India has tremendous untapped potential for solar-powered enterprises that now require access to affordable financing to flourish at scale

Women operating solar-powered spinning wheels in Gujarat (Photo by Abhishek Jain/CEEW)

Women operating solar-powered spinning wheels in Gujarat (Photo by Abhishek Jain/CEEW)

Entrepreneurs using solar-powered appliances, such as machines used in food processing, manufacturing, tailoring, carpentry and others, face challenges in accessing end-user finance in India. Despite being a USD 50 billion market, lack of affordable financing options hinders these businesses from achieving scale.

Lack of awareness and a perceived unreliability of the technology among financiers is a big challenge faced by the sector. Decentralised renewable energy (DRE) technologies and business models are still fairly new, and financiers are sceptical of the commercial viability of solar-powered appliances.

“While conducting interviews with stakeholders across financial institutions we realised that for most financiers productive use of DRE was a fairly new concept,” says Shaily Jha, one of the authors of a recent report by the Council on Energy, Environment and Water (CEEW) that analysed findings based on interviews with bankers at the state and national levels, civil society organisations, and other financiers.

Interviews were also conducted with over 300 micro-enterprises to understand the economic viability of solar-powered livelihood appliances. The report — Financing Solar-powered Livelihoods in India — analysed two types of enterprises supported by Selco Foundation, a non-profit based in Bangalore. These were tailoring and digital services (printers, copiers, computers), known as Lok Seva Kendras.

Repayment challenges

Interviews with over 300 entrepreneurs using DRE-powered appliances found that those who were paying close to half their incomes on loan repayment were finding it increasingly challenging to sustain this level of pay out. In such cases, extended loan tenures were found to increase the feasibility and ease of repayment for the entrepreneur and reduce the likelihood of defaulting on the loan, with a marginal impact on the economic viability.

Bankers also have concerns regarding the cost of evaluating and recollecting loans. Most loans for micro-enterprises range from INR 30,000-80,000. Compared with the administrative costs involved for banks, small loans like these become unviable from the bank’s perspective.

In addition, the lack of adequately trained capacity in rural areas to assess the viability of new technologies and business models, and the absence of collateral and credit histories for first-time borrowers is a big concern.

Several organisations are working with lenders and rural entrepreneurs to bridge the affordable finance gap, help increase confidence among financiers, and accelerate the growth of DRE technologies in rural India. While progress is slow, the sector is starting to see positive changes. Banks and financial institutions are recognising the market potential of these endeavours and are considering innovative lending mechanisms to leverage this opportunity and spur growth.

Selco Foundation has been working with banks and other financial institutions to sensitise them on the opportunity in financing DRE technologies. Banks are also being supported in establishing end-user loans and other innovative financing activities. In addition, the organisation is working with banks to include a clean energy financing component within their internal training programmes, making DRE an important portfolio for bank financing in rural areas.

Innovative financing required

India will need USD 450 billion to finance its 2030 clean energy targets, according to estimates by the International Finance Corporation, the private sector investment arm of the World Bank. Innovative financing structures will be required to inject new financing into DRE.

Since the cost of solar-powered appliances can be prohibitively high for users and enterprises to bear upfront, and the corresponding benefits accrue later over time, debt financing – expected to be about 70% of IFC’s overall estimate – is an option that can make it easier for entrepreneurs to commit to.

Increasing awareness on the commercial viability and loan repayment performance of existing DRE-powered livelihoods will encourage more investment and scale in the sector, and help rural entrepreneurs access affordable financing even if they are first time entrepreneurs without collateral or credit histories.

Evidence from the financial performance of micro-entrepreneurs in Karnataka shows that there is a significant increase in income after the installation of solar-powered appliances. CEEW researchers found that simply extending loan tenures made a big difference to the end users’ ability to repay.

Despite high upfront costs of these appliances, entrepreneurs were able to repay the loans from their increased incomes. On an average, annual incomes increased by INR 20,000-25,000 after switching to solar-powered appliances, and over 60% were able to repay their product loans from their increased incomes.

The need for affordable and adaptable productive end-use of energy has sparked several innovative solutions and created new jobs and avenues for skills development in rural areas, according to the State of the Decentralised Renewable Energy Sector, an annual report by the Clean energy Access Network (CLEAN). However, there is still a need for a more conducive financial environment for DRE enterprises to flourish and help cater to the growing demand for affordable and reliable energy.

Government policies

The CEEW report analysed existing government policies that target various categories of businesses and individuals to identify the scope for support towards solar-powered livelihoods.  It was found that while there are schemes supporting technologies for income generation, their guidelines do not explicitly include solar-powered appliances and the value of such support does not account for the higher upfront costs of these products.

CLEAN’s analysis found that 78% of enterprises surveyed had changed their business models as a result of government initiatives. About 45% reported profits in the last financial year, and 57% were able to raise capital. However, bridging access to finance remains a challenge, especially limited end-user financing, owing to lack of financiers’ exposure to the sector resulting in reluctance in investing.

In order to scale up DRE entrepreneurship, what is necessary is a comprehensive approach including increased awareness around solar-powered livelihood technologies and their economic value, technology improvements and enhanced after-sales services of appliances to help reduce financiers’ risk perception, capacity building of users, and policy support through the evolution of schemes.

Targeted support of funds for DRE-enabled livelihoods, alternative and innovative loan collection mechanisms for frequent and flexible repayments, and adequate market linkages will help boost rural livelihoods and increase incomes.

Divya Kottadiel is Communications Director, India, Power for All

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