New-age leasing businesses (Column: Behind Infra Lines)
By Taponeel Mukherjee
Steps taken to boost the Indian economy, especially with a view to providing a fillip to the credit markets, have lately dominated the news headlines. This is an excellent time to look at the need for the more significant role that the leasing companies must play to relieve the pressure on credit markets. Generally speaking, the primary focus of the new age leasing businesses must be to provide greater access to trade, technology and high capital expenditure for Indian companies, especially with a view on high capital expenditure but movable assets such as sea containers and aircraft. Assets such as large-scale sea containers and planes have movability in terms of the asset user being changed, which helps in the utilisation of the asset when regional trends change or individual company fortunes vary.
The critical advantage of changes in asset ownership is that while the assets being utilised are exposed to macroeconomic trends, the exposure to the fortunes of individual companies is significantly reduced. Even as an industry is seen to perform well, a particular company can be in trouble due to a variety of reasons. The ability of an efficient leasing business to reallocate and manage assets creates significant value for the entire ecosystem. Companies benefit since they have greater flexibility regarding assets and leasing businesses create value through access to a broader market.
While the focus on new-age businesses through technology usage and asset-usage is crucial, so is innovation utilising more efficient leasing models that can help improve capital usage and asset utilisation for businesses, leasing companies and capital allocators. The applicability of leasing solutions, especially on high capital expenditure movable assets, can help boost trade and exports as further focus on businesses such as sea containers picks up.
As the government looks for the Sagarmala project to provide a boost to the ports related business in India, efficient leasing businesses that have a focus on high capital expenditure movable assets in the maritime space will be vital. Especially, to create an ecosystem that can genuinely help the Sagarmala port assets generate the required returns and deliver the economic value foreseen.
To further boost new-age leasing businesses, the two driving factors will be access to low-cost funds and efficient asset management on the part of the leasing businesses. For capital looking at India as a business opportunity, financial innovation to provide leasing businesses that can be astute asset managers with the assets and yet borrow for long is the way forward.
Efficient asset management and aggregation of assets will help reduce the cost of capital. A leasing business that can have a more extensive regional focus with access to more potential customers will help diversify the risk and hence reduce the cost of capital. Risk-pooling both through geographical and customer diversification is precisely why leasing businesses should be able to utilise relatively inexpensive balance sheets to reduce the cost of capital expenditure for the economy. While this applies to leasing businesses in general, for assets that are high capital expenditure and yet movable, efficient asset management should help reduce the cost of capital further. Lower cost of capital is a much-needed requirement as Indian businesses face a capital crunch. The problems faced are two-fold and inter-related, i.e., low access to capital and high cost of the available capital if any. A robust leasing business
that focuses significantly on the movable high capital expenditure assets helps reduce both the issues mentioned above.
The leasing businesses mentioned are also a more efficient economic model for the economy than individual companies borrowing from banks to make capital expenditures for high Capex movable assets. The advantages mentioned above of risk-pooling and asset management allow the leasing company to reduce the cost of capital. The companies benefit through lower cost of capital and the dependence on purely bank financing is reduced.
Additionally, when individual companies face issues such as unfavourable business conditions and bankruptcy, a visible concomitant of a rapidly changing economy, leased assets can be pulled out by the leasing company and utilised elsewhere. Alternatively, assets backed by bank loans must go through a cumbersome and long bankruptcy process with precious capital tied up unproductively for extended periods. The efficient deployment of capital is a crucial factor that must be kept in mind while promoting new-age leasing businesses in India.
As India looks to tide over the current economic slowdown to generate significant economic growth in the decades to come, it would be sagacious to have a renewed focus on new-age leasing businesses to reduce the cost of capital and improve asset access.
(The views expressed in this article are personal and that of the author. The author heads Development Tracks, an infrastructure advisory firm. You can contact him at [email protected] or @Taponeel on Twitter)