Budget 2014 must revive infrastructure sector to revive growth of NBFCs

Deciding not to grow is a tough call that any business is forced to take during any period of its life cycle. The chief executives of non-banking finance companies (NBFCs), particularly those funding commercial vehicles and equipment, did exactly that when the economy came to a grinding halt some time back. And that decision is yet to be revoked, in a telling sign that the core of the economy is still to get out of the woods.

"The disbursements have slowed down and have plateaued primarily because of the fact it was a conscious decision. It is always better to be safe than sorry that was the cautious attitude we have taken," Hemant Kanoria, chairman and managing director of Srei Infrastructure Finance, had told analysts post the fourth-quarter earnings.

Srei's fortunes are closely linked to the state of the infrastructure sector, to which most of its funding goes.

But even for those offering loans for commercial vehicles, things are yet to look up.

For reasons quite different, Sriram Transport Finance, country's largest pre-used trucks financier has decided not to grow either.

Sales of commercial vehicles is key barometer of economic activity in a country: more sales of trucks usually indicate more goods being transported for consumption or more capital equipment being taken to project sites to start construction.

"In the first half of fiscal 2014, we had grown our loan book by 22%. But then we heard about El Nino in October, and we decided not to grow our asset size. We will lend only to the extent assets are maturing. So, in the second half, asset growth was flat. We have decided not to grow till the monsoon clarity is not there," said Sanjay Mundra, senior vice-president of Sriram Transport.

Mundra sees growth coming back in second half. "We see a great opportunity from October-November in the commercial sector as a whole, maybe 6-7%. But then many things depends upon the rains."

V Lakshmi Narasimhan, chief financial officer of Magma Fincorp, another major player in used vehicle financing sector, agreed with the timing of the recovery, but sounded less optimistic about the likely growth figures in the equipment and vehicles segments when the economy revives.

"The construction equipment sales de-grew by 28 % during April- May 2014 over last year. The commercial vehicle sales have also declined by 15% in the first two months. The overall trends are expected to remain negative till September, post which take-off for vehicle and equipment is likely to get into positive territory. However, the overall growth for CV and construction equipment is likely to be flat to negative for the year fiscal 2014-15," Narasimhan said.

But what makes them see recovery from October?

"Tractor sales are generally the highest in the third quarter, as per the seasonality. Car sales are also aligned with festive seasons starting October. Over and above, the new budget related policies affecting the auto industry would have settled. And with equity market-led profit bookings that have started from May and likely continuation in bull run will also lead to improved sentiments. The new government and ministries would have been delivering the post budget changes in key sectors. Hence, we feel that asset sales should improve considering the general optimism in the economic environment," Narasimhan said.

So, what are the sops that NBFCs are expecting from this budget?

"Not much, primarily because it's the regulator Reserve Bank of India that directly controls the sector. Indirectly, the sector is banking on revival in all the stalled infrastructure projects that would trigger demand for the equipment to build them and the trucks to carry men and material," said Mundra.

"The government does not have headroom and finances to offer sops to the industry, It is, however, working towards clearing the dormant projects and boost investment in the infrastructure sector. The government is working at a very fast pace to clear projects and boost demand," Narasimhan said.

Beyond these short-term concerns, the NBFC sector wants the government to address access to cheap credit, particularly from overseas, a window now virtually closed.

"Indian financial market needs to develop in a big way with the creation of new avenues for raising funds. Today all our sources of funds are domestic. The external commercial borrowing route should be opened up. Options are opening up but the momentum needs to be built. We keep raising retail funds through issue of non-convertible debentures, which was unthinkable, say, seven to eight years back. With the coming of the new government, we are optimistic that new avenues will open up," said Mundra.