Q: What are the funding challenges plaguing the equipment sector?
A: Post the IL&FS episode in 2018, access to new funding has been a major challenge for NBFCs in the infrastructure space. Banks and other sources of institutional finance have become immensely risk-averse towards such NBFCs. Equipment financing has suffered.
To overcome the problem, RBI launched the co-origination of loan programme in September 2018 which explored dovetailing the strengths of both banks and NBFCs – banks’ access to a continuous and steady source of low-cost liability with NBFCs’ reach and expertise in asset management. This arrangement was slowly gaining momentum and volumes, picking up when the pandemic brought everything to a standstill. The scheme has been amended and re-introduced as the co-lending model. the new model allows greater operational flexibility to the players.
Q. How can these challenges be mitigated?
A: The immediate need is to allow a one-time restructuring window for the NBFCs from their lenders while holding the account as a ‘standard asset’. The re-launched co-lending model will play a key role in helping the NBFCs chart an asset-light, capital-light growth path.
I also believe that there is a strong case for differential regulations for different types of NBFCs. Entities which contribute more to the economy deserve greater flexibility in terms of rules and regulations. More leeway on the liability side should be provided to those NBFCs which are active in the infrastructure space, especially the systemically important ones.
Q. Do you see any green shoots in the infrastructure equipment sector?
A: While Q1 of 2020-21 witnessed a sharp dip in demand for infrastructure equipment, there was a strong revival in demand in Q2, especially for equipment used in road projects. Additionally, announcements to liberalize mining would translate into higher demand for earthmoving and other specialized mining equipment.
Growth in construction and mining equipment in Q2 FY21 was 25% more than that of the corresponding quarter last fiscal. Thus, some green shoots are visible in select sectors. But to keep the momentum, Centre must step up investments in infrastructure.
The pandemic has brought to the fore the importance of three sectors – healthcare, agriculture and IT. While government will take steps to scale up the healthcare and the IT hardware segment, agriculture has remained relatively unscathed. A strong revival in demand is already under way in the rural economy. I foresee a major pick-up in demand for both agri equipment and equipment for allied activities and logistics.
Q. What has kept Srei Equipment Finance going?
A: The pandemic has demanded a re-invention of the processes and business model. The group’s decision to reduce exposure in infrastructure was a timely one and helped us focus on our equipment financing business. We now have an asset-light model.
Going forward, Srei plans to leverage the strengths of its fintech partner, iQuippo – a state-of-the-art digital platform. This partnership-based model, ready and functioning before the outbreak of Covid-19, will prove invaluable in a transformed world.