor does Paode see any shift in the per capita machine ownership as the ratio of new to existing buyers has remained constant and hence so has the machine ownership pattern. While existing customers purchase new machines, they also periodically dispose off older ones to maintain operational efficiency. For its part, industry stalwart Srei BNP Paribas witnessed business growth as usual, at about 35 to 40 per cent in the first quarter of the current year led by the healthy demand for equipment finance from road and urban development projects. The rising interest rate trajectory had not ushered in a slowdown until the start of the current monsoon season, says DK Vyas, CEO, Srei BNP Paribas. Things do seem to have come to a head in the last three months, thanks to a decision paralysis at the central level. But on the other hand, the second quarter also coincides with the monsoon season that is conventionally a 'go slow' time for the construction industry. So we will need to reassess the situation after the monsoon. The client base Emerging areas of the expanding equipment financing industry are changing the way some financiers perceive their potential client base. At Shriram Equipment Finance, A-class cities encompass the mid and large customers while B and C-class cities constitute smaller and new customers. According to Paode, The customer class mix has not changed much in the past few years, so the city class distribution is largely the same for us. Still, he observes that some banks and NBFCs have started penetrating hitherto low-priority rural markets (C-class cities) to improve their spread. He believes that deep-distributed lending necessitates an adequate collection mechanism to ensure that losses and recover costs do not overshoot estimates.For HDFC Bank, areas used to be classified into A, B and C towns to describe the geographical spread of demand. HDFC Bank has included two new segments in the last two years. As we have achieved significant growth and scale in A, B and C towns, we have created tier 4 and 5 categories as well, explains Shah. New projects and government initiatives have led to saturation in the top 3 tiers. On the other hand, good agricultural output has ensured higher disposable income and higher demand in smaller towns, villages, talukas, etc.   Banks vs NBFCsAs banks make inroads into smaller towns, is the industry likely to see competition between non-banking finance companies (NBFCs) and banks? The fact is that these two players, of which NBFCs dominate the industry, are not in direct competition with each other. NBFCs are not in direct competition with banks as each has its own space, says Vyas. There is a whole segment of customers who fall outside the purview of the banking setup or who find it easier to approach the more flexible NBFCs. By covering these sections, NBFCs serve as a vital link in the financial mesh. Elaborating on the NBFC way of doing business, Vyas explains that they rely on dev-eloping relationships with the customer segment and fostering these associations so that they can become long-term partnerships, thus creating a durable value proposition for both. He added that Srei BNP Paribas is carving a new economic landscape by actively acquiring used equipment from the bigger infrastructure players and getting them retro-fitted and refurbished. Such equipment is then resold to upcoming contractors. In this way, we are helping nurture and expand the industry by bringing more players into the fold, he says. We are simultaneously helping big contractors acquire the latest technology by assuring them of a competitive resale value on their old asset. Vyas believes that the new RBI regulations for NBFCs go a long way in acknowledging the latter's contribution.The extensive reach of another leading NBFC, Shriram Equipment Finance, can be gauged from Paode's description of its geographical spread and modus operandi. We have a strong retail distribution in place and operate out of over 110 locations, he says. Our customers can avail repayment facility at any of the cash counters of Shriram Transport spread across over 550 branches nationwide. This, coupled with faster approval processing and specific industry-focussed approach, gives us an edge over both private and nationalised banks. We understand the customer's business better than others.NBFCs certainly have greater scale but bank finance has its own appeal for some customers. NBFCs dominate the equipment finance sector because of their faster response time and greater reach, obse-rves RK Sharma, Deputy General Manager鈥揥holesale Banking, Bank of Baroda. They can process loan applications faster because they lack the multilayer sanction system in vogue in banks. But NBFC interest rates tend to be 1 to 2 per cent higher than the best offers made by banks as the former source their funds from banks. So, larger contractors who can easily establish their credit worthiness would benefit from approaching banks for equipment finance.Spiralling interest ratesThe last year has seen consecutive up-ward revisions of interest rates. Industry analysts expect the RBI's role and inflation figures to continue to directly influence interest rates in the near future. The RBI has constantly been raising interest rates to control inflation, says Paode. But inflation was still 9.22 per cent in July, more than double the target of 4 to 4.5 per cent. So we should be prepared to see some more increases in the next few months. Shah also expects interest rates to harden further, at least for a quarter.Speaking of interest rates, Vyas opines, We are almost there. Interest rates may rise by another 50 basis point at most. I do not see the industry as being capable of absorbing higher rates than that. He also elucidates the need for fiscal policy interventions to help create a healthy supply. Cautioning that monetary policy can only work up to a point in curbing inflation, he believes the health of the economy as a whole should be looked at. This includes taking economic measures to boost supply and reduce inflation. Further, investing in warehouses and developing an effective supply chain would go a long way in avoiding supply side constraints. Certainly, appropriate measures would boost the construction industry; in turn keeping the going good for both equipment vendors and financiers.Equipment vendor speak  In which sectors of the construction industry is equipment finance most in demand? Also, for what products is finance most demanded? According to Subir Bhattacharyya, Advisor, TIPL, Equipment financing is generally demanded in the general and road construction sectors and for hydropower projects. In our experience, among the Cat products offered by TIPL, the highest demand for financing is for wheel loaders, backhoe loaders, hydraulic excavators, motor graders and track-type tractors. Our preferred financing partners are Bank of India, State Bank of India, Indusind Bank, HDFC, ICICI, Union Bank, Tata Capital, and Magma.The extent to which equipment finance matters can be gauged from this comment made by AM Muralidharan, Managing Director, Volvo India About 80 per cent of our construction equipment sales are financed by banks and NBFC's. We also launched Volvo Financial Services (VFS) in India this year to support the entire range of Volvo products being sold in the country. VFS has forged an alliance with Srei BNP Paribas, a strong player in equipment finance. Volvo India has tied up with the seven to eight top financing companies who are active in the construction equipment business.Second-hand equipment finance  Clarifying the ambit of second-hand equipment finance, Pratap Paode, CEO, Shriram Equipment Finance Company Ltd, explains, It covers the purchase of old equipment and the working capital needs of customers with unencumbered equipment. The second-hand equipment market is still largely unorganised and has certain risks associated with it.