As one of the planet’s fastest growing economies, India has long been in the sights of Europe’s major leasing players. And, with GDP growth estimated at around 7% in 2013 and leasing penetration as low as 2%, Grant Collinson discovers the world’s second most-populous nation is still an attractive opportunity.
The penetration rate for leasing in India differs slightly depending on who you ask but every answer puts it low enough that it is only going to go one way in future: up.
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New business volume for equipment leasing in India was INR 49bn (673m) in 2012, according to a report by leasing industry consultancy firm Vinod Kothari Consultants. Neetu Wadia, sales director for India at leasing software provider Cassiopae, puts the figure closer to INR 40bn and the penetration
rate between 2 and 3%.
Wadia blames the low penetration rate and business volumes on the global economic downturn which, despite continued growth, has affected the Indian economy dramatically. The Indian government’s official, estimated first-quarter growth figures for 2013 were revised down in February following a slower-than-expected second half in 2012.
“Over the last few years, with the global economy being so low, leasing has taken a slight backburner,” she says.
Nonetheless, with figures so low, and the Indian economy still set to grow around 6 to
7% in 2013 and further in the following years, there is an opportunity in India for leasing companies to grow business volume significantly, says Wadia.
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By GlobalData“In the leasing industry we are anticipating, over the next three to four years, there will be growth of at least 15 to 20%.”
Despite having the outward appearance of nascent industry, leasing began in India in the 1970s but, says Wadia, “never really took off until the 1990s and early 2000s when people really started looking at leasing.”
As well as the economic turmoil which engulfed the globe in 2008, the Indian leasing industry has also been held back by attitudes, says Wadia.
“Traditionally, most Indians and Indian firms want to own assets and, as a result of that, for a very long time people did not believe in the concept of leasing,” she says.
The economic slowdown has been a doubled- edged sword for Indian leasing, however, as the restriction in capital has led more firms to look to leasing.
“In 2005-2006, when there was strong economic growth, people had a lot of finance and were looking at owning things,” says Wadia. “Since 2008 people are now looking at how to utilise their capital in a more effective manner and that has meant moving away from ownership and looking at leasing instead.”
The transition towards a leasing culture is not so straight-forward, however.
Diwakar Singhal, senior vice-president of software firm Genpact, says, although leasing is developing, the Indian finance market is currently dominated by term loans.
Within the leasing industry, operating leasing is by far the dominant product, says Singhal, who adds the leasing market split is 65% operating leases with 35% transacted as finance leases.
“Most leasing in India is operating leasing. If the lease is a financial lease, it usually takes the character of a loan and asset backed loans are more accepted as a financial product. Hence, most financial leases get transacted as loans,” he says.
One development in Indian leasing helping to change attitudes, says Singhal, is the steady entry of more multinational leasing firms which has given leasing “momentum”.
Bank-owned lessors such as Macquarie Leasing, De Lage Landen and BNP Paribas Leasing Solutions have entered the market as have captive lenders in the automotive and IT sectors such as Daimler Financial Services, Volkswagen Financial Services, IBM Global Financing, Cisco Capital, HP Financial Services and others.
Singhal says the finance market is dominated mainly by the domestic banks in India but the influx of foreign-owned manufacturer finance companies has helped to boost leasing in their respective asset sectors and, Singhal adds, captives will play a much bigger role in growing the leasing industry in the future.
Outside investment
One such foreign player is Siemens Financial Services (SFS) which began operating in 2011.
Sunil Kapoor, chief executive of the Commercial Finance business of SFS India, says the number of non bank companies offering leasing has increased and he expects competition in the sector to intensify as a result.
Kapoor says the economic growth outlook in India is around 6% for 2013, slowed from around 9% in 2011, which provides an opportunity for lessors but will also increase competition.
“The continued economic growth will underpin and maintain the requirement for business credit and accordingly for asset finance, although at reduced growth rates,” he says. “This will increase the intensity of competition in the market, as the industry adjusts to lower rates of demand.”
That said, Kapoor says interest in leasing, as an alternative to term loans, has been on the increase. Demand for finance on equipment which supports “shorter cycle” industries such as retail businesses remains strong, particularly machine tools, vehicles, printing equipment, medical equipment and small-scale industrial machinery.
SFS India has also seen demand grow in the equipment sectors occupied by its manufacturer parent such as healthcare equipment, industrial equipment and energy efficiency sector.
Kapoor adds finance linked to larger orders and “slow-cycle” business such as power, construction and infrastructure are performing less well.
Infrastructure growth
Construction and infrastructure, however, are sectors in which demand is expected to increase in 2013 and beyond, and lessors are poised to take advantage.
Genpact’s Singhal calls infrastructure development “an important foundation for building the leasing sector in India,” and says demand for leasing in the construction sector is already growing thanks to growth in real estate projects and road construction. The sector is unorganised at present, he adds, but is becoming more structured.
Hoping to capitalise on this development is BNP Paribas Leasing Solutions which operates a joint venture with Indian stateowned lessor SREI.
Valérie Mérien, deputy head of BNP Paribas Leasing Solutions’ International Development Division, says the Indian construction equipment industry is expected to grow 20% from 2010 to 2020 to become a $22.7bn (16.9bn) sector. Growth which would make India the third largest construction market in the world, according to Mérien.
“India is an infrastructure-deficient nation,” Mérien says. “Thus, the coming years are bound to witness substantial investments going into infrastructure projects. Indian construction equipment industry
is also thus bound to grow as more and more infrastructure projects take off.”
Mérien says recent economic reforms in India will lead to a spurt in infrastructure projects with $1trn set aside for projects between 2012 and 2017 and open up the area to greater private sector involvement. She also says strict project timelines and a shortage of skilled labour will accelerate the trend toward the mechanisation of construction and therefore increase demand for the equipment needed to complete projects.
Mérien says the construction and mining equipment (CME) sector, which BNP Paribas’ partner SREI had a strong footprint in prior to the joint venture, has a high leasing penetration rate, unlike the wider industry, with up to 80% of CME sold being financed.
“The high cost of CME coupled with its predominant usage for commercial purposes makes access to financing a key enabler for the growth of the industry,” Mérien says.
Mérien identifies other sectors in which leasing growth is anticipated as IT, road vehicles, office equipment, renewable energy, medical equipment, and also in agriculture where an increase in mechanisation is creating potential.
Impediments to growth
Despite definite potential, however, there are still challenges in the Indian market for lessors, both domestic and foreign.
Mérien echoes Cassiopae’s Neetu Wadia and says there is “an inherent bias” for owning assets adding, “the advantages of renting and leasing are yet to fully dawn upon Indian users.” Although Mérien adds, “a change in mindset is only a matter of time.”
One of the less abstract obstacles to leasing growth is the complex tax regime which applies to the industry.
Lease rentals are currently subject to dual taxation, both VAT and service tax, and Mérien says additional taxation costs make leasing “commercially unattractive to potential customers.”
India’s federal system is also an obstacle to pan-Indian leasing operations as different states have different regulations and leases are subject to inter-state taxation.
“The movement of any kind of asset between states involves many regulations and complex registrations and transfers,” says Cassiopae’s Wadia who adds this aspect of the India’s structure currently inhibits leasing growth.
“If some of these regulations were maybe tackled better then I think we would see a much higher growth rate in leasing,” she says. “Everyone [in the industry] is aware of this and is working to see if the rules can be simplified.”
Wadia adds she anticipates, when the system is simplified, leasing will be able to grow at a faster rate as a result.
One solution to the inter-state problem is the goods and services tax (GST) which the Indian federal government is in the process of creating. The GST is designed to unite India’s 28 states in a single market and has been under discussion in parliament for several years.
Both BNP Paribas’ Mérien and SFS’ Kapoor say they welcome the potential of GST to simplify the tax system both companies are subject to.
Border controls
The rules governing the entry of foreignowned lessors into the market is also highlighted as an impediment to leasing’s development in India.
Genpact’s Singhal points out a license to operate as a Non-banking Financial Institution (NBFI), which the majority of lessors require to do business, can take more than six months to be approved by India’s central bank, the Reserve Bank of India.
Furthermore, Singhal adds, India’s Foreign Direct Investment (FDI) rules require NBFIs with a significant foreign holding to maintain a minimum threshold capital of $50m.
“Easing of some of the regulatory restrictions,” says Singhal, “keeping in mind the importance of increased participation from global manufacturers in developing the equipment and automotive market in general, would give the leasing market a thrust in India.”
SFS’ Kapoor agrees FDI rules have historically reduced the potential for foreign companies to enter and dominate domestic markets but adds rules are being reviewed to help boost economic growth.
“The challenge for foreign companies operating in India,” says Kapoor, “is the continually shifting and evolving legal and regulatory environment, requiring the capacity and agility to effectively cope with those changes.”
Kapoor says foreign-owned firms with a strong brand can offer “the reassurance and stability sought by customers” to take advantage of opportunities in the market as well as utilising their experience of various global markets around the world.
“That said,” he adds, “foreign companies cannot rely on simply duplicating processes, policies and controls for the Indian market – a truly localised approach to doing business is required.”
Singhal agrees and says companies entering the market need to create “low cost and scalable operating models, customised to the Indian market – especially on the underwriting side, given the limited ability of credit bureau scores.”
Singhal also says lessors need a clear strategy on residual values because used market in India for equipment and vehicles is still unsophisticated.
“The market for used cars and equipment is highly disorganised in India and residual value risk is a key issue to be overcome by lessors,” he says.
The resale market will become increasingly important, particularly when it comes to passenger vehicles, as long term sales in the automotive sector are set to grow considerably.
“Taking a longer term view, specifically for the automotive sector, sales are expected to grow at 14 % compound annual growth rate over the next 15 years, reaching 19 million units by 2027,” he says. “This will be driven by improving road infrastructure in rural and semi-urban areas and a growing young population with an increasing number of well-educated workers and a strong demand for luxury products like cars.”
It is a vision of the future which Singhal says is “a
