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Slowdown in the economy is affecting the new equipment finance business of Srei Equipment Finance Pvt Ltd. To tackle this situation, the non-banking finance company has ventured into financing of used equipment. Devender Kumar Vyas, Chief Executive Officer of the equal joint venture between Srei Infrastructure Finance and BNP Paribas, outlines his company’s growth strategy amidst challenging times in the industry.
What is Srei Equipment Finance doing to battle the protracted slowdown?
There may not be any growth this year for new construction equipment financing as equipment sale itself is looking flat. We will, however, grow 10-15 per cent due to our diversified portfolio of IT and medical equipment financing.
This year we also started financing used construction equipment. Though there are short-term challenges in the infrastructure industry, the long-term story for the sector is still good as India needs more infrastructure. The political will to undertake reforms shown in the last few weeks should help in reviving the economy.
Why have you ventured into used equipment financing?
There is no organised player in this segment. Since the economy is not doing too well and there is not much liquidity, people are looking at used equipment. The cost of used equipment is only half that of new equipment. The risk is very low for both customers and the lender. It also gives us 2-3 per cent higher yield than new equipment financing.
What is your business strategy and what are the targets you have set?
We have hired 40-45 people for the used equipment business. We are also approaching manufacturing partners to create a business model for financing.
It is better to do business model-based financing than opportunity-based financing.
The current market size for used equipment finance is about Rs 20,000 crore. This year we will do business worth Rs 400-500 crore. Next year our target is Rs 1,500 crore. We expect used equipment finance to contribute about 20 per cent to our portfolio in the next 2-3 years.
What is the reason for your rising NPA levels?
It has gone up because two of our large accounts (in which we have Rs 100-crore exposure) have been referred to the corporate debt restructuring cell.
The gross NPA (non-performing asset) ratio is 3 per cent now. According to RBI norms, any restructured account for an asset finance company (AFC) becomes an NPA. However, for a bank, a restructured account is not automatically classified as an NPA. This is unfair to AFCs because we have assets as collateral. We have written to the RBI to rectify this.
How will the new external commercial borrowing norms help companies such as yours?
ECB is available to us only for importing equipment. We are telling the Government that ECB should be allowed to finance domestic infrastructure equipment manufacturers as well. This will encourage Indian manufacturing.
Infrastructure creation will improve in the country because the capital raised through ECB can only be used for infrastructure purposes. Also, ECB will become a good window for companies like ours to raise long-term financing.
What are the other areas that you are looking to finance?
We think agri-financing is an area where not many organised players are present. We intend to serve different points across the agri-value chain.
Mechanised harvesting and irrigation systems are some of the areas we are looking at.
Our partner, BNP Paribas, has strong experience in agri-financing in Europe. We are trying to leverage their experience and their relationships to build a strong business model for agri-financing.
Can you elaborate on your plans to get into retail segment of the business?
Apart from getting more aggressive on the retail front in the new equipment finance business, our used construction equipment business is a pure retail play.
Moreover, we have also signed up with Volvo for financing their Eicher vehicles. This gives us a chance to grow and diversify our portfolio in the retail segment. We have also just started with agri-financing which will be pure retail and focussed on all equipment required for the entire value chain, from cultivation and distribution to storage and transportation.
> satyanarayan.iyer@thehindu.co.in
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