The construction equipment finance business is witnessing robust growth owing to the spurt in the road, irrigation, railway, affordable housing and mining sectors. Public and private sector banks, non-banking financial companies (NBFCs) and private financiers operate in this space. NBFCs, besides offering financing to contractors and medium-sized companies, are also more active in lending to first-time buyers and first-time users of equipment such as backhoe loaders, excavators, and pick-and-carry cranes that have been traditionally underserved by banks. Though the penetration of the rental and leasing market in the country is low, it is picking up gradually.
Overview of the equipment financing industry
Financing accounts for 80-85 per cent of the total equipment purchased domestically. In the case of overseas purchases, it accounts for approximately 90 per cent. Most financing is procured through loans while leasing is the second most common mode of procuring equipment. Of the earthmoving equipment users who opt for finance, 80-85 per cent are micro, small and medium enterprises (MSMEs) with transaction sizes varying from Rs 2 million for a backhoe loader to Rs 4.2 million for an excavator.
Feedback Consulting estimated the total equipment finance disbursement for 2017-18 to be Rs 374 billion. Over the past six years, disbursements to the sector have grown at a compound annual growth rate of 10.9 per cent. The construction equipment industry grew at a rate of 24.4 per cent during the economic recovery period from 2014-15 onwards.
At present, the equipment finance industry has 20-25 organised companies (NBFCs and banks) offering various products and services for the infrastructure equipment segment. The top five companies account for approximately 73 per cent of the overall equipment financing market. Among the top five companies, two are NBFCs and three are private banks. Srei Equipment Finance Limited (SEFL) leads the construction equipment finance market with a market share of about 33 per cent in 2017-18, distantly followed by HDFC at 14 per cent.
Rental and leasing market
Rental and leasing of construction equipment is still at a nascent stage in the country, accounting for less than 10 per cent of the overall construction equipment market, whereas the global average for leasing is 50-60 per cent. The rental construction equipment industry is very small, highly unorganised, fragmented and mostly dominated by small and regional rental companies/third-party rental companies as compared to the more developed countries. However, original equipment manufacturers (OEMs) are gradually gaining presence in the market. Construction companies have started preferring renting equipment from OEMs given the additional services and expertise that they provide. Players such as JCB and Caterpillar are operating in the rental space as well.
The heavy equipment rental business is facing a number of challenges such as non-availability of new machines for rent, rentals being mostly restricted to low- and medium- value and general-purpose equipment, low availability of technologically advanced equipment for rent, and current rental players having a limited service offering. However, the rental market is especially expected to pick up in Tier II and Tier III cities with demand coming from small- and medium-scale contractors.
The construction equipment finance industry is expected to grow at a CAGR of around 20 per cent between 2018-19 and 2020-21 to reach Rs 660 billion. With the increased momentum in infrastructure development, demand for earthmoving equipment will continue, and will result in a share of 68-70 per cent of the overall equipment finance market. Banks and NBFCs are expected to have an equal share in the equipment finance industry for the next two years with the equipment leasing industry expected to grow at a CAGR of 15-16 per cent till 2019-20. The overall construction equipment industry is expected to reach about 125,000 units by 2020, and the new equipment finance market will continue to have a share of 85-87 per cent.