Here are some disruptive innovations helping the CE financing industry
Over the past few years, infrastructure development and construction have been at the forefront of public and economic policy. This is being recognised as a key driver for achieving the Government’s goal of a $5 trillion economy by FY 2024-25.
Recognising the economic benefits of infrastructure and housing development as well as its employment generation potential (the construction sector is the second-largest employment generator in India, after agriculture), the Government of India is making a policy push with various programmes, such as the National Infrastructure Pipeline (NIP), Gati Shakti, the National Monetisation Plan (NMP) and housing schemes to create an enabling environment for such development.
Over the past few years, infrastructure development and construction have been at the forefront of public and economic policy. This is being recognised as a key driver for achieving the Government’s goal of a $5 trillion economy by FY 2024-25. Recognising the economic benefits of infrastructure and housing development as well as its employment generation potential (the construction sector is the second-largest employment generator in India, after agriculture), the Government of India is making a policy push with various programmes, such as the National Infrastructure Pipeline (NIP), Gati Shakti, the National Monetisation Plan (NMP) and housing schemes to create an enabling environment for such development. Growth drivers The construction equipment industry’s growth is directly related to proposed infrastructure development and investment in new projects. The following figure shows key growth drivers for the industry in India: With the NIP and Gati Shakti in perspective, growth in the construction, earthmoving, material handling and mining segments is expected; earthmoving equipment is the largest across key segments. The market is expected to grow at a CAGR of 12 percent to reach sales of 260,000 units by 2030.24. Buying behavior Financing is a good way for the construction equipment industry to drive demand and increase the customer base. External financing makes up a significant share of the total equipment purchased. Financing used equipment necessitates enhanced due diligence, including more thorough valuation checks. As there is a higher risk associated with used equipment, financiers charge a higher rate of interest. The key instruments of external financing are buyers/suppliers’ credit, loan financing, leasing and renting. SMEs find it difficult to raise financing from banks. Hence, they borrow at a higher rate of interest from NBFCs. Large entities are predominantly funded by banks. Disruptive innovations in financing The growth in the construction equipment market will be fuelled by increased infra investments, expansion of urban infrastructure and economic corridors. With the equipment industry looking to take advantage of new and evolving opportunities, the hassle-free flow of funds becomes crucial. Several new trends are emerging in this space that are disrupting the way products are offered and consumed. Players offer an end-to-end solution, such as asset lifecycle management, to customers. They also offer equipment recommendations based on business needs or technical requirements and return on investment. The use of FinTech has simplified complex and time-consuming processes, such as credit decision-making. By using artificial intelligence (AI) and big data frameworks, FinTech solutions help lenders partially automate the credit decision-making process through enabling auto-approvals based on a borrower’s credit history. Platform-based aggregator solutions (that allow customers, equipment manufacturers/traders/lenders and financiers to interact seamlessly) and hybrid companies (that combine modern technology with traditional channels) are leading this revolution in financing of construction equipment. These ‘phygital’ platforms are differentiating themselves from traditional players in many ways. Customer preference is shifting in favour of managed services, subscription models, pay-per-use rentals, standard or customised automated payment schedules, reward programmes and refinancing and alternative financing. Thisis encouraging equipment finance companies to find innovative ways to meet demand. Banks and NBFCs have fostered exclusive partnerships with construction equipment manufacturers to fund their dealers. Lease investing is also becoming popular in the Indian market as an excellent diversification tool in the asset-backed investment space. The reach of investment platforms offering these services covers high-net-worth individuals and family offices as well as retail investors. Road ahead High growth projections for the construction sector will have a trickledown effect on formal equipment financing, leasing and rentals. Small construction companies and contractors from Tier-2 and 3 cities are expected to drive demand for leasing and renting in the next few years. Intervention across the value chain by various stakeholders is necessary to create a more conducive environment for equipment financing. The following recommendations would deepen and broaden the CE financing market in India: Emergence of platforms for obtaining financing, insurance and other allied services; and generating revenue opportunities using data monetisation and near real-time demand matching Co-lending to take joint propositions to customers with better agility and lower costs Buyback schemes and used equipment exchanges to help aid the penetration of leasing and renting in India by improving the activity in the secondary market Use of innovative payment mechanisms such as bullet payments, Skip payments, step-up and step-down payments, balloon payments, and rent to purchase Focus on digitisation and end-to-end services to improve customer experience Using connected technology and IoT to bring in operational efficiencies Changes in taxation rules Regulatory reform, wherein given the contribution of the construction sector to infrastructure development and employment generation, equipment financing can be included under PSL Streamlining the process for repossession of assets Promotion of leasing and renting by industry bodies as an alternative source of financing. Enabling large rental companies to act like an FI: Provide access to credit history, credit reporting to bureaus and legal recourse in case of default to help rental companies better understand the intentions of customers and their willingness and ability to pay.