Access to Finance for MSMEs in the Renewable Energy …Exhibit 26: Potential impact of pledge...

Access to Finance for MSMEs in the Renewable Energy Sector in India

Access to Finance for MSMEs in the Renewable Energy Sector in India viv

Acronyms

BMBOMBoPCGTMSECDCPDRE FI HNIICS JNNSM MFIMNRE MSME NBFC PPA PE PSL ROI R&D RE RBI RRB SHG SHS SPL SG&A SIDBI SWP TA T&D VLE WC

Build-Maintain business modelBuild-Own-Maintain business modelBase of the PyramidCredit Guarantee Fund Trust for Micro and Small EnterprisesConvertible DebtConsumer ProductDecentralized Renewable Energy Financial InstitutionHigh net-worth individualImproved CookstovesJawaharlal Nehru National Solar Mission Microfinance InstitutionMinistry of New and Renewable EnergyMicro, Small or Medium EnterpriseNon-Banking Financial CompaniesPower Purchase AgreementPrivate EquityPriority Sector LendingReturn on investmentResearch and DevelopmentRenewable EnergyReserve Bank of IndiaRegional Rural BankSelf-Help GroupSolar Home SystemsSolar Portable LanternSelling, General and Administrative expensesSmall Industries Development Bank of IndiaSolar Water PumpsTechnical AssistanceTransmission and distributionVillage-level entrepreneurWorking capital

Access to Finance for MSMEs in the Renewable Energy Sector in India viivi

ContentsExecutive Summary

Context, objectives and approachContext and objectives Research sources and scope of the report

Developing an approach for the segmentation of RE MSMEs Enterprise finance: Summary of findings Current and expected participation of financial institutions in the RE MSME market Perceived relative risk-reward profile of market segments Financing needs for individual segments Barriers to the supply and access to different financial products

Enterprise finance: segment-specific profiles DRE-1: Solar pico utilities, utilizing a BOM model DRE-2: Solar micro utilities, utilizing a BOM model DRE-3: Wind-solar micro and mini utilities, utilizing a BM model DRE-4: Biomass small utilities, utilizing a BOM model DRE-5: Hydro utilities, utilizing a B/BM model CP-1: Cross-market player in cookstoves for less than $120 CP-2: Cross market players in SPLs for less than $120 CP-3: Cross-market players in solar home systems from $120 – $600 CP-4: Solar water pump procurers CP-5: RE-specific distributors, across all RE consumer products

Enterprise finance: Implications for financial solutions to pursue further Consumer finance: Summary of findings Current state of consumer finance providers in the market Demand for consumer financing products Consumer finance: Barriers to the supply and access to different financial products

Consumer finance: Segment specific profiles CP-1: Cross-market players in cookstoves less than $120 CP-2: Cross market players in SPLs for less than $120 CP-3: Cross-market players in SHSs from $120 – $600 CP-4: Solar water pump procurers CP-5: Distributors of RE consumer products (across price ranges)

Consumer finance: Implications for solutions to pursue further Financial product solutions for consumer finance Business model solutions to address consumer finance

Cross-cutting solutions to unlock access to and supply of finance

Annexures

Annex 1: Market segmentation methodology and results Annex 2: Description and prioritization of enterprise financing products Annex 3: Profiles of key financial institutions Annex 4: Detailed profiles: Enterprise finance and consumer finance solutions Enterprise financing solution: Lease finance Enterprise financing solution: Mini project finance Enterprise financing solution: Developing a credit line for soft loans/working capital Enterprise financing solution: Pledge guarantee facility Consumer financing solution: Product-linked savings accounts Consumer financing solution: Scale-up lending to Self Help Groups through Regional Rural Banks and Commercial Banks

Annex 5: Detailed profiles of market segments Annex 6: List of interviews

Exhibits

Exhibit 1: Elimination process of market segmentation criteria Exhibit 2: Size based segmentation of DRE utilities <100kW Exhibit 3: DRE utilities MSME market segmentsExhibit 4: Product-price segmentation of the RE consumer product market Exhibit 5: Consumer product MSME market segments Exhibit 6: Segmentation of financial institutions in the small-scale RE sector for enterprise finance Exhibit 7: Financial actor perception of relative risk-reward profiles of market segments Exhibit 8: Stated financing needs across market segments from the perspective of RE MSMEs Exhibit 9: Applicability of enterprise financing solutions across market segments Exhibit 10: Assessment and prioritization of enterprise financing solutions Exhibit 11: Presence of consumer finance providers across market segments Exhibit 12: Consumer financing sources used for purchase of solar lights across five states in India Exhibit 13: Enterprises’ stated need for consumer financing product types Exhibit 14: Applicability of consumer finance solutions across market segments Exhibit 15: Assessment and prioritization of consumer financing solutions Exhibit 16: Secondary buy-back facility for RE products Exhibit 17: Prioritization of financial products for enterprise finance for RE MSMEs Exhibit 18: VLE lease finance model Exhibit 19: RE enterprise lease finance model Exhibit 20: Potential impact of lease finance on small-scale RE sector Exhibit 21: Structure of mini-project finance Exhibit 22: Potential impact of mini-project finance for RE MSMEs Exhibit 23: Potential impact of a soft loan credit line for RE MSMEs Exhibit 24: Potential impact of a credit line for working capital loans for RE MSMEs Exhibit 25: Pledge guarantee facility Exhibit 26: Potential impact of pledge guarantee on RE MSMEs Exhibit 27: Structure of RE product-linked savings solution Exhibit 28: Model for scaling up RRB/CB lending to SHGs Exhibit 29: Status of bank-linked SHG households in five most states (millions)

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Executive Summary

Micro, small and medium enterprises (MSMEs) are playing a key role in helping increase access to energy for India’s energy poor population. Ensuring energy access for all in a sustainable manner is a critical prerequisite for India to be able to empower each of its citizens to transform their lives. Scaling up access to renewable energy (RE) can enable the millions of India’s energy poor population to improve their livelihoods in a sustainable manner. It can help them to power lights to help keep their businesses open late, to enable women to cook in cleaner and smokeless environments, and to help farmers reap more profits from their land by decreasing their cost of irrigation. MSMEs have long been involved in this sector, and most have an exclusive focus on identifying innovative and cost-effective ways to bring energy to populations who do not have access to sustainable energy. They do so in two ways: by setting up off-grid or decentralized renewable energy (DRE) utilities which provide power to a small community or collection of villages, or by providing consumer products (CP) such as clean cookstoves, solar portable lanterns (SPLs), solar home systems (SHSs) or solar water pumps (SWPs) to help individuals increase their access to energy sources.

However, these MSMEs are not able to grow at a fast pace because there are barriers preventing the supply of and access to both enterprise and consumer finance. Nearly 90% of the MSMEs interviewed for this report stated that “access to enterprise finance” was the key constraint limiting their ability to grow and meet their growth targets. In addition, MSMEs also suggested that for selected products, consumer financing and consumer awareness were barriers in growing the market more broadly.

In order to unlock finance for the sector, a series of targeted solutions is required which meets the needs of the particular segments of RE MSMEs as well as the relevant financial institutions (FIs). Too often, the solutions recommended to tackle financing challenges are a “one-size-fits-all” approach. While these can have some merit, they do not take into account the different

types of demand that exist (from working capital to asset growth), the variable risk/return of different investment categories and the capacities and skills of different financial institutions to cater to these needs. As such, this report goes beyond the existing literature and segments both the demand and supply of finance currently flowing to the sector, identifies the key barriers facing each segment, and recommends a portfolio of targeted financial and cross-cutting solutions that can help the sector to achieve its potential.

Segmenting the marketThere are ten distinct segments within the RE market, each of which has its own financing needs, gaps and potential solutions. The segmentation is based on clearly defined criteria. For MSMEs who are currently involved in the off-grid DRE utilities space, three criteria were applied: (i) the RE fuel source of the plant, (ii) the size of plant1, and (iii) the business model employed. For MSMEs who are involved in the CP space, two criteria were used: (i) the primary technology that is the focus of the enterprise, and (ii) the business model of the MSME. Applying these criteria to the current landscape of players resulted in the following ten segments:

The focus of the present study is on plants who provide energy primarily to off-grid rural households which only includes mini utilities less than 100kW in size.

1

Segment title Description

MSMEs own and operate solar-pico plants that provide basic amount of power to households in rural areas – usually just enough to power 1-2 lights and a cell phone charger. The majority of players in this segment have been operating for less than 3 years.

MSMEs own and operate solar-micro plants that provide lighting and other household appliances (e.g. TV, fan) solutions to households in rural areas. MSMEs in the segment are a mix of new entrants and some established players with more than 3 years of operations.

MSMEs build and maintain micro and mini wind-solar plants to provide lighting + ‘products’ (e.g. TV, fan) solutions to consumers, usually in semi-urban or higher income rural areas. These MSMEs are diversified across different RE technologies. Some are early-stage enterprises, whereas some are mature, having transitioned from pure solar or wind technologies, and have some more experience in the sector. However, the technology is still not very widespread.

MSMEs own and operate micro biomass projects, to serve up to 250 households for part or all of the day for lighting and appliances. Players have been in the sector for some time (5-7 years).

MSMEs manufacture turbines and provide turnkey solutions to rural communities, along with small businesses and individuals in rural and semi-urban areas. Most actors have been active for 3-5 years, but still have a low turnover and growth rate.

Enterprises focused on the design, assembly, and distribution of clean cookstoves (from basic to advanced models) throughout India – there are over 15 players in this space and the majority of them are recent entrants (<3 years).

Enterprises that derive majority of their revenue from design, assembly, and sales of SPLs. Most MSMEs have been operational for 5-6 years, but a select few are well established at this point of time.

Enterprises that design, assemble and distribute SHSs – from basic to advanced models – to provide lighting solutions to individual homes/businesses. These MSMEs are more mature and many have been operational for 5+ years and are growing fairly quickly.

Consists of 10 MSMEs involved in the procurement of SWPs; most have been around on average for 3 years and are undergoing significant growth.

DRE1

Technology: SolarCapacity: < 2 kW (pico)Business Model: BOM

DRE2

Technology: SolarCapacity: 2 – 10 kW (micro)Business Model: BOM

DRE3

Technology: Solar/ wind-solarCapacity: 11 – 25 kW (mini)Business Model: BM

DRE4

Technology: BiomassCapacity: 26 – 100 kW (small)Business Model: - BOM

DRE5

Technology: HydroCapacity: < 100 kWBusiness Model: – All

CP1

Technology: clean cookstovesRole: cross-market playersPrice range: < $120

CP2

Technology: SPLsRole: cross-market playersPrice range: < $120

CP3

Technology: SHSsRole: cross-market playersPrice range: $120-$600

CP4

Technology: SWPsRole: ProcurersPrice range: across price $1000

Executive Summary ixviii

Access to Finance for MSMEs in the Renewable Energy Sector in India Executive Summary


Comprises a limited number of RE-focused distributors who procure and distribute RE products – they focus on lighting products such as SPLs and the range of SHSs across India; a few players also distribute improved cookstoves. Players in this segment are fairly well established, and on average have been operational for over a decade.

CP5

Technology: MultipleRole: Distribution onlyPrice range: < $120 (across price ranges)

Enterprise financing: needs, barriers and recommendations for action

Financing needs and barriersThrough detailed discussions with over 40 MSMEs2 across multiple MSME segments, a picture emerges of the major gaps in access to finance for RE enterprises as noted in the summary table below.

The table below is indicative of the financing gap based on the stated financing need of RE MSMEs and is meant to provide a high-level snapshot of the unmet needs.

Debt Equity/Hybrid Subsidies Grants

DRE1

Solar pico utilities (<2kW), utilizing a BOM model

DRE2

Solar micro utilities (2-10kW), utilizing a BOM model

DRE3

Wind-solar mini utilities (11-25kW), utilizing a BM model

DRE4

Biomass small-utilities (26-100kW), utilizing a BOM model

DRE5

Hydro utilities

CP1

Cross market players in cookstoves less than $120

Subsidy for capital and T&D1

Utility set-up subsidies[2/3 of utility set up cost]

Long term debtSoft loan[$1 – 2 million]

Long-term debtSoft loans[Up to $1 million]

Debt for working capitalSoft loans[Up to $2 million]

Long-term debtSoft loans[$300K – 1.5 million]

Debt for working capital[Up to $200K]

One-time or milestone based grants[$0.5 – 1 million]


One-time grants for setup and testing

One-time or milestone based grants[Up to $500K]


Patient equity or hybrid products[$1 – 2 million]

Patient equity[Up to $1 million]

Patient equity[up to $2 million]

Patient equityAngel investment[$100K - $2 million]


CP2

Cross market players in solar portable lanterns (SPL) for less than $120

CP3

Cross-market players in solar home systems (SHS) from $120 – $600

CP4

Solar water pump procurers

CP5

Distributors of RE consumer products (across price ranges)

Debt for working capitalSoft loans[$200K – $3 million]

Debt for working capital[up to $600k]

Soft loansCollateral free loans[up to $800K]

Debt for working capitalUnsecured loans[up to $800K]

Patient equity and hybrid products[$100K – $2 million]

Patient equity[$300 – $600K]

Patient equityAngel investment[up to $300K]

Patient equity[up to $1-2 million]

State/central procurement subsidy[up to 90% of product cost]

Note: 1 T&D – transmission and distribution; specific products are only noted for financing types for which there is a “substantial demand gap”.

Substantial demand gap Partial demand gap No stated demand

Summary of perceived gaps across MSME segments (from the perspective of MSMEs)

The complete list of RE MSMEs interviewed has been included in Annex 6.2

The primary unmet need for most MSMEs is debt financing to support either growth or working capital needs. Most RE MSMEs cited the general lack of access to debt financing, particularly with preferred terms as one of their primary challenges. Most DRE utility players stated that their preferred form of debt is in the form of long-term debt or soft loans to finance growth and expansion of the business (an objective for which many are using equity financing currently). On the other hand, CP companies and biomass utilities stated that their primary objective of debt financing was to cover working capital and operational costs. However, most MSMEs stated that debt was difficult to access because they lack fixed assets that are considered acceptable forms of collateral by FIs (such as land or property) , the tenure of loans available is often too short, most enterprises lack three-year positive cash flows, and the cost of traditional debt products is often too high for them. Financial institutions also have challenges supplying debt – in addition to the riskiness of many of the segments due to the lack of collateral and financing history, many financial institutions stated that they were wary of extending credit because there is no

customized assessment framework to assess RE MSMEs effectively and they may not be equipped with the technical expertise and quality market information to be able to evaluate these investments fully. In addition, even government credit schemes designed to speed up access to unsecured loans have had limited impact because many financial institutions are wary of the lengthy repayment timeline (in the case of default) and are concerned about the availability of funds in the longer-term to support these schemes. As such, debt financing remains a key unmet need for many players in the sector.

Equity products are in demand, but increasing access and supply depends primarily on investing in information and awareness. Equity financing – primarily through patient capital sources – was stated as a need by MSMEs, but tended to be a secondary priority to debt financing (and this was the case even for those companies who had not yet received equity financing). Most MSMEs deprioritized equity in favour of debt primarily due to misperceptions on the role that equity can play – many believe that external investors typically look to control the

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business completely and do not want to cede ownership. In addition, many MSMEs are unaware of the variety of hybrid financing products that are available in the market (such as convertible debt or mezzanine financing) which could be useful for their needs given their more flexible terms for investment. From the perspective of an investor, there is reluctance to play a more active role in the sector because there is a perception that many MSMEs do not have well established business models, and there remain challenges in determining appropriate returns from investments given the nature of the sector and the early stage of the MSMEs. For impact investors in particular, the nature of the social impact created also remains an issue as other sectors (e.g. health, education, etc.) are noted to have more direct impact on the lives of the people (in terms of health benefits, income generation potential, etc.) than the energy sector. Scaling up knowledge and information of the potential of the sector and of the applicability of specific products would help increase the access and supply of equity.

Companies across segments are seeking similar levels of debt and equity financing – at a sector-wide level, this demand for these products far outstrips the current supply. Looking across the segment-specific needs, the average stated range of financing need is actually fairly comparable. This is primarily driven by the fact that many of the firms are at a similar stage in their growth cycle and are therefore looking for similar amounts of financing to scale up their operations. When totalled across segments, the total debt need is expected to be between $30-90 million, significantly above the ~$25 million is currently available on an annual basis as debt capital to seed and grow MSMEs in this sector. For equity, the gap is equally large: there is an estimated $50-115 million in demand and only $23 million per year currently available.

There is a particular unmet need for subsidies in three market segments and identifying ways to scale up supply to match demand would help address these challenges. MSMEs in three segments – solar micro-utilities, biomass utilities, and SWP procurers – continue to require subsidies to maintain their current business model as their setup and/or operational costs can be quite capital-intensive. However, many MSMEs stated they faced difficulties in accessing these subsidies because they are usually not disbursed in a timely manner. As such, this creates further constraints on their availability of working capital financing which in turns limits their operations and growth prospects. On the other hand, from the perspective of the government, maintaining timely

with a secondary buy-back facility and effective quality guidelines, it can also help to de-risk the investment for an FI. This would be particularly relevant for DRE utility sectors as well as MSMEs selling SWPs.

Mini project finance: while project finance is traditionally used for large infrastructure projects, it could be adapted to finance a series of small projects primarily among DRE utility segments. It would help MSMEs (primarily those in the DRE utility sector) obtain financing for a bundle of projects, as opposed to one project a time. This diversified approach could help de-risk the value proposition for FIs. As per above, the success of this product would depend on a secondary buy-back facility (in the case of default) and on developing effective product quality guidelines.

Credit line for soft loan/working capital loan: soft loans and/or working capital loans are a major stated need across all segments. To address this, a credit line could be extended to FIs for the purpose of making these loans available to RE MSMEs. This would provide MSMEs with access to much needed debt through a targeted instrument. This would incentivize FIs to make these loans as the line of credit would enable them to supply the sector with the necessary debt without needing them to dip into existing funding pools.

Pledge guarantee for subsidy disbursement: this system would be a temporary stop-gap solution to help disburse subsidies in a faster manner. It would enable MSMEs to use their subsidy approval letter to approach a commercial bank for the loan amount and the bank would then be repaid through an external pledge guarantee fund which would be replenished through the ministry subsidy pool. This would enable MSMEs to access loans in a faster manner while the relevant capacity is built up at the ministry level to meet the demand.

Addressing knowledge and information gaps: This report recommends using a series of continuous workshops and capacity building seminars for two audiences: (i) for RE MSMEs on the suitability of different financial products (and equity/hybrid investment in particular), (ii) for banks and equity/hybrid investors on how to evaluate different technologies and business models, and case studies of successful investments in RE MSMEs with successful exits (particularly for equity/hybrid investors). The material from these workshops and additional materials

disbursements is challenging because there is limited existing capacity to check for the eligibility and quality of the applications that are submitted. Developing solutions that help to ensure that MSMEs are submitting these applications in an error-free manner and developing solutions to enhance capacity for disbursements would help to address these challenges. Finally, grants were usually only preferred to finance early stage operations and were prioritized by few organizations. As such, this report does not focus heavily on this need.

In addition to the financial product-specific barriers noted above, there are additional challenges in the policy environment that limit greater supply of financing to the sector. For DRE utility segments, financial institutions stated their primary challenge was the uncertainty associated with understanding when and where grid extension would occur, and what opportunities there would be for existing off-grid solutions to interact with the grid if and when it did extend. This uncertainty was a key reason that many financial institutions were concerned about the long-term viability of their investment. For CP segments, the primary concern for financial institutions was a lack of clarity of what was considered to be a “quality product” – in the absence of institutional quality ratings system for many RE consumer products, financial institutions were unwilling to back a product which could potentially have a lack of uptake and mar their reputation in the sector.

Recommendations for actionSolutions to addressing these barriers can be built at three levels: developing or adapting financial products, addressing knowledge and information gaps, and developing stronger policy frameworks. Taking a three-pronged approach would help to address the barriers faced by both FIs in supplying finance as well as the MSMEs in accessing finance.

Developing/adapting financial products: This report recommends piloting the following four enterprise financing products (three focused on debt products, one focused on subsidies) which could help unlock significant value for the sector:

Lease finance product: adapting a lease finance product for the sector would allow a borrower to pay the cost of the underlying RE asset over the term of the loan, and the lender would maintain ownership during this time. This would decrease the burden for the MSME on upfront payments, helping to scale the market. If paired

would be made available publically so that the lessons could be scaled up beyond simply the participants of the workshop and provide information for future MSMES and financial institutions. This report also recommends that the relevant public agency publish effective market information on the sector (i.e., cost benchmarks, business model effectiveness studies, etc.) to help scale up information on the sector.

Strengthening policy environment: In terms of the policy environment, two high priority initiatives are recommended in this report. The first is to clarify policy priorities in the upcoming Rural Energy Access Policy (REAP) particularly as it relates to the grid extension timeline, grid interactivity policy and the size and timing of the capital subsidy. The second is to develop a set of standardized and updated product quality standards – both for CPs and DRE utilities – in order to provide greater clarity for potential investors.

Consumer financing: current state, barriers and recommendations for actionWhile the primary challenge in growing the market base for CPs is awareness, consumer financing options can also play an important role. Most MSMEs interviewed cited a lack of consumer awareness as the primary barrier to greater market growth for a number of reasons: consumers had a low perception of the value and long-term benefits of the product being sold, consumers tended to be very dispersed in rural areas making them hard to reach, and parts of the market had been spoiled by using poor quality products. However, it was also noted that consumer finance can play a critical role in making the market more attractive to potential buyers, particularly for those who would have difficulty in affording the product.

Current state of consumer financing and barriersThere is very limited access to formal consumer financing products in the market today.Based on a field survey across five states in India3 , an average of 70% consumers who had purchased a solar lighting device had done so through a mixture of own savings or personal loans. However, MSMEs have tried to increase provision of consumer financing solutions and have done so by providing one (or multiple) of the following products through their own means or through partnerships. The first, and most popular, is the traditional micro-loan product that can either be individual or group in nature. Second, there are examples

Executive Summary xiiixii

The states included in the survey were Uttar Pradesh, Bihar, West Bengal, Rajasthan, and Tamil Nadu and total sample size was n=4673


of trade finance wherein credit is extended from the retailer or distributor to the consumer. Third, consumers subsidies from MNRE can help offset upfront costs for specific segments, (i.e., for solar water pumps). Fourth, certain segments have used a “pay-as-you-go” model allowing consumers to pay for the product in instalments. Finally, grants from philanthropic sources are also used in the market to improve affordability.

The need for micro-loans and savings products is strongest across segments but there are a number of barriers limiting access and supply. Micro-loans and savings – either through microfinance institutions (MFIs), self-help groups (SHGs), or regional rural banks (RRBs) – would be welcome across market segments as a way to enhance affordability for the end consumer. MSMEs stated that micro-savings products in particular could have strong potential, especially given that over 70% of those who do purchase a product do so through their personal savings. Developing a product which helps formalize that process would help address an existing financing need. However, many MSMEs and their consumers face barriers in accessing this because there is a limited penetration of MFIs in some of the key geographies of operation, and RRBs – which have a stronger national presence – have a strong emphasis on credit history which many consumers cannot provide. In addition, linked to the consumer awareness challenge noted above, consumers do not believe that the cost of the loan (and of the RE product) matches the value and

There are also ecosystem wide barriers that affect the supply and access to consumer finance. Most importantly is a lack of awareness which exists across stakeholders. Most products are considered to be relatively new on the market and consumers are usually not aware of the product or its benefits – as such, there is a limited natural demand for the product which limits the market for consumer finance solutions. From the perspective of the financial institution, many are not aware of the sector and those who are aware may not have the technical skills necessary to evaluate this newer industry – as such, they are wary of providing consumer financing options. Supply of consumer financing is also hindered by a lack of consistent quality standards to rate products and inconsistent after-sales service for products. As a result, FIs are wary of engaging too deeply in the market as they may face negative reputational repercussions.

Recommendations for actionAs per above, solutions to scaling up the supply and access to consumer finance can be undertaken at three levels. Developing/adapting financial products:This report recommends piloting the following two consumer financing products (focused on micro-loans and savings) which could help unlock significant value for the sector:

Product-linked savings account: this would allow a consumer to put aside savings, in a formal manner, and link it directly to the purchase of an RE product. This would leverage the existing method of financing RE consumer products (i.e., through informal savings) and encourage consumers to use more formal mechanisms for their financing needs. From the perspective of the FI, it would enhance the portfolio of offerings to the consumer which may result in greater market share and would provide additional “reserve capital” to grow the banking business as needed.

Scaling up partnerships between RRBs and SHGs: this would entail tapping into the extensive network of bank-linked SHGs in India and scaling up group loans to them. This has advantages for both the potential consumers as well as the RRBs – consumers would be able to take out loans without needing a credit history (as long as the SHG has one) and purchase high-quality RE products; RRBs would be able to partner with credible RE enterprises and provide loans of ticket sizes that are high enough to cover their costs and make the process more financially sustainable.

benefits that the RE product can bring them. However, from the supply side it is not simple either: many MFIs consider the ticket size of small RE products too small to match the transaction costs and MFIs do not wish to be involved in last mile distribution. Finally, micro-savings products are in particular not offered because many FIs are not yet aware of how to roll-out a product along those lines as they were until recently, not allowed under the standard regulations.

For two segments, subsidies and variations on the pay-as-you-go models were also stated as needs. Subsidies were in demand from those segments that particularly benefit from consumer subsidies (e.g. under the Jawaharlal Nehru National Solar Mission scheme) today – SHSs and SWPs. For players in these segments, the major barrier to be addressed was to find ways to speed up the disbursement of subsidies so it did not create constraints to growing the market. Pay as you go models were also highlighted as having potential, but there are two primary challenges in scaling up this model. The first is that they depend on the supplier or distributor having adequate working capital requirements in order to be able to extend credit to the consumer – something most MSMEs do not currently have. The second, is that some of these models, such as a mobile based payment platform, require an enabling environment (in terms of regulation and technology) which does not yet exist in the Indian context. As such, pay-as-you go models are only considered as a longer-term solution for the market.

Addressing knowledge and information gaps: This report recommends awareness campaigns and capacity building seminars for two audiences: (i) for potential consumers to increase an understanding of the value proposition of RE products and especially for products such as cookstoves that have not been as popular as SPLs and SHSs in most markets, and (ii) for RRBs and MFIs on how to evaluate different technologies and RE products, and case studies of successful lending to RE consumers. Similar to the recommendations for enterprise financing, the material from these workshops and additional materials would be made available publically so that the lessons could be scaled up broadly. This report also recommends technical assistance (TA) for RE MSMEs in developing innovative business models which integrate consumer finance as a central element in their operations.

Strengthening policy environment: There are two high priority initiatives for consumer finance which are recommended in this report. The first is to clarify and develop a set of technical standards for RE products that are in-line with the latest technologies prevailing in the market. The second is to develop a “one-stop shop” information portal on the relevant policies and regulations applicable to the RE sector – this would help consumers and enterprises alike in accessing information that it typically spread over multiple sources is hard to access.

Summary of consumer financing needs across consumer product segments

CP2

Cross market players in SPLs for less that $120

CP3

Cross market players in SHS’ from $120 - $600

CP4


CP5

Distributors of RE consumer products

CP1

Cross market players in cookstves for less that $120

Micro- Loans and Savings

Trade Finance

Subsidies

Pay as You Go Model

Grants

Medium/Low needHigh need No stated need

Executive Summary xvxiv

2Access to Finance for MSMEs in the Renewable Energy Sector in India1

1Context, objectives and approach

Context and objectivesThe off-grid RE sector is growing in India and MSMEs are playing an increasingly important role in it. Whereas the majority of large established corporations active in the off-grid space consider it an additional market to tap into, MSMEs operating in the off-grid space are usually exclusively focusing on this market. MSMEs are driving most of the activity and innovation in the off-grid RE market and they are at the forefront of providing energy access to millions of BOP consumers. However, the growth of MSMEs in this sector has been limited by a lack of finance, both for enterprises as well as for consumers. Of the over 45 MSMEs interviewed for this report currently operating in the RE sector, nearly 90% cited “access to finance” as one of the three primary reasons hindering the growth of the sector. For MSMEs focusing particularly on standalone RE products (such as cookstoves, SPLs, etc.), consumer awareness and consumer finance were areas where they stated further attention was required. In addition to citing access to finance explicitly, the majority of the respondents also cited other barriers which are closely linked to limiting the flow of finance to the sector: namely, a lack of awareness from the part of FIs, project viability that was perceived to be low by FIs, and a fragmented policy environment (lack of clarity on relevant future regulations, eligibility and process for subsidy disbursement, etc.).

Addressing the lack of access to finance requires solutions which are tailored to different segments of the market – just as there is no homogenous market, there can be no silver bullet solution. Most existing reports of the sector tend to treat the off-grid market as one overall sector. While there is merit in this approach in identifying solutions that can help unlock finance broadly, these solutions are not tailored to the significant amount of diversity that exists among RE MSMEs currently in the sector. There are multiple ways in which enterprises differ from each other. First, there are variations in the types of solutions provided: some

players provide access to electricity through RE off-grid solutions, whereas others provide access to clean energy directly in the form of consumer products. Second, there are a number of different clean energy sources which are used in bringing innovative RE products to the market - ranging from solar, to biomass, to wind and hydro. Finally, there is a diversity of business models used by MSMEs in the sector – some focus on upstream activities (such as design and construction) while others focus on downstream activities (such as distribution) and some cover the gamut of activities. Solutions developed for the market as a whole often have a limited impact either due to a mismatch between the solution offering and the financing needs of specific segments of RE enterprises.

This report aims to fill the gap in the literature by providing information on the financing needs, barriers gaps and solutions for specific segments with the RE sector, rather than at a broader level. The objective of the present study is to identify market segments with distinct financing needs, both in terms of quantity and type of finance needed, as well as with specific risk-return profiles. The segmentation analysis allows the audience to go deeper than the existing broader understanding of the financing needs and barriers faced by the sector. The present study also provides information on the current role played by various FIs in the RE MSME sector and evaluates both their role as well as the applicability of the products they provide in terms of their ability to address financing needs of RE MSMEs included in these segments. The report concludes with discussion and assessment of the solutions that are best positioned to unlock value for different segments of MSMEs in the RE sector and how these solutions can be scaled up in the near term.

The audience of this report is fourfold: RE enterprises, policy makers, financial institutions, and donors and multilateral agencies. This report aims to address key questions raised by a variety of stakeholders from both a broader market level as well as from a segment level perspective. It provides current and future RE MSMEs in different segments of the market with information on

Context, objectives and approach


what financial products others have availed of, and what products can be best suited to their needs, as well as the priorities of various FIs who can provide them with these products. It provides policy makers with an improved understanding of the opportunities and challenges in the existing regulatory framework and proposes recommendations on how it can be further improved. The report also provides FIs with tools to understand the potential that various segments of the small-scale RE market have and which segments are best suited for their particular portfolios. Finally, multilateral agencies can use this report understand the role that they can play in facilitating the scale up and access to finance for a number of MSMEs across market segments.

The main report is divided into 9 sections which focus on providing summary findings from the study and 5 annexes that discuss these findings in detail. Section 2 of the report discusses the approaches to segmenting the market and outlines the ten segments that are the focus of the report. Sections 3-5 of the report discuss enterprise financing – section 3 focuses on segment level findings (FIs active at present, risk-reward profiles, financing needs and barriers faced), section 4 presents a high-level view of each of the segments, and section 5 identifies high potential solutions to pursue further. Sections 6-8 discuss consumer finance and are structured in a similar manner as the enterprise finance sections outlined above. Section 9 of the report concludes the report and identifies key cross-cutting solutions that would help create an enabling environment for the proposed financial solutions and long-term growth of the sector – these would have cross-segment applicability and impact.

The detailed findings of the study are discussed in the annexes. These annexes include detailed discussions on the methodology for market segmentation, profiles of each of the market segments, prioritization of financial products considered, profiles of various FIs active in the market, and detailed exploration of high potential financial solutions to pursue (for both enterprise finance and consumer finance).

Research sources and scope of the reportResearch sourcesThe findings for this report are based on a mix of desk research leveraging existing databases and reports, interviews with RE enterprises and sector experts. Desk research was used to ensure that the report was building on an existing knowledge base of the RE MSME sector, and was also used to construct the initial segmentation

methodology. Primary source interviews with RE MSMEs in each of the segments were used to validate these initial findings and dig deeper into the financing history of these enterprises, as well as identify the key needs and constraints that they face in terms of accessing finance, and test the viability of specific solutions. Given the sensitivity of the topics discussed, the findings have been aggregated at an industry level in order to respect the confidentiality of enterprise level information. Interviews were also conducted with a host of different financial institutions – ranging from public sector banks to private investors – in order to better understand the rationale for why they do or do not participate in the sector.

Scope of the reportAs per the context and objectives above, this report is focused on understanding, assessing and providing solutions to financing barriers for MSMEs in the RE sector. As such, the scope of the report is limited along the following parameters.

The focus of this analysis is primarily on micro and small enterprises operating in India. While MSMEs are technically defined by the Reserve Bank of India (RBI) as enterprises which have invested less than INR100 million (approximately $1.6 million) in plant and machinery or equipment. This definition was used as the broad guidance to define the dataset used for this report. However, the actual focus of the report was on micro and small enterprises as medium-level enterprises often have more opportunities to access finance, given their larger size and asset base. The insights and inputs of select larger enterprises currently operating in the RE space occupied by MSMEs is included, but does not form the primary component of the dataset underpinning this report.

MSMEs in the RE sector have been split into two distinct segments: (i) those engaged in decentralized renewable energy utilities, and (ii) those providing RE consumer products.

DRE utilities: this segment includes DRE utilities that have generation capacities of less than 100kW and are primarily off-grid (i.e., do not supply power to captive sources or are grid-connected). Technologies that fit into this category and are included as part of this report are: solar, wind-solar, biomass, and hydro.

RE consumer products: this segment includes those MSMEs providing access to standalone RE household level products. Technologies that are included are:

improved biomass cookstoves, solar portable lanterns, solar home systems, and solar water pumps.

The analysis is based on the composition of the current market landscape. While the report does include analysis of trends in the market as well as potential for future financing opportunities, the dataset of RE MSMEs used to underpin the majority of the findings in this report is based on an “as-is” version of the market as of late 2013.

Needs, barriers and solutions to financing focus on two distinct areas: enterprise financing and consumer financing. For all MSMEs considered in this report, one key area of findings is on the needs, availability and barriers to accessing finance to sustain the operations and growth of the enterprise itself. A second area of investigation, for enterprises in the CP segment, is on the current barriers and need for finance for consumers for them to afford RE consumer products. These two areas of financing are treated separately in the report.

Context, objectives and approach


2

Source: Dalberg analysis

DRE utilities:TechnologySize of operationsBusiness model

Consumer products:Business modelTechnologyPrice of product

Business modelTechnologySizePrice of productNumber of years in the marketStage of growthFinancial sustainabilityManagement team capacity

Business modelTechnologyCustomers servedSize of operationsPrice of productNumber of years in the marketStage of growthGeography of operationsFinancial sustainabilityManagement team capacityNumber of employeesSocial impact created… (others)

Which criteria are most relevant in terms of determining access to �nance?

Which criteria will result in the most distinct market segments?

Developing an Approach for the Segmentation of RE MSMEs In order to identify solutions to unlock finance for the sector, a deeper understanding is needed of what finance is required, by whom and for what purpose. As noted above, these financing needs are not homogenous across the small scale RE sector and vary significantly depending on the type of RE MSME. As such, this section of the report first identifies the various segments which exist in the market and provides an overview of the methodology used (further information is included in Annex 1).

The methodology to segment the market was based on identifying characteristics which would (i) have an implication on the financial needs of the enterprise, and (ii) provide distinct enough differences between players in the market.

There are different ways to segment the market as enterprises can have multiple defining characteristics: ranging from their geographic location, to the technology of focus, to their stage of growth. The criteria ultimately selected to be used to segment the market had to meet two conditions. First, they had to have a strong implication on the type of financing demanded by the enterprise. Second, they had to have the ability to result in distinct market segments (i.e., not be so broad as to group too many companies into one segment). This elimination process to determine criteria is detailed in the exhibit below.

Elimination process of market segmentation criteriaExhibit 1

Developing an approach for the segmentation of RE MSMEs


It is important to note, that criteria that are excluded at this second stage are still considered as part of the report. One example of this is “stage of growth”: while this is an important indicator of access to finance (and eligibility for different types of financing) it emerged that many of the players in the MSME RE sector who had established proof of concept were all relatively new entrants and had been operating for less than three years. Given the ubiquity of MSMEs with early stage operations across the market, it was not considered an effective primary criteria to segment the market. However, included in the analysis of many of the challenges and solutions to scaling up access to finance in the market are the implications of being a new entrant to the sector.

DRE utilities: segmentation criteria For DRE utilities, three primary criteria were selected:

Source of renewable energyThe specific type of renewable energy used to power the utility (i.e. biomass, solar, hydro or any hybrid combination of these) has a significant impact on the type of technology used, which in turn has implications on the technical feasibility of the plant, the level and structure of costs for a particular plant size, as well as its resale value. This has implications for the suitability of different financial products. Four different sources of renewable energy that are most prevalent in the Indian market were selected:

Solar: the most traditional form of RE, these utilities use multiple solar panels to generate power for the community they are seeking to serve. The primary cost for solar is in the upfront capital expenditure of purchasing and installing the solar panels. However, the relative size of this cost bucket has been decreasing as the price of solar panels decreases. As a result, the economics of solar projects have rapidly improved, and it is now a key growing sector in India.

Wind-solar: a hybrid form of technology which uses mini-wind turbines to supplement any lapse in solar power. It was earlier seen as a cost-effective and operationally more reliable alternative to solar-only utilities, but as costs of pure solar have dropped and the effectiveness of the technology has improved, the value proposition of wind-solar has become limited.

Biomass: These utilities rely on agricultural waste or other biomass-equivalent sources for fuel. Most of these technologies are not new, but their economic and financial viability are still being tested. In addition, biomass plants have a large reliance on continual supply of fuel from external sources (such as third party vendors, commercial plantations, etc.), which increases its working capital requirements, particularly when compared to other RE sources.

Hydro: According to sector experts, hydro power technology is usually more commonly used and suited for large-scale, grid connected plants (greater than 100 kW in size) but a few firms do exist which promote this at the smaller plant size level. These plants are usually set up fording a water source and are focused on community-level operations and service.

Note: Only 100% wind energy powered Off-grid utilities were explored, but based on a number of interviews with RE enterprises and sector experts, it was determined that there are very limited service offerings in this area. Most existing utilities that started as pure-wind <100 kW utilities have chosen to transition to wind-diesel (not included since it is not a pure RE source) or wind-solar (included in the first segment above), because these technologies are more reliable and can generate stronger financial returns.

Plant sizePlant size refers to the rated capacity of the utility. It was chosen as a criteria because the size of the plant has an impact on the type of financing that the project might be eligible for and has an impact on the level and structure of costs required. As per the objectives of the report, in order to target completely off-grid enterprises (i.e., those that are not connected to the grid or to anchor loads), the analysis is focused on plant sizes of less than 100 kW in size as firms operating larger plants are likely not off-grid.4 As such, the technologies were also limited to the four ones listed above.

Utilities greater than 100 kW in size may find it easier to raise finance as they are usually grid connected or have anchor loads and have stable PPAs with an established buyer, or are used for captive consumption in which case the facilitates to which the power is lent to can be used as collateral.

4

Access to Finance for MSMEs in the Renewable Energy Sector in India7

Solar

Wind - Solar

Biomass

Hydro

Indicates continuous range of utility sizesMicro-small enterpriseMedium-large company Utility size(kW) (log scale)


2 10 25 1000

“Pico power” (< 2 kW): Provides power to up to 100 households for a few hours a day with 2 lights and a cellphone charger

“Micro power” (2–10 kW): Provides energy access to up to 100 households for part or all of the day to power lights and multiple power outlets

“Mini power” (10–25 kW): Provides energy access to up to 250 households for part or all of the day to power lights and multiple power outlets

“Small power” (26–100 kW): Provides continuous power access to households and captive consumption targets

Based on this analysis, four size segments were developed:

Pico-power (less than 2 kW): These are very small power utilities that can be as small as 240W in size and typically serve a maximum of 30 households to meet a part of their energy requirements on a daily basis – usually just enough to power 1-2 lights and a cell phone charger. However, there are instances where a broader service offering (such as DC fans, small televisions, etc.) is made to a more limited set of households.

Micro-power (2 to 10 kW): These are slightly larger utilities and can serve a larger number of households, but will likely still only serve a part of the household’s energy needs.

Mini-power (11 to 25 kW): Mini utilities typically provide energy access to up to 250 households for part or all of the day to power lights and multiple power outlets (e.g. TV, fan etc.). This is the least populated segment in the DRE utilities space less than 100 KW.

Small-power (26 to 100 kW): Small power utilities typically provide power for part or all of the day for a large number of households – at the upper end of this range, the utilities have more potential to be interactive with the grid.

Business modelThere are a number of business models that are prevalent in the market and they each have a distinct impact on the financing needs of players, particularly when paired with the technology for the source of RE. Reviewing the market, three business models emerge strongly across MSMEs in the DRE utilities segment:

Build only: these businesses are only focused on building the components or the structure of the utility that will be used, but have no role to play in the ongoing operations beyond maintenance for a limited warranty period (less than 2 years).

Size based segmentation of DRE utilities <100kWExhibit 2

8Developing an approach for the segmentation of RE MSMEs


Build-own/operate-maintain (BOM): RE enterprises with this business model build and own the plant and are also involved in operations and maintenance over the duration of the plant’s lifetime.

Build-maintain (BM): In this business model, the MSME will be involved in setting up the utility but will outsource operations to another company or individual (sometimes a village-level entrepreneur or a VLE), that will own the plant. The transfer of plant ownership can be at the time of set-up or over 3-5 years, i.e. the time required for the MSME to recoup its initial investment.

DRE utilities MSME market segments


Exhibit 3

Moreover, the MSME is committed to providing maintenance for the plant as per a long-term contract.

Based on these three criteria, the current landscape of RE enterprises was mapped and segments with two or more players were selected for further analysis. In the case where a business could fall into two segments (i.e., set up both pico and micro solar utilities), they were placed in one segment only based on whichever segment comprised the majority of revenues (the full mapping of this segmentation approach can be found in Annex 1). Through this approach, five market segments emerged:

This segment includes players providing off-grid utility service at 240 W – 2 kW utilizing a BOM model. Currently, there are less than 5 MSMEs operating in this sector, although there are a few players which are start-up arms of larger companies who are looking to expand into this space (although they are not technically MSMEs). All of the MSMEs are relatively new entrants (less than 3 years operating in the sector) and are exploring growth opportunities in the near term. The geography of operations of these firms is indicatively limited to Northern India (notably Uttar Pradesh and Bihar).

Note: Actors are currently exploring the possibility of setting up a BM model for this segment and transferring ownership to a VLE. This report does not focus on this sub-segment, as it is not well developed (less than 2 MSME actors involved) and there are still challenges in identifying and training VLEs. However, it could be a high potential segment in the future.

This segment includes players providing off-grid utility service at 2 kW – 10 kW utilizing a BOM model and includes between 2-5 MSMEs. Some players first set-up pico plants of 1 kW providing basic lighting and mobile charging services, and gradually increase the size of the plant to provide a greater service offering to their customers. Some of the MSMEs in this segment are early entrants, while others have completed slightly more than 3 years. Their geography of operations spans multiple states such as Rajasthan, Uttar Pradesh, and Maharashtra.

This segment focuses on players providing off-grid utility service at 11 kW – 25 kW utilizing a BM model and includes between 5-7 MSME players. Players in this segment initially entered as it was considered a viable alternative to pure-solar entities – however, as the cost of solar panels has decreased, the cost effectiveness of wind-solar has come into question. Most players are therefore moving into other appliances – namely other solar and wind powered standalone consumer product. This segment is included, but is not considered one with long-term viable growth.

This segment includes players providing off-grid utility service at 26 kW – 100 kW, using biomass energy and through a BOM model. Currently, there are less than 10 MSMEs operating in this segment. The majority of players have been in operation for 5-7 years and there have been very few entrants in the past three years, indicating that growth in this segment is relatively slow (particularly when compared to the solar sector).

Note: This segment is changing rapidly – some players are looking to develop hybrid solar-biomass technology to decrease reliance on subsidies, and others are looking to set up BM business models for traditional biomass plants. However, these are relatively new developments and are not included here as they do not form the majority of players in the segment.

DRE1

Technology: SolarCapacity: < 2 kW (pico)Business Model: BOM

DRE2

Technology: SolarCapacity: 2 – 10 kW (micro)Business Model: BOM

DRE3

Technology: Solar/ wind-solarCapacity: 11 – 25 kW (mini)Business Model: BM

DRE4

Technology: BiomassCapacity: 26 – 100 kW (small)Business Model: - BOM

DRE utilities MSME market segments


Exhibit 3 (contd.)

DRE5

Technology: HydroCapacity: < 100 kWBusiness Model: – All

This segment includes players providing off-grid utility service of up to 100 kW, using hydro energy and through a BM model. Currently, there are about 5-7 MSMEs operating in this segment. The majority of players are close to completing 3 years of operations. They are primarily based in geographies with potential for hydro power, such as Himachal Pradesh, Andhra Pradesh, Karnataka, Orissa, and North-East India. Overall, the hydro industry is poorly developed in terms of distribution networks and manufacturing capability, hampering firms’ ability to grow – as such, many of these enterprise remain very small. Note: There are other players (i.e., larger hydro firms and civil works contractors) that conduct small hydro projects – however this segment only focuses on MSMEs and as such, they are not included here.

Consumer products: segmentation criteriaFor CP companies, two criteria were selected to segment the current market of MSME players:

Technology-priceA key determinant of the type of finance needed and the level of finance available is based on the technology – different products are perceived differently and face different market conditions, resulting in variable levels of financing being available (i.e., SHSs are a more established technology that consumers are demanding, whereas improved biomass cookstoves are still considered to be a “push” product). Based on the current state of products in the market, the following technology-price segments were developed:

Cookstoves less than $120: This segment includes MSMEs who are primarily selling improved biomass cookstoves including basic and advanced models (e.g., rocket stoves or natural or forced draft gasifiers) as well as solar/retained heat cookers.5

SPLs less than $120: This segment includes MSMEs who derive the majority of their revenue from SPL sales. The product-price segment includes most small-scale SPLs available on the market today. The product line includes basic SPLs which are geared towards portability with little to no additional features. It also includes multifunctional SPLs which combine portability with higher lumen output and additional features (i.e., alternate charging, mobile charging, and FM radio).

Note: Companies could actually provide two or more of these products – in these cases, they were categorized according to whichever product provided them with the majority of their revenue.

SHSs between $120 and $600: This segment includes MSMEs who derive the majority of their revenue from the sale of SHSs. The product range here includes basic SHSs (relatively low wattage systems (<10W) and have one or more lights with little to no value added features) as well as advanced systems (higher wattage systems, with multiple detachable lights, and are commonly bundled with multiple consumer-oriented features such as mobile charging and attached fans within the product).

SWPs (above $600): SWPs are the most expensive standalone RE consumer products considered as part of this report and can range in price from $1,000 – $10,000+. Solar water pumps procured and distributed by MSMEsoperating in the sector are surface or submersible pumps, have both AC and DC motors, and usually have capacities of between 1 – 5 horsepower (HP).6

LPG stoves could also be considered, but as they are not technically an improved biomass cookstoves, they are not included as part of this analysis.SWPs types vary in rating by the depth of groundwater and the acreage of land needed to pump from and to.

56



Business modelAs with DRE utilities, the type of business model has a significant impact on the type of financing required. A review of the market revealed that MSMEs follow one of three primary business models7 :

Design, procurement, and sales (“cross-market players”): these players, which form the majority of the cookstove and SPL market, will own the design of the product but will primarily outsource the actual manufacturing of the product to a medium/large manufacturer.8 They will then procure the finished good and work through both their own as well as partner distribution networks, micro-franchisees or VLEs to sell the product. These players work across the market (from the R&D stage at the beginning to the distributions points at the end) but are not involved in the middle manufacturing stage, as such they work across the two ends of the market chain.

Procurement and sales: these players, primarily prevalent in the SWP space (although they also exist as a small minority of SHS players), are different from the first business model in that they do not design their own products – rather they source finalized products from existing manufacturers and sell them on through

distribution and sales networks of their own and through partnerships. They can also be referred to as “system integrators”.

Distribution only: these players focus on distributing multiple RE products (SPLs, SHS, cookstoves, etc.) to rural and urban areas and supplement the work of enterprises who develop/design/assemble the products. These distributors often undertake rural marketing campaigns, educate future consumers on the benefits and use of RE products, or provide demonstrations of the products. While there are a number of large-scale distributors operating in this space, the focus here is on MSME distributors who focus exclusively on RE products.

As per the previous methodology, the current landscape of RE enterprises was mapped against these three criteria and all segments with two or more enterprises were selected for further analysis. As above, if an enterprise was active in more than one segment, they were placed in one segment only based on whichever one comprised the majority of their revenues. The full mapping of this segmentation approach can be found in Annex 1, and overall, it resulted in five key segments (as shown in the exhibit below):

MSMEs are also not involved in manufacturing directly – most of the manufacturing of the products is outsourced to larger firms with scaled manufacturing facilities as this enables the MSME to keep the cost of production lowThere are a few exceptions to this model with some players outsourcing the manufacturing to local artisans; however this has limited impact on their financing needs and it is only the case for a minority of players.

7

8

Product-price segmentation of the RE consumer product marketExhibit 4

Solar Portable Lanterns (SPL)

Solar Home Systems (SHS)

Solar water pumpsClean cookstoves

Very low(1-25 USD)

Low(25–120 USD)

Medium-high(120–600 USD)

Very high (600 USD+)

Basic ICS (1-10 USD)

Enhanced & Advanced ICS(20-90 USD)

RE Cookstoves (30–90 USD)

Basic Lighting Systems(40–120 USD)

Standard power systems (120-340 USD)

Advanced power systems(340-600+ USD)

Solar task lights (8–15 USD)

Basic SPL (11–25 USD)

Multifunctional SPL(30–50 USD)

Source: Interviews with RE MSMEs, Dalberg analysis

Solar water pumps(1,000 – 10,000+ USD)


Consumer product MSME market segments


Exhibit 5

This segment is made up of over 15 MSME improved cookstove players who design the cookstove, assemble it, and distribute it through direct sales channels, an established third party distribution network, or through external distribution networks. The majority of these enterprises have only been operational for 3 years and are particularly small when compared to MSMEs in other RE consumer product segments.

This segment focuses on over 10 MSME players who derive the majority of their revenue from the design, procurement, and sales (both through their own networks as well as through partnerships) of both basic and multifunctional SPLs. Most players in this segment have been operational for 5-6 years, and have established a proof of concept and are looking to increase their operations both geographically across India as well as in terms of overall sales.

This segment is made up of more than 20 MSME players that design, develop, procure, and distribute (both by themselves and through partnerships) a range of SHSs– from basic to advanced systems – across India. They are cross-market players because they work at the early stages of the value chain (R&D) and the latter stages, but are not involved in the actual manufacturing of the product. Overall, this segment is experiencing high growth relative to other segments, with SHSs becoming one of the mostly highly demanded products in the RE space. Players in this segment are fairly well established, SHS players have been operational for at least 8-10 years.

This segment is made up of more than 10 MSME SWP players who conduct R&D and procurement of SWP components (i.e., solar panels, an AC or DC pump, and generally a converter or controller to act as an interface between the pump and panel). On average, actors have been operational for just under three years and despite being relatively new, are undergoing steady growth. Players have a wide geographic presence across India.

This segment is made up of MSMEs who focus on distributing RE consumer products, primarily to rural consumers. Most players in this segment undertake rural marketing initiatives and create VLE networks to support rural outreach, sales, and after-sales support. This is a relatively small segment and exists primarily because there is limited awareness of RE products – as the popularity of these products grows, the need for RE-specific distributors will diminish as traditional distributors would be expected to play a bigger role.

CP1

Technology: biomass improved cookstovesRole: cross-market playersPrice range: < $120

CP2

Technology: SPLsRole: cross-market playersPrice range: < $120

CP3

Technology: SHSsRole: cross-market playersPrice range: $120-$600

CP4

Technology: SWPsRole: ProcurersPrice range: across price ranges

CP5

Technology: MultipleRole: Distribution onlyPrice range: < $120 (across price ranges)


3Enterprise Finance: Summary of Findings

Current and expected participation of financial institutions in the RE MSME market There is significant diversity in how active specific financial institutions are across the RE MSME market. As demonstrated in the exhibit below, there are certain players that are quite active across multiple segments (such as impact investors), some who are only active in a few specific segments (such as government agency subsidies), some who have a light presence across the sector (such as public sector banks and development finance institutions) and others who have no presence at all (such as PE/VC investors).

Developing a segmented view of which financial institutions are more likely to be involved in the sector is critical to designing effective solutions. Without a clear understanding of the dynamics and motivations

of different financial institutions, it will be difficult to engage these stakeholders in innovative solutions to help unlock financing for the sector. Based on analysis using the financing histories of companies, a review of the applicability of financial products offered by different institutions (see Annex 3 for more details), and targeted interviews with financial institutions to test interest and perception of the market in the future, three groups of stakeholders emerge: (i) Group 1: those who already engaged in the sector and whose participation is likely to continue, (ii) Group 2: those whose presence is limited today, but could be scaled up in the medium-term (within 3-5 years), and (ii) Group 3: financial institutions who are unlikely to enter the market in its current form. Details of each of these groups is included in further detail below.

Current presence of financial institutions in the small-scale RE sector for enterprise finance Exhibit 6

DRE1


DRE2


DRE3


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Group 1 Group 2 Group 3

Enterprise Finance: Summary of Findings


Current presence of financial institutions in the small-scale RE sector for enterprise finance Exhibit 6 (contd.)

DRE4


DRE5

Hydro utilities

CP1


CP2


CP3


CP4


CP5


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Note: This table is based on the number of players in a particular segment that have been able to tap into a particular financing source. It was not possible to take total exposure into account due to consistency of data available, period of investment (1 year vs. 3 years), and one-time payments v/s milestone based. The number of players that have received funding from that source has been considered as a proxy for this. As such, for DRE segments, medium-high rating indicates two or more players financed by the particular FI. For CP segments, medium-high rating indicates three or more players financed by the particular FI. Different relative cutoffs are used in order to account for the differing sizes of the

Source: Interviews with RE MSMEs; Interviews with FIs; Interviews with experts; Dalberg analysis

Low presence Medium - High presence

Group 1: Financial players currently active in the sector and whose participation is likely to continue. These are the players who have some record of involvement in this sector and have demonstrated an appetite to invest/lend to this sector, either from a commercial returns perspective or from a public policy/social impact perspective. This category is made up of the following key players:

Impact investors (e.g. Lok Capital) have been actively involved in both the DRE utility as well as in the CP segments. Interviews with these investors indicate that they are looking to increase investments in the short term and are seeking “investment” quality enterprises. However, key issues that will govern their future role in the sector will be to demonstrate a successful exit from their existing investments in the sector, and to demonstrate that investments in energy access can have equal if not greater levels of “impact” on end beneficiaries as other social sector investments.

Donor agencies (e.g. USAID) have played an important role in the sector, especially for the CP segments. For certain segments such as RE distributors, grants from donor agencies have been a critical source of finance so far. Energy access continues to be a priority area for donor agencies and these players can be expected to provide more funding for the sector in the short term. However, their role is not sustainable in the long-term and as such, players are increasingly looking to rely on more commercial sources of financing.

Multilateral development banks (e.g. ADB) have undertaken efforts to establish credit lines with government bodies such as SIDBI, IREDA, NABARD – to accelerate the flow of finance to the RE sector. Interviews indicate that some of these government bodies are looking for new credit lines since the existing ones have been used. This indicates that there is likely to be continued high levels of engagement of multilateral development banks in the sector over the short and medium term.

Public sector banks (e.g. SBI) and development finance institutions (e.g. NABARD) – while their presence overall is relatively low across a few segments, they are still the most active banking institutions in the market. For those enterprises whom they have funded, they have been primarily involved in disbursing debt products – primarily in the form of soft loans, but also for working capital loans and unsecured loans (under the Credit Guarantee Trust for Micro and Small Enterprises or CGTMSE scheme). While barriers limit

their involvement in the sector, discussions with representatives of these institutions indicates that they would be interested in scaling up their presence in the market if specific barriers could be addressed (explored in further detail below).

Philanthropic foundations (e.g. Shell Foundation) have typically provided one-time grants as well as milestone-based grants to RE MSMEs. A high success rate of MSMEs to meet the agreed upon milestones will most likely build more confidence in the sector and direct more funding from philanthropic foundations in the future.

Government agencies (e.g. MNRE) have instituted various subsidy programmes to provide finance for enterprises and consumers in the small-scale RE sector. Interviews with RE MSMEs indicate a high level of subsidy usage in the mini-grids sector and in the SWP sector in particular. While there are challenges with the disbursement and implementation of the subsidies (explored in further detail below), the government is expected to continue to focus attention on this sector for the short and medium term. These subsidies will continue to be important for specific segments of players in particular, even if enterprises are looking to move away subsidies in the longer-term.

Group 2: Financial players expected to have higher levels of engagement in the medium-long term (within 3-5 years). This category includes actors who could be leveraged in the medium term given their risk-reward appetites. These players presently have a limited engagement in the sector because of a lack of attractive investment opportunities from their perspective. This category comprises the following players:

Angel investors (e.g. HNIs) are driven by “buzz” created by a particular sector and target a very high rate of return. As such, their interest and participation in the sector is low given its overall nascence. However, if the sector continues to grow and angel investors can be shown successful case studies of investments in the sector and the possibility of returns in a relatively short time frame (i.e., less than 3 years), than they could have the incentives to get involved. Corporate social responsibility funding has not been a major source of funding in the sector and have only disbursed funding to a minority of the market segments. However, with the introduction of the



Companies Act in 2013, CSR funds could likely become an increasingly important source of finance for the sector as corporations look to find new avenues to spend their money on development activities. There is an opportunity to take advantage of the legislation as this would enable companies to channelize their funds towards the sector in a structured fashion rather than on a piecemeal basis.

PE/ VC investors are unlikely to get involved until the business models employed by RE MSMEs are better understood or have been proven to generate strong returns on investment. These investors are likely to get involved only when enterprises in the sector have reached a certain level of maturity and stability in their growth stage, which is unlikely to be achieved in the short-term. However, as the sector matures and establishes itself in the longer-term, there is an opportunity that investments could meet the investors’ risk appetite.

Group 3: Financial players not expected to enter the market in its current form. This category includes players who do not have a footprint in the sector at present and are not interested in entering the sector in its current form. These players can be expected to get involved in the long-term when the sector has reached the mature growth stage. This category of financial players comprises:

Private sector banks and NBFCs (e.g. Reliance Capital) have a lower risk appetite than public sector banks and typically look to cover the entire ticket size by fixed assets as collateral. They also look for a 3 – 5 year loan repayment capacity of the borrower, which is difficult for most RE MSMEs at this stage. These players can be expected to play a role in the sector only when it develops a strong track record, and has proven and well established technologies and business models.

Foreign banks (e.g. Citibank) typically prefer to have the lowest risk exposure among all banking institutions in India and lend only in cases with a minimal risk of default. Considering the current risk profiles of RE market segments and expected evolution of risk-return profiles across these segments, these institutions would be interested only in the long-term.

Perceived relative risk-reward profile of market segmentsFinancial institutions will choose to participate in specific market segments based on the perception of the risk-reward profile that exists. Matching products and potential solutions to unlock finance for the sector is heavily dependent on the active involvement of financial actors. And this in turn depends on how risky financial institutions perceive specific segments to be, particularly in relation to the potential rewards. Based on an assessment of the market dynamics today and interviews with specific commercially-oriented FIs, this report constructs an initial assessment of the relative risk-reward perception of different segments as of the structure of the market today9 . This may not match the perception of the MSME themselves have of their sector – in these cases, it is a reflection that financial products with greater risk-sharing potential and/or investments in knowledge and awareness are needed.

Note: While this analysis provides an aggregated view of each of the segment, it is true that there may be individual MSMEs in segments which have been able to secure financing from financial institutions who demand “higher returns”, even though they are described as relatively “low return” segments. This analysis provides a general trend and overview of perceptions of the segment as a whole rather than assessments of individual companies which may be able to perform under or below the broad expectations of the segment that it is active in. The exhibit below maps the risk-reward profile of each of these market segments and details of the ratings for each of the segments is included in further detail in Section 4 of the report.

This is a relative risk-reward profile construction (not an absolute one) and valid when compared to MSMEs in the RE space. As such, these ratings cannot be compared directly to MSMEs in other sectors.

9

Based on the mapping above of perceived risk-reward profiles, three broad groups emerge. This provides a mechanism by which to map actors to specific segments, based on their overall “attractiveness” to different FIs (and further details on each is included in Section 4).

Segments which require stronger support from non-commercial financing in the short-run: The segments included in this category are all DRE utility companies – those engaged in micro solar utilities (DRE-2), wind-solar technologies (DRE-3), and hydro utilities (DRE-5). There are a number of reasons they are considered higher risk and lower reward by FIs – for micro solar utilities, there are still challenges in establishing a standalone commercially viable business model, for

wind-solar technologies in DRE-3, the sector has dwindled in the recent past as the cost of pure-solar utilities has dropped; and for hydro utilities in DRE-5, the technology is perceived to be old and there are limited technical experts for micro-hydro, the application of this model for smaller communities is still being validated, and there are challenges with the policy environment. As such, a stronger emphasis on non-commercial financing is likely needed (i.e., grants or subsidies) in the short-medium term until the challenges can be addressed. Segments with potential for a mix of commercial and quasi-commercial capital: There are two subsets in this group. The first subset is for two CP segments –

Financial actors perception of relative risk-reward profiles of market segments Exhibit 7

Incr

easi

ng p

erce

ptio

n of

rew

ard

Decreasing perception of risk

High

Stronger support required in from non-commercial financing sources in the short run

Potential for commercial financing and quasi-commercial financing with lower requirement for returns

Stronger eligibility for stand-alone commercial financing

Hig

h

Medium

Med

ium

Low

Low

RE consumer products segments

DRE mini- utility segments



CP 4

CP 1

DRE 5

DRE 4

DRE 1

DRE 2

DRE 3CP 5

CP 2CP 3


cookstoves (CP-1) and RE distributors (CP-5) – who are perceived to have lower rewards than other segments in this group. For the cookstoves segment, this is because there is a perception among FIs that the market is still being developed and there is limited “pull” from the consumer base for the product because it is not well understood. For RE distributors, FIs typically believe that this is fairly niche and relies on small margins and large volumes for success which is still being demonstrated. The other segments in this group are perceived by FIs to have higher rewards because the markets is expected to be more mature and there is strong consumer awareness (i.e., for SPLs (CP-2) and SWPs (CP-4) sectors) or there has been previous success stories (i.e., for pico solar utilities (DRE-1) and biomass utilities (DRE-4). As such, they are believed to be more attractive candidates for commercial financing, particularly in the form of loans from public sector banks or patient equity which require lower returns. However, there may be some support from non-commercial financing sources in the short-run to continue developing the supporting ecosystem.

Segments with stronger eligibility for standalone commercial financing: only one market segment falls into this category, and that too it is only beginning to move into this space. Most RE MSME players are still considered quite risky by investors – however, those players involved in the SHS space (CP-3) are considered

by many investors to be playing in a market that is growing quickly as awareness of the benefits of the product are being appreciated by the consumer. As such, while the players in this segment are more likely to be candidates for standalone commercial financing in the short-term from impact investors (primarily patient equity), but may also include angel investors, commercial equity investors, and slightly less risk averse commercial lending institutions.

Considering a segment in terms of its risk-reward as well as the financial players that are likely to play a role in both the short and medium term are important components of identifying solutions that will work well in unlocking finance. This is explored in further detail in Sections 4 and 5 of this report.

Financing needs for individual segments Using this segmentation approach, the financing needs of the RE MSME sector can be better articulated in a more granular manner. The exhibit below identifies the key financing needs and gaps that exist for the segments noted above as defined by the RE enterprises themselves across different product categories. The extent of the demand gap was assessed through detailed discussions with MSMEs and based on the prioritization that they themselves provided. The figures for financing are based on their stated need and are intended to provide an overall guidance only.

Stated financing needs across market segments from the perspective of RE MSMEs


Exhibit 8

DRE1


DRE2


DRE3


DRE4


Subsidy for capital and T&D1

Utility set-up subsidies[2/3 of utility set up cost]

Long term debtSoft loan[$1 – 2 million]

Long-term debtSoft loans[Up to $1 million]

Debt for working capitalSoft loans[Up to $2 million]




Stated financing needs across market segments from the perspective of RE MSMEs


DRE5

Hydro utilities

CP1


CP2


CP3


CP4


CP5


Exhibit 8 (contd.)

Long-term debtSoft loans[$300K – 1.5 million]

Debt for working capital[Up to $200K]

Debt for working capitalSoft loans[$200K – $3 million]

Debt for working capital[up to $600k]

Soft loansCollateral free loans[up to $800K]

Debt for working capitalUnsecured loans[up to $800K]

Patient equityAngel investment[$100K - $2 million]

Patient equity and hybrid products[$100K – $2 million]

Patient equity[$300 – $600K]

Patient equityAngel investment[up to $300K]

Patient equity[up to $1-2 million]

State/central procurement subsidy[up to 90% of product cost]



Note: T&D – transmission and distribution; specific products are only noted for financing types for which there is a “substantial demand gap”

Source: Interviews with RE MSMEs; Dalberg analysis

Substantial demand gap Partial demand gap No stated demand

Looking across this summary exhibit, there are implications which can be drawn for the type and amount of financing needed and how that varies by segment.

Type of financing neededThe needs of DRE segments are much more diverse than for CP segments, meaning that solutions for DRE utility players needs to be broader in scope: Based on the exhibit above, it is evident that across a number of DRE utility segments, the breadth of financing demanded

across product types is higher – while debt is consistent across all segments, demand gaps for equity, subsidies and grants are quite diverse. CP companies, on the other hand, are more targeted in their financing demands with a clear emphasis on debt and equity, and subsidies for those focusing on SWPs. This is an important distinction to make when designing solutions for DRE utilities players – the breadth of solutions to meet their needs will be larger than for CP companies.


Patient equity or hybrid products[$1 – 2 million]

Patient equity[Up to $1 million]

Patient equity[up to $2 million]


Access to debt remains the primary unmet need across nearly all segments and should be a priority area for any new financial solutions: lack of access to debt financing on preferable terms was cited as a primary area which most players could not access. For most DRE utility players (except DRE-4), debt in the form of long-term debt or soft loans is required to finance growth and expansion of the business (an objective for which many are using equity financing currently). For all CP companies and for biomass utilities, the objective of debt financing was to primarily cover WC and operational costs. Challenges in accessing debt finance was a consistent theme across nearly all of the discussions with RE MSMEs and are explored in further detail in the next section. Finding solutions to scale up access to debt would go a long way in addressing the financing issues of this sector.

Patient equity and hybrid products are in demand, but are not as well understood as debt financing and the focus needs to be on awareness: equity financing – primarily through patient capital sources with longer tenures and lower expectations of returns – were stated as needs by RE MSMEs, but were secondary to debt financing. This is for two reasons: (i) some players who had already accessed equity were unwilling to further dilute ownership, and (ii) players who had not yet accessed it were concerned about the implications for their full ownership. Hybrid products were not prioritized by many players as many were unaware of how these products such as mezzanine financing and convertible debt (CD) might work in practice – indicating that further education on these products is likely required.

Subsidies and grants were only demanded as a tool to support short-medium term operations: there are a total of six segments for whom subsidies and/or grants are a critical need and they can be classified into two groups. The first is those players who are looking to support early stage operations in order to build out the sector and market – this includes cookstoves players who are looking for grant financing to transform cookstoves from a push product to a “pull” one that is actively demanded by consumers, and wind-solar and hydro utilities who could use grant financing to continue to hone the technological solution. The second group is those players for whom the subsidy/grant forms an

integral part of their business model – this includes micro solar utilities, biomass utilities, and SWP players. While players in these segments mentioned that there is scope to decrease dependence in the longer-term, the short-term viability of business models does depend on these subsidy/grant structures being in place.

Amount of financing neededThe stated range of financing required does not vary significantly across different segments: based on detailed discussions with each of the enterprises, the range of financing required is actually fairly comparable across different segments of the market. This is primarily driven by the fact that many of the firms are at a similar stage in their growth cycle and are therefore looking for similar amounts of financing to scale up their operations. That being said, there are variations for individual companies – i.e., hydro-utilities in DRE-5 are more conservative at the lower end of their debt financing required (~$300K) while small biomass utilities can be more aggressive in their financing needs (up to ~$2 million). Given the scope of this report, the amount of financing required has not been compared to whether the enterprise can actually absorb it effectively – that requires a case-by-case basis analysis.

At a high level estimate, the current overall market demand for debt products for the RE MSME sector is estimated to be between $30-90 million. This estimate has been calculated based on the estimated number of current RE MSMEs in the market (as validated with market players and sector experts) and the average range of debt financing that most players stated was needed to support their needs. Based on estimates from other reports, it is estimated that only ~$25 million is currently available on an annual basis as debt capital to seed and grow MSMEs in this sector,10 indicating that a significant gap exists.

The overall market demand for equity products is expected to be larger than the demand for debt – at $50-115 million. Across most segments, average ticket sizes for equity investments are comparable or larger than for debt. As a result, the overall size of the equity market is expected to be larger. According to estimates from other reports, the currently available equity financing is very low – some estimates are as low as $23 million per year11 although it is likely that the actual

cKinetics, “Financing Decentralized Renewable Energy Mini-Grids in India”, October 2013Ibid

1011

size is slightly larger – indicating that a significant equity gap exists for the market.

Addressing these financing needs first requires an understanding of the barriers that currently exist in the market. These barriers include the ones faced by (i) financial institutions in more actively participating in the sector, and by (ii) RE MSMEs in being able to access the finance they seek. This is explored in the next section.

Barriers to the supply and access to different financial productsThis section discusses the critical barriers that have prevented the availability and access of specific financial products for RE MSMEs. The discussion below presents these barriers from the perspective of both RE MSMEs themselves as well as the relevant FIs – the table below looks at debt instruments, equity/ hybrid products, and subsidies.

Why is it difficult to access?Perspective of the MSME

Why is it difficult to supply?Perspective of financing institutions

Debt Lack of fixed assets considered acceptable collateral by lenders: Most players, across both DRE and CP segments, tend to lack any fixed assets (namely, property) that are considered acceptable collateral by FIs. DRE utility and CP enterprises typically have inventory and receivables, but neither are accepted by banking institutions. As such, standard debt financing to finance expansion or working capital becomes very hard to access due to lack of collateral. Tenure of financing is too short for MSME needs: Most firms and projects look for long-term financing products (typically of a 7-10 year tenure) due to difficulties involved in setting up and operating in the RE sector. However, banking institutions conventionally provide loans for a maximum of 3-5 years and most MSMEs do not have the ability to repay these investments in that timeframe.

Lack of a three year financing history: FIs have eligibility criteria that include the need for enterprises to have at least 3 years of positive cash flows, presence of a credit history, and proven profitability. With the exception of a few segments, RE enterprises are relatively recent entrants into the sector, and are as such unable to meet these financing history requirements.

Cost of loan may be out of range for MSMEs: Standard financing products on the market are difficult to access for many MSMEs – for example, many firms cited the cost of standard debt products (13-18% annually) to be too high. They would prefer, in the ideal scenario, to have interest rates in range of 7-8%. MSMEs face challenges accessing these debt instruments because they are not in a position to service the payments at interest rates charged to them.

Failure of entrepreneurs and investors to agree on pre-investment valuations: For some MSMEs, there is a belief that equity players typically seek to undervalue companies they invest in and this leads to a greater dilution of ownership. This belief often leads to failure of negotiations between the entrepreneur and investors on the valuation of RE enterprises.

Project assessment framework mismatched to RE enterprises: Most FIs interviewed did not have a dedicated framework or team for assessing RE projects and relied on their SME financing team to evaluate RE investments. These teams rely on traditional assessment models that fail to capture aspects unique to the RE sector and are not directly applicable to these projects. Further, no initiative has been made to really try to adapt the conventional assessment models to the RE sector.

Lack of a past lending record to RE MSMEs: Interviews with FIs revealed that most of them had no prior experience of lending to RE MSMEs. Further, most FIsz indicated that there are very few successful cases of RE MSMEs. Due to these reasons, there tends to be a “wait-and-watch” policy for the RE sector at most FIs, restricting debt for both enterprises that have been operating in the sector for a long time as well as relatively new entrants. Delay in processing and disbursement of loans under the CGTMSE scheme: FIs are typically reluctant to provide unsecured loans under the CGTMSE scheme because the process to claim defaults tends to be lengthy and bank managers are as such reluctant to take accountability for defaults on loans made by them.

Lack of RE MSMEs with well-established business models: The majority of equity investors interviewed indicated that their limited engagement in the sector is due to a lack of RE enterprises with well- established distribution channels, after sales service networks, and plans to increase operations. Due to these reasons, investors remain sceptical about the scalability of these enterprises and are reluctant to invest in them.


Equity/ Hybrid




Negative perception of equity investors due to potential loss of control over business for the entrepreneur: Entrepreneurs also tend to be wary of external investors due to a belief that the investment would most likely dilute their decision making powers. Few enterprises see investors as partners in the decision making process and instead view their presence as a restriction on their ability to operate their business.

Lack of awareness of hybrid products: Most RE MSMEs interviewed were typically not aware of convertible debt and mezzanine as possible financing mechanisms. The gap in knowledge about the potential advantages of these products in the context of RE MSMEs (e.g. non-requirement of pre-investment valuation and collateral) has resulted in little demand for them.

Perceived uncertainty and delay in subsidy disbursement: For RE MSMEs who rely on subsidies as a key part of their financing structure, a key concern is the lack of timeliness in disbursement of subsidies. This creates liquidity constraints for firms, increasing their working capital requirement, and can render some business models and enterprises unviable. In addition, this uncertainty makes lenders or investors more wary of lending to enterprises whose business models are dependent on subsidies for financial success.

Restricted eligibility of RE enterprises for MNRE subsidies: Interviews with RE enterprises reveal that MNRE subsidies are typically available for select technical specifications, some of which tend to be outdated. Several RE enterprises felt that their products were technologically more advanced than that prescribed by MNRE but were not eligible for subsidies as they did not match the exact requirements included under MNRE policy documents.

Matching and aligning expectations of returns from investments in RE MSMEs: Equity investors are often concerned about the returns they can expect from their investments in RE MSMEs – patient capital investors would expect 10-20% and others might expect slightly more, while companies are looking to return much lower over the same time frame (sometimes at or below 10%). This creates a difference in the expectations of the investors and entrepreneurs, limiting the engagement of equity investors in the sector.

Questions around potential social impact of RE sector: Interviews with impact investors indicate that small-scale RE is typically not considered to be have the kind of direct social impact that other sectors might have (i.e., healthcare, education, livelihoods, etc). As such, energy investments may be considered less favourably, particularly when compared to other potential sectors of investment.

Lack of resources dedicated to processing of subsidy applications at MNRE: There is limited dedicated capacity (human and financial) and resources to process the subsidy applications at the central level and to review each application in detail and ensure that it meets all requirements and is error-free. As such, this results in delays in the assessment and disbursement process.

Limited understanding of MNRE guidelines among RE MSMEs and errors in the application process: Relevant government bodies indicated that market players often make errors in the subsidy application process – these include insufficient documentation and calculation errors on the forms. These errors call for multiple iterations on submitted documents, increasing time to disbursement.

Abundance of non-quality operators in the small-scale RE space: The sector comprises several fly-by-night suppliers, with minimal credentials and reliability. Therefore, government bodies feel the need to institute stringent disbursement processes to minimize the risk of fraud from these players.

Equity/ Hybrid

Subsidy

Broader non-product specific barriers also limit the supply of finance, particularly for commercial sources (such as debt, equity and hybrid products):

Lack of technical expertise among FIs to evaluate RE investments: Across a number of interviews with FIs, many were hesitant to enter the market because they did not understand the nuances of the market –what the implications of different business models were, what the viability of different technologies were, or how best to assess the future profitability of a specific investment. Because of the low perceived value of the sector, FIs are not prioritizing this as an area to develop technical expertise.

Lack of quality market data in the public domain: There exists a gap in the quality of information available on the small-scale RE sector in the public domain. This includes reliable information on market size for RE products and services, the current gap between demand and supply, benchmarks on costs and projected returns, and case studies of successful RE enterprises. This has further discouraged investors from getting engaged in the sector.

Lack of clarity on grid extension/interaction policy: A particularly pertinent point for DRE utilities is that there is a lack of clarity on grid extension plans and timelines, as well as the implications for the utility’s interactivity with the grid, plant operations and tariffs if the grid extends to its area. This policy gap is a key reason why FIs are not keen on investing in the sector as they are unclear as to whether DRE utilities will have long-term viability as a business model.



4Enterprise Finance: Segment-Specific Profiles

In the following section, profiles of the needs, challenges and opportunities for enterprise finance are included for each of the ten segments identified above. Each profile includes the following broad elements:

Description: a short exposition of the enterprises which are included in that segment Risk-reward profile: an analysis of the risk-reward profile of that segment from the perspective of financial institutionsEnterprise finance: the information answers the following questions

Which enterprise financing products are currently used in the market?Which enterprise financing products are in high, medium and low demand?How will these financing products be used?Why are there barriers to access and supply?What are some high-priority product-specific and cross-cutting solutions that exist to addressing this barriers?

These profiles are meant to provide a short summary of the findings and are, by design brief. They are supplemented by more detailed profiles that are included in the Annex.

1.

2.

3.4.5.

Note: for each segment, the enterprise finance products are ordered in terms of highest need/priority as stated by the enterprises (i.e., from high to low based on answers to questions).

Enterprise Finance: Segment-Specific Profiles


Product type

Debt

Equity/ hybrid

Grants

Subsidies

Soft loansLonger-term debt of up to 5-10 years

Convertible debt from patient capitalPatient equity

One timeMilestone based

JNNSM utility set up subsidies

Growth and expansion


Growth and expansion – at a very early/pilot stage

Project set-up

All MSMEs stated a need for debt products (particularly soft loans and longer-term debt), for loans up to $1-2 million

MSMEs stated a need for patient equity (equally as important as debt) for up to $1-2 million

A few MSMEs are seeking grants; more established MSMEs are seeking commercial financing

A few MSMEs use capital subsidies to support their projects, whereas others are not interested in accessing it

Sub-types Product availability

Stated need for product Intended Application

No MSME has yet been able to access debt financing of any kind

Only certain MSMEs have been able to access equity products, that too hybrid products only

Some MSMEs were able to access grants from multi -lateral agencies

Some MSMEs were able to access them, however others faced challenges with uncertainty and delays in disbursement

DescriptionThis segment includes enterprises providing off-grid utility service at <2 kW (lowest of 240 W) utilizing a BOM model, primarily in North India. Currently, there are less than 5 MSMEs operating in this sector, although there are a few MSMEs, which are start-up arms of larger companies who are looking to

expand into this space. The majority of the MSMEs are relatively new entrants (less than 3 years operating in the sector) and are exploring growth opportunities in the near term.

Risk-reward profileThis segment is perceived to be medium-high risk, because it is a relatively new sector of activity in the micro-grid sector, its business models are still being proven, but there is growing

DRE-1: Solar pico utilities, utilizing a BOM model

Highlighting case studies of successful investments in DRE enterprises for a variety of commercial financial institutions, namely equity investors

Additional cross-cutting solutions that can help unlock value in the sector include the following:

Instituting ratings for utilities to allow FIs to benchmark utility quality

The solutions presented here are only those which address a critical financing need and have a medium-high potential to unlock value12

Lack of assets that are considered collateralTenure requirements are too long Less than three years of operations Unstable cash flows of MSMEs FIs’ inability to assess project’s viabilityLack of reliable sector data in public domainLack of clarity in subsidy disbursementUncertainty around grid extension policy

Tenure requirements are misalignedUnstable cash flows of MSMEs FIs’ inability to assess project’s viabilityLack of reliable sector data in public domainPerceived lack of clarity in subsidy disbursementUncertainty around grid extension policy

RE is sometimes considered to be less impactful thanother sectorsLack of reliable sector data in public domain

Lack of clarity and perceived delays in subsidy disbursement

Developing new credit lines for soft loans Developing a lease finance model

Scaling up convertible debt and mezzanine financing through knowledge initiatives

N/A

N/A

Barriers to financial access and supply High priority product-specific solutions 12

awareness of the sector among FIs. There is a significant market for these utilities given the level of under/un-electrified populations, and existing MSMEs have grown rapidly as awareness of solar products grows, implying potentially significant rewards in the long-run. Given this profile, potential investors will need to have a risk appetite, patience for returns and be seeking fairly high rewards. Likely financial actors who could play a role in the short term would likely be impact investors who could provide equity, development

finance institutions (e.g. NABARD) who could provide debt and donors/grant organizations who could support very early stage projects. Angel investors could play a role in this sector as well (as equity or hybrid investors) if convinced of the profitability but they need to have longer term reward horizons. Non-impact investors are not likely interested given the long-time required for rewards and this is likely too risky a sector for standard commercial banks.

Establishing a formal secondary market for utility components to facilitate loans to the sector (in the absence of other collateral)

Establishing policy clarity on grid extension to address long-term risk and return concerns of potential investors


Low/ MediumLowNone HighMedium Medium/ High


Product type

Subsidies

Grants

Equity/ Hybrid

Debt

Project set-up costs

Growth and expansion – at a very early/pilot stageProject set-up costsR&D


No stated need

Enterprises depend on subsidies through the JNNSM scheme and seek continuation of these subsidies to ensure project viability

All enterprises rely on grants either towards operations or project set-up to ensure project viability and look for $0.5 – 1 million in grants

Some MSMEs stated interest in patient capital in the short-medium term, although they were not actively seeking it

MSMEs believed that any sort of debt was inappropriate for their operations due to its high cost and short tenure



Most MSMEs were able to access them, but faced many challenges with uncertainty and delays with disbursement

Most MSMEs were able to access grants from a variety of sources (CSR, multilateral agencies, socially-minded angel investors etc.)

No MSMEs have accessed patient capital previously, although some could indicatively secure it in the short-medium term

No MSME has actively sought debt financing

DescriptionThis segment includes enterprises providing off-grid utility service at 2 kW – 10 kW utilizing a BOM model, with utilities in multiple states such as Rajasthan, Uttar Pradesh, and Maharashtra. Currently, this segment includes between 2-5 MSMEs. Some of

the MSMEs in this segment are early entrants, while others have completed slightly more than 3 years of operations.

Risk-reward profileThis segment is perceived to be higher risk, as projects require a significant component of subsidies and/or grants to be viable. Moreover, most utilities have low profit margins, out of which some

DRE-2: Solar micro utilities, utilizing a BOM model

JNNSM utility set up subsidies

One timeMilestone-based


N/A

Highlighting case studies of successful investments in DRE enterprises for a variety of commercial financial institutions, namely equity investors;

Introducing an online portal for small-scale RE MSMEs to gain information and engage on financing schemes and other issues;


Perceived delay and uncertainty in disbursement of subsidiesLack of capacity (human and technical) to process requests and meet the demand for subsidies

Lack of adequate grant funds available in the market Perception that the RE sector is less impactful than other equivalent sectorsLack of reliable sector data in public domain

Unviability of projects without subsidy and/or grant componentUnstable cash flows of MSMEsFIs’ inability to assess project’s viabilityTenure requirements are misalignedLack of reliable sector data in public domainPerceived delay and uncertainty in subsidy disbursementUncertainty around grid extension and interactivity policy

N/A

Developing a pledge guarantee facility

Scaling up grants

N/A


even have unstable cash flows. Consequently, the expected short term reward is low, despite the existence of a high potential market of un-electrified and under-electrified households. Based on this risk-reward profile, it will most likely attract grant funders such as multilateral aid agencies and philanthropic foundations. There is also some opportunity for impact investors to start financing this segment in the near future, if enterprises are able to ensure the viability of

their business models over a longer period (e.g. 5-7 years). Angel investors looking to make social impact, with conservative return expectations could increase their sector presence, if convinced of the potential impact on the communities they power.


Note: Cross-cutting barriers were considered by MSMEs to be the primary challenge to the growth of the sector (as opposed to access to commercial sources of finance). As such, addressing these challenges is the priority for this segment.

The solutions presented here are only those which address a critical financing need and have a medium-high potential to unlock value 13

Instituting ratings for utilities to allow FIs to benchmark utility quality;

Establishing policy clarity on grid extension to address long-term risk and return concerns of potential investors.



Product type

Debt

Grants

Equity/ Hybrid

Subsidies


Growth and expansion – at a very early/pilot stageR&D

Growth and expansionR&D

N/A

All MSMEs stated a need for debt products (particularly soft loans and longer-term debt), for loans up to $1 million

Most MSMEs seek grants and would be helpful in addressing some of the technical challenges of the sector

MSMEs stated a need for patient equity (equally as important as debt) for up to $1 million

MSMEs stated that subsidies in the sector were likely to have distortionary effects



Limited number of MSMEs have been able to access debt financing of any kind; those who have accessed it have been given unfavourable terms

There is limited evidence to suggest that any MSMEs have accessed grants to date

Only certain MSMEs have been able to access equity products

Limited scope of subsidy; besides, most MSMEs were unable to access subsidies

DescriptionThis segment includes MSMEs providing off-grid utility service from 2 kW – 25 kW utilizing a BM model. Some of these enterprises have diversified their product offerings and are also starting to offer standalone solar products as well. Their

operations are spread across the country. At present, there are 5-7 MSMEs in the segment – a mix of growth stage companies, with approximately 4 years of operations, and mature companies, with up to 10 years of operations.

Risk-reward profileThis segment is perceived to have a high risk because the sector

DRE-3: Wind-solar micro and mini utilities, utilizing a BM model

Soft loansLonger-term debt of up to 5-10 years



Utility set up subsidies for wind solar systems and aero-generators

Providing technical assistance to MSMEs on how to improve financial and operational sustainability


Instituting ratings for utilities to allow FIs to benchmark utility quality


FIs’ inability to assess project’s viabilityLack of reliable sector data in public domainPerceived delay and uncertainty in subsidy disbursementUncertainty around grid extension and interactivity policyLack of assets that are considered collateralSlow revenue growth due to difficulties in utility saleTenure requirements are misaligned

Lack of adequate grant funds available in the market RE is sometimes considered to be less impactful than other sectorsLack of reliable sector data in public domain

Nascent sector with limited growth potentialFIs’ inability to assess project’s viabilityLack of reliable sector data in public domainUncertainty around grid extension and interactivity policySlow revenue growth due to difficulties in utility sale

N/A

Developing a new credit line for soft loans

Scaling up grants

N/A

N/A


as a whole is stagnating and many MSMEs are exiting the sector in favour of other solar-only applications. As such, this segment is expected to have lower rewards since MSMEs have difficulty in maintaining sustainable business models and ensuring steady cash flows from consumers for the energy that is purchased. Considering this risk-reward profile, the primary actors likely to be involved in this segment would be multilateral aid agencies and philanthropic

foundations in the provision of grants for MSMEs that have high social impact. However, if the risk profile can be partially mitigated other actors such as development finance institutions (i.e., NABARD) could be involved in the provision of soft loans.

Note: Cross-cutting barriers were considered by MSMEs to be the primary challenge to the growth of the sector. As such, addressing these challenges is the priority for this segment.



Establishing a formal secondary market for utility components to facilitate loans to the sector (in the absence of other collateral)



Product type

Debt

Subsidies

Equity/ Hybrid

Grants

All MSMEs stated a need for debt products (particularly soft loans & longer-term debt) for up to $2 million across multiple projects

MSMEs stated that the set-up subsidies (of 2/3 of total setup cost) were necessary in the near future

Some MSMEs were still interested in accessing patient capital (up to $2 million), but others had already diluted ownership significantly and were not seeking it

Some MSMEs seek grants towards project set-up; however, most MSMEs prioritize commercial financing



DescriptionThis segment includes MSMEs providing off-grid utility service at 26 kW – 100 kW, using biomass energy and through a BOM model. Currently, there are less than 10 MSMEs operating in this segment. The majority of MSMEs have been in operation for 5-7 years and there have been very few entrants in the past

three years, indicating that growth in this segment is relatively slow (particularly when compared to the solar sector). In fact, there is interest from existing MSMEs (both micro-small enterprises as well as larger enterprises) in exploring solar-biomass hybrid or solar-only technology, or switching to a BM model for biomass-only utilities.

Risk-reward profileThis segment has a medium-high risk because of difficulty in

DRE-4: Biomass small utilities, utilizing a BOM model

Soft loansLonger-term debt of up to 5-10 yearsDebt for working capital

Utility set up subsidies

Convertible debt from patient capitalPatient equityPrivate equity


Growth and expansionIndividual project set-up

Project set-up


Growth and expansion – at a very early/pilot stageR&DProject set-up

Some MSMEs have accessed debt as a part of the financing for certain projects. However, all MSMEs have found access very difficult for larger ticket sizes

Some MSMEs were able to access them, however others faced challenges with delays with disbursement

Most MSMEs were able to access equity or hybrid instruments in the past, to finance their activities

Most MSMEs were able to access grants from a variety of sources (HNIs, multilateral agencies, etc.)

Highlighting case studies of successful investments in DRE enterprises for a variety of commercial financial institutions, namely equity investors.


Introducing an online portal for small-scale RE MSMEs to gain information and engage on financing schemes and other issues.

Lack of assets that are considered collateralTenure requirements are too longCost of capital offered is too highUnstable cash flows of MSMEs FIs’ inability to assess project’s viabilityLack of reliable sector data in public domainDelay and uncertainty in subsidy disbursementUncertainty around grid extension and interaction policy

Lack of clarity and perceived delays in subsidy disbursementLack of capacity to meet demand for subsidies

Unrealistic expectations of equity investors regarding project and firm returns, and a suitable exit periodUnstable cash flows of MSMEsFIs’ inability to assess project’s viabilityLack of reliable sector data in public domainDelay and uncertainty in subsidy disbursementUncertainty around grid extension and interaction policy

Lack of adequate grant funds available in the market RE is sometimes considered to be less impactful than other sectorsLack of reliable sector data in public domainMSMEs in the sector could be perceived to be too mature for early/ pilot-stage enterprises

Developing new credit lines for soft loans and working capitalDeveloping a lease finance modelDeveloping mini-project financing options


N/A

N/A


utility-level operations especially due to fluctuating input supply, as well as uncertainty around grid extension policy. However, it is mitigated in part by some promising successes that certain firms in this space have had. Expected reward of this segment in the short-term is low-medium primarily due to the challenges in utility-level operations mentioned above. However, there is an untapped high potential market of unelectrified and underelectrified regions in areas where biomass input is easily available which is encouraging.

Likely financial actors who could play a role in the short term would be impact investors as well as angel investors with a desire to make social impact, provided they had more information about the segment. Development finance institutions such as NABARD could also be involved, especially in the provision of soft loans and possibly lease finance. Further, private project financing options can be explored through private NBFCs, as some of them have room to increase their exposure to the sector.


Establishing a formal secondary market for utility components to facilitate loans to the sector (in the absence of other collateral).Introducing an online subsidy tracker to further transparency on disbursement timelines.

Instituting ratings for utilities to allow FIs to benchmark utility quality.Establishing policy clarity on grid extension to address long-term risk and return concerns of potential investors




Product type

Debt

Grants

Subsidies

Equity/ Hybrid

All players stated a need for larger-ticket debt products (particularly soft or unsecured loans), of $300k – 1.5 million

While not explicitly stated, grants would be needed to help support the growth of the sector

While subsidies were not actively prioritized, MSMEs also noted that they would like to continue availing of the current system

MSMEs stated an interest for patient equity to supplement debt funding



DescriptionThis segment includes MSMEs providing off-grid utility service of up to 100 kW, using hydro energy and through a B or BM model. The geography of operations of MSMEs spreads across states with potential for small-scale hydro power, such as Himachal Pradesh, Andhra Pradesh, Orissa and other parts of

North-East India. Currently, there are about 5-7 MSMEs operating in this segment. The majority of MSMEs are in their early growth stage, having completed up to 3 years of operations. Overall, the hydro industry is poorly developed in terms of distribution networks and manufacturing capability, hampering firms’ ability to grow. In addition, what distinguishes this segment from others is that the key barrier to its growth lies in a fragmented policy and enabling environment.

DRE-5: Hydro utilities, utilizing a B/BM model

Soft loansUnsecured loans


Utility set up subsidies



Growth and expansion – at a very early/pilot stageR&D

Utility set-up


Most players have been able to access debt, although only of a low ticket size

No MSMEs had actively sought out or accessed grants

Given the dependence on government tenders, many MSMEs used subsidies for their operations

No MSME has been able to access equity or hybrid products

Low/ MediumLowNone

Providing technical assistance to MSMEs on how to improve financial and operational sustainability

Additional cross-cutting solutions that can help unlock value in the sector include the following:Instituting ratings for utilities to allow FIs to benchmark utility quality

Lack of adequate assets that are considered collateralUnavailability of high risk capital to match “testing” phaseSlow revenue growth due to difficulties in utility saleFIs’ inability to assess project’s viabilityLack of reliable sector data in public domainMisalignment in government tendering processDelay and uncertainty in subsidy disbursement

Misunderstanding of how grant funding could be used in the short term by MSMEsLack of adequate grant funds available in the market RE is sometimes considered to be less impactful than other sectorsLack of publically available sector-data

Delay and uncertainty in disbursement of subsidiesLack of capacity to meet demand for subsidies

Unavailability of high risk capital to match “testing” phaseSlow revenue growth due to difficulties in utility saleNascent sector with limited capacityFIs’ inability to assess project’s viabilityLack of reliable sector data in public domainMisalignment and inefficiency in government tendering process – this allows sub-standard products to enter the market, running product perception for both consumers, and investorsDelay and uncertainty in subsidy disbursementUncertainty around grid extension and interactivity policy

Scaling up unsecured loans and increasing the ticket size

Scaling up grants


N/A


Risk-reward profileThis segment is considered high risk because the application of hydro technology to the small-scale sector is still not well understood, the technology implemented can still be made technically superior and there are significant regulatory challenges with setting up a suitable utility. While in the long-term the reward could be high (given comparable examples in other geographies), the short-term reward is limited because the market is still

fragmented and sector awareness among FIs is low, so rapid growth is not expected. Considering these factors, financial actors likely to be involved in the short-term would need to be philanthropic foundations, multilateral donor agencies could potentially provide grants to MSMEs for R&D purposes. For slightly more mature firms, public sector banks and development finance institutions such as NABARD (especially in the provision of unsecured or soft loans) would be important players.

HighMedium Medium/ High


Introducing an online portal for small-scale RE MSMEs to gain information and engage on financing schemes and other issuesEstablishing a formal secondary market for utility components to facilitate loans to the sector (in the absence of other collateral)




Product type

Debt

Equity/ Hybrid

Grants18

All players stated a need for debt products (particularly working capital), for loans up to $200K

Most players stated a high need for patient equity between $100K and $2 million

Players stated a high need for grants of up to $500K

Players did not prioritize these grants as a sustainable source of enterprise finance



DescriptionThis segment is made up of over 15 improved cookstove MSMEs who design the cookstove, assemble it and distribute it through direct sales channels, an established third party distribution network, or through impact-oriented distribution networks. The

majority of these enterprises have only been operational for 3 years and are particularly small when compared to MSMEs in other RE consumer product segments.

Risk-reward profileThe cookstove segment is perceived to be higher risk among consumer product segments, primarily because there is limited

CP-1: Cross-market player in cookstoves for less than $120

Working capitalSoft loansLonger-term debt of up to 5-10 yearsCGTMSE



Sales-linked subsidies from CSR initiatives and grants

No player has yet been able to access CGTMSE loans, while working capital is very hard to access. However some players have accessed soft loans

Only certain players have been able to access equity products, in the form of patient capital and convertible debt

Few grants are available and the majority of players did not access them19

A few players were able to access these CSR grants to offset the cost of the cookstove for the end-beneficiary

Low/ MediumLowNone

Highlighting case studies of successful investments of cookstoves MSMEs for a variety of commercial financial


institutions, namely equity investorsEstablish national quality standards for cookstoves to help increase

Inventory costs Growth and expansion


Growth and expansionEarly stage financing R&DMarketing

N/A

Lack of assets that are considered collateralLess than three years of operations Lack of access to collateral-free loans under CGTMSELack of reliable sector data in public domainLimited understanding of how to approach banks by players

Low perception of profitability from the segmentExpected ROI in equity investment is too high for cookstove players to meet Limited set of product standards or regulationsLack of reliable sector data in public domain

Lack of adequate grant funds available in the market Lack of reliable sector data in public domain

N/A

Developing new credit lines for working capital Increase access to unsecured loans under CGTMSE


Scaling up access to grants

N/A


independent consumer demand for the product and it remains a “push product”. In addition, there are concerns about ensuring that only high quality products are financed as there is mixed adherence to quality standards. Rewards are expected to be low-medium in the short term from FIs because even though there is a strong market potential, uptake is likely to be slow and the market is not expected to grow very quickly (although it is expected to do so in

the long-term). As such, actors in the sector are most likely to be served by patient equity/impact investors who have an appetite for long-term rewards, and foundations/donor agencies who can provide grants to help grow the market. Finally, public sector banks or NBFCs could play a role, but would have to be educated as to potential to the sector and their investments would have to be de-risked.


The solutions presented here are only those which address a critical financing need and have a medium-high potential to unlock value Two different types of grants are included here as the availability and stated need vary significantly depending on the sub-typeGrant funding in the sector is typically available for pilot projects and market development

171819

certainty of investments in high-quality products and enterprisesProvide workshops and technical assistance to financial

institutions and investors on how to invest in and evaluate potential deals in the sector



Product type

Debt

Equity/ Hybrid

Grants

Debt is the highest need for players in this segment. Players seek working capital between $400K to $2m, and soft loans between $200k to $3m

Players stated a high need for patient equity between $100K and $2m

Players stated that their need for grants was not high



DescriptionThis segment focuses on the almost 10 MSMEs who derive the majority of their revenue from the design, procurement and sales (both through their own networks as well as through partnerships) of both basic and multifunctional SPLs. Most players in this

segment have been operational for 5-6 years, and have established a proof of concept and are looking to increase their operations both geographically across India as well as in terms of overall sales.

Risk-reward profileThis segment is perceived to have medium-risk – lower than most of the other segments in the consumer products market. This is because

CP-2: Cross market players in SPLs for less than $120

Working capitalSoft loansCollateral-free loans (e.g., CGTMSE)

Convertible debtPatient equityMezzanine


Two players were able to secure debt in the form of a long term loan and working capital loan with a ticket size between $200K-$1.3m

Only certain players have been able to access equity products, in the form of patient capital and preference shares

Select players were able to secure grants through competitions and international aid agencies

Low/ MediumLowNone

Highlighting case studies of successful investments of SPL MSMEs for a variety of commercial financial institutions, namely equity investors


Operational costs (particularly around maintaining and scaling inventory)


Growth and expansionEarly stage financing (first 3 years of operation)General operational costs

Provide workshops and technical assistance to financial institutions and investors on how to invest in and evaluate potential deals in the sector

Lack of assets that are considered collateralCost of debt is too high for playersLack of access to CGTMSE collateral-free loans

FIs’ inability to assess project’s viabilityLack of reliable sector data in public domainOutdated technical guidelines and lack of product standards


Developing new credit lines for soft loans and working capital Increase access to unsecured loans under CGTMSE


N/A


there is generally greater consumer awareness of solar products and the benefits that they bring to the consumer. In addition, the technology is better understood by financial institutions and there has been significant activity in the sector over the past few years. From the rewards perspective, there are expected to be medium-high rewards for two reasons: first, there is a growing market given an increasing awareness of the benefits of solar lanterns, and second, the

cost of the product is expected to decrease as the cost of LED bulbs and batteries continues to decrease making it even more accessible for the general population. In addition, there have been successful examples of companies growing quickly in this sector. Based on this profile, it is expected that impact investors (either patient equity or impact-oriented angel investors) or public sector oriented banks would be best suited to meet the financing needs of the sector.



Oversee and implement uniform import duty structures for imports of SPL components into IndiaRevision of MNRE guidelines technical specifications for SPLs to ensure alignment with the most updated technology

Establish national quality standards for SPLs to help increase certainty of investments in high-quality products and enterprises



DescriptionThis segment is made up of more than 15 enterprises that design, develop, procure and distribute (both by themselves and through partnerships) a range of SHSs– from basic to advanced systems – across India. While they are not involved in the actual manufacturing of the product, they usually own the design and

are involved in sales and distribution. Overall, this segment is experiencing high growth relative to other segments, with SHSs becoming one of the most highly demanded products in the RE space. Players in this segment are fairly well established, on average these enterprises have been operational for at least 8-10 years.

Risk-reward profileAmong consumer product segments (and indeed across other RE

CP-3: Cross-market players in solar home systems from $120 – $600

Product type

Debt

Equity/ Hybrid

Grants

Debt is the highest need for players in this segment, primarily for working capital, for up to $600K

Players stated a high need for patient equity of $300 - $600K with below-market interest rates (5-10%) and long term tenure (between 5-10 years)

Players stated that their need for grants was low




Convertible debt Patient equityMezzanine finance


One player was able to secure debt in the form of a collateral-free loan between $40K - $60K


Two players were able to secure grants through competitions and international aid agencies

Low/ MediumLowNone



Working capital for Inventory costs MarketingGeographic expansion


N/A

Revision of MNRE guidelines technical specifications for SHSs to ensure alignment with most updated technology Establish national quality standards for SHSs to help increase

segments) this segment has the lowest relative risk because the technology is fairly well understood, the enterprises have been in operation for a number of years, and there is a strong awareness of the product among potential consumer segments. Returns in the short-term are also perceived to be medium-high given that the market is growing quickly and many enterprises have been able to demonstrate profitability in serving their customers (however, it must be noted that these are relatively high returns for the sector

at 10-14%, and not absolute high rewards). Given this profile, it is likely to attract a variety of commercial financial institutions such as public sector banks and even private sector banks, as well as patient equity investors. As the market and enterprises mature, standard equity investors may also become interested in the market.


Lack of assets that are considered collateralCost of debt is too high for playersLack of access to CGTMSE collateral-free loansTenure of debt products is too short (2 to 3 years, instead of preferred 5 years)

FIs’ inability to assess project’s viabilityLack of reliable sector data in public domainLack of product standards or regulationsTarget ROI for equity is too high for players to meet


Developing new credit lines for soft loans and working capitalIncrease access to unsecured loans under CGTMSE


N/A



certainty of investments in high-quality products and enterprisesHighlighting case studies of successful investments of SHS MSMEs for a variety of commercial financial institutions, namely equity investors

Oversee and implement uniform import duty structures for imports of SHS components into India



DescriptionThis segment is made up of more than 10 MSME solar water pump players engaged in R&D and in procurement of solar water pump components (i.e., solar panels, an AC or DC pump, and generally a converter or controller to act as an interface between

the pump and panel). On average, actors have been operational for just under three years and despite being relatively new, are undergoing steady growth. Players have a wide geographic presence given that more than 90% of all SWP players rely on MNRE and government-based subsidies, and that these subsidies and state-based projects are present and distributed across India.

CP-4: Solar water pump procurers

Product type

Debt

Equity/ Hybrid

Subsidies

Debt is the highest need for players in this segment. The ideal form is collateral-free loans with a ticket size between $300K - $800K

Players stated a high need for patient equity of up to $300K with below-market interest rates (5-10%) and long term tenure (5-10 years)

Subsidies of up to 90% of the final cost of the product (depending on the state)




Convertible debt Patient equityMezzanine finance

JNNSM and MNRE solar mission schemes

Access to debt financing was limited – only two players were able to access it (in the form of CGTMSE loan or a working capital loan)


The majority of players state that they accessed subsidies and won tenders through the MNRE

Low/ MediumLowNone

Highlighting case studies of successful investments of SWP MSMEs for a variety of commercial financial institutions, namely equity investors


Inventory costs Geographic Expansion


Operational costs


Risk-reward profileThe risk of the solar water pump sector is perceived to be medium because while there is strong support for the sector from the government (through the JNNSM subsidy and state-based SWP schemes) and there is growing consumer awareness of the efficacy of the product, the sector is still vulnerable to policy shifts which can impact the overall sustainability of the market. Returns from

investments in this sector are also expected to be medium as there is a significant unmet need and a growing market, but the speed at which the market will grow will be constrained by the speed at which subsidies can be disbursed. Given this profile, this sector is most attractive to commercial actors who have the opportunity to wait longer-term for rewards (i.e., impact investors, or public sector banks).


Lack of assets that are considered collateralCost of debt is too high for playersLack of access to CGTMSE collateral-free loansTenure of debt products is too short (2 to 3 years, instead of preferred 5 years)

FIs’ inability to assess project’s viabilityLack of reliable sector data in public domainLack of product standards or regulationsTarget ROI for equity is too high for players to meet

Inability to predict size and type of government tender which causes liquidity stress in the case a tender is won Perceived delay in disbursement of subsidies

Developing new credit lines for soft loans and working capitalIncrease access to unsecured loans under CGTMSE Develop a lease finance model

Knowledge initiatives included below

Developing a pledge-fund guarantee facility



Revision of MNRE guidelines technical specifications for SWP to ensure alignment with most updated technology



DescriptionThis segment is made up of relatively established and large-scale RE-dedicated distributors who focus on the distribution of RE consumer products to rural consumers. Most players in this segment undertake rural marketing initiatives and create VLE

networks to support rural outreach, sales, and after-sales support. This is a relatively small segment currently and its long-term potential may be limited by the fact that its role can be taken up by traditional distributors in the space. Risk-reward profileThe relative risk profile of this segment is perceived to be medium

CP-5: RE-specific distributors, across all RE consumer products

Product type

Debt

Equity/ Hybrid

Grants

Subsidies

Debt is the highest need for players in this segment for ticket sizes between $200K-$800K

Players stated a high need for patient capital for expansion purposes between $1-$2m

Select players stated the need for grants as flexible funding to be used towards expansion, R&D, training and outreach, or testing new RE products

While subsidies assist with consumer finance, they present numerous challenges and are not central to enterprise finance needs



Revolving overdraft facility or structured guarantees for working capitalCollateral-free or low collateral loans Unsecured loans

Patient capital

One-timeMilestone basedDonation

Government subsidies (mainly used for SHS)

Players have been able to access debt in the form of an overdraft facility and a low-collateral loan. However working capital remains hard to access for all players

Players state that they face significant challenges accessing equity, especially within India.

Players were able to access grants from HNIs, Foundations, through awards and international NGOs

Select RE distributors are able to access JNNSM scheme subsidies for SHS products

Low/ MediumLowNone

Highlighting case studies of successful investments of distributor MSMEs for a variety of commercial financial institutions, namely equity investors


Inventory costs and inventory cycleMarketing campaigns for all RE productsGeographic expansion


After-sales serviceExpansion of distribution network

Increase RE sales for SHS, and increase revenue

Establish national quality standards for cookstoves to help increase certainty of investments in high-quality and other products and enterprises

because the enterprises have shown some success and have been established for a few years, and there is growing demand for the RE products (namely solar portable lanterns and solar home systems). However, rewards in the sector are expected to be low, even in the short-term, because these firms depend on high volume to achieve profitability which will take time given the speed at which the market is growing. In addition, many of

these enterprises also partner with NGOs to conduct specific programs for local communities (e.g., improving living conditions or increasing income through their VLE training and salesforce structure), which could further strain their profitability. As such, actors interested in this sector are likely to be patient equity investors who have long-term appetite for rewards, public sector banks and grant-making organizations.


Lack of assets that are considered collateralCost of debt is too high for players (e.g., 13-18%, instead of preferred 7-10%)

FIs’ inability to assess sector’s viabilityLack of reliable sector data in public domainLack of RE product standards or regulationsLack of availability of productTicket size misalignment

Ticket size misalignment

Uncertainty, delay, and shortfall in subsidy disbursement

Developing new credit lines for working capital

Scaling up convertible debt and mezzanine financing through knowledge initiatives targeted at both investors and RE MSMEs

N/A

N/A (see non-financial solutions below)






Enterprise Finance: Implications for financial solutions to pursue further

5Based on the barriers that segments face in accessing finance, there are a number of product-specific solutions that can be developed to help unlock access to and supply of specific types of finance. In addition to the broader investments in strengthening the knowledge and

policy ecosystem (explored in further detail in Section 9), there are a number of financial products which can be either piloted or scaled up to help unlock value for the sector which are outlined in the table below. Each solution is described across multiple dimensions.

Products Solution(s) RationalePrimary action required

Lease finance

Mini project finance

Designing a new financial product


Developing a lease finance model. The lease finance model involves linking a loan to the purchase of an asset. This can be implemented in the DRE utility sector by enabling utilities to lease assets to VLEs and supporting them in the process or by supporting the leasing of RE equipment by an enterprise. As with the traditional lease model, the loan would be paid back over a period of 3-5 years.

Developing a mini-project finance model. This model involves directing financing not directly to an enterprise, but rather directly towards a specific set of projects. This model would be implemented through a mechanism which would involve providing technical assistance to a bank/ NBFC to identify a high potential mini-utility enterprise and facilitate the provision of project finance (covering 70% project costs) to set up multiple mini-utilities over a period of ~3-5 years.

This would help MSMEs obtain financing for a bundle of projects (as opposed to one project a time) and ease the process of financing. This could serve as a more diversified approach which could help de-risk the value proposition for FIs.

Primarily applicable to high growth and larger sized DRE utilities because a minimum ticket size is required and can only be applicable for a collection of planned projects which these players have the capacity to implement.

This would decrease the burden of upfront payment for the MSME and would help them set up more plants with the available capital. If paired with a secondary buy-back facility and effective quality guidelines, it can also help to de-risk the investment for a financing institution.

Primarily applicable to DRE segments and SWP segment because it requires a larger ticket size to be viable and assets need to be able to be easily tracked.

Applicability across segments

Debts



Products ProductsSolution(s) Solution(s)Rationale RationalePrimary action required

Primary action required

Soft loan

Working capital loan

Grants

Unsecured loan

Subsidies

Secured transactions

Convertible debt

Mezzanine financing



Investing in knowledge & awareness

Addressing policy gaps



Investing in knowledge & awareness

Establish a line of credit. Soft loans are helpful for earlier stage enterprises as they require lower repayment costs. This model would involve developing a line of credit to a specific lending institution (preferably public sector bank such as SBI) with a specific mandate to direct more soft loans towards small-scale RE sector.24

Establish a line of credit. Working capital needs are hard to address with currently available debt products. A line of credit from a development agency to FIs with a specific mandate to increase the provision of working capital loans for RE MSMEs would help to meet this demand.25

Develop an information hub. Access to grants is limited by a lack of information. Establishing a central information facility whereby interested parties would be able to access information on the availability and their eligibility for grants could help address this.

Establishment of a secured transaction facility. Developing alternative forms of collateral can be an important way to unlock finance for many in the sector, as many do not have bank-accepted collateral. A secured transaction facility would set up a registry of approved assets which could be substituted as collateral, which would then enable enterprises to use alternative assets such as receivables, machinery, inventory, etc. as collateral to access funds.

Scale up access through the CGTMSE scheme. Lack of access to bank-accepted collateral is a persistent issue for RE MSMEs. This solution would focus on working with relevant government bodies (e.g. SIDBI) and find mechanisms to speed up disbursement in case of a default in order to incentivize more FIs to offer loans under the CGTMSE.

Establishment of a pledge guarantee fund. Delays in the disbursement of subsidies often exacerbate financing gaps for enterprises. A pledge guarantee fund, set up by a development agency, would help to accelerate the process and delays in could be reduced significantly (e.g. to 2 months instead of 6-12 months. It would function as such: RE enterprises would be able receive funds from commercial banks based on the initial approval of subsidy. These banks would be able to tap into the pledge fund to recover the amount lent before the amount is actually disbursed into the fund by MNRE. However, this would be a stop-gap solution until the capacity of the subsidy-disbursement authority can be built up.

Scale up awareness of financial product. Hybrid products often provide equity in forms that are more amenable both for the investor and investee but are not well understood in the market today. As such, this solution advocates conducting workshops and organizing forums for investors to highlight success stories and potential for CD or mezzanine financing; as well as conducting workshops for RE MSMEs on how to access and use CD.

This would address the working capital constraints that many segments face. From the perspective of the FI, it would provide them with an external source of capital to extend soft loans to RE MSMEs without needing to tap their existing pool of funds.

This would address the information gap regarding the availability and eligibility of RE enterprises for grants, allowing them to be more selective in applying for grant funding.

This would reduce the time required to claim defaults on unsecured loans made under the scheme by commercial banks, incentivizing them to extend more of these loans to RE MSMEs.

This would mitigate the risk due to unexpected delays in disbursement of subsidies by the MNRE, reducing working capital constraints and improving the overall financial health of RE MSMEs.

This would mitigate the barrier related to requirement of fixed assets as collateral to access debt from commercial banks. The transactions facility would help FIs sell these alternative assets to recover the loan amount in case of default.

This would increase awareness in the RE market at two levels: potential investors would develop a better understanding of the small-scale RE sector and RE enterprises would gain knowledge about these financial products (including applicability, eligibility criteria, and implications for their businesses).

Primarily relevant across CP segments and DRE-4 as they are the ones with significant working capital constraints

Broad applicability across multiple MSME segments

Broad applicability across all MSME segments since these enterprises typically lack fixed assets acceptable as collateral to FIs.

Applicable primarily to those segments who are dependent on subsidies (i.e., DRE-2, DRE-4, DRE-5 and CP-4)

Applicable to segments which have assets of a slightly higher value (i.e., DRE segments and solar water pumps), which are more easily tracked and have greater inherent value.

This is applicable across most segments – particularly for enterprises that have shown proof of concept and need/prefer equity financing as a mechanism for scale and need an easier way to access it.

This would provide MSMEs with access to debt products at affordable rates, and would give FIs an external source of funding to be able to supply the sector with the necessary debt without dipping into existing funding pools.

Financial product most sought by RE MSMEs due to flexible tenure and low interest rate. Broad applicability across all MSME segments



Equity/ Hybrid

Grants, subsidies and other

There is also an option to develop a standalone soft loan facility to be created to direct these loans specifically to the RE MSME sector – however this is harder to implement and is therefore not prioritized here. As with soft loans, a standalone working capital facility was also considered but not prioritized for further analysis.

24

25



As noted in the analysis above, each of these solutions has the potential to unlock value across a number of different segments. . Not every solution outlined above will be applicable to each of the segments in the RE MSME market. However, as the exhibit below demonstrates, there are solutions, which have broad applicability in one sector (i.e., DRE utilities vs. consumer products) or across both sectors. In particular, there are a few financial solutions to consider in further detail:

Across both DRE and CP segments: there are five key products that emerge: a credit line for working capital and/or soft loans, scaling up access to unsecured loans through the CGTMSE scheme, scaling up access/supply of CD and mezzanine financing, scaling up access to grants, and setting up a pledge guarantee for subsidies

Across DRE segments only: there are two key products to consider further: lease finance and mini-project finance

Exhibit 9

DRE1

Solar pico utilities (BOM model)

DRE2

Solar pico utilities (BOM model)

DRE3

Wind-solar mini utilities (BM model)

DRE4

Biomass small utilities(BOM model)

DRE5

Hydro utilities

CP1

Cross market cookstoves players, less than $120

CP2

Cross market SPL players, less than $120

CP3

Cross market SHS players from $120 - $600

CP4

Solar water pump procurer

CP5

Distributors of RE products (across price ranges)

Soft loan credit line

Working capital credit line

Partial Credit Gurantee for trade finance

Scale up unsecured loans

Scale up convertible debt

Scale up mezzanine financing

Scale up access to grants

Pledge guarantee for subsidies


Lease finance

DEBTS PATIENT EQUITY OTHERS

Mini-project finance

Applicability of enterprise financing solutions across market segments


Note: The applicability of solutions to a segment is based both on the stated need for a product from the market players in that segment, as well as an analysis of which products are best suited to unlock value in the sector in the short-term. For each segment, a shortlist of solutions was selected as “highly relevant” based on the shortlist of products available.

Highly relevant product

Partially relevant product

Not relevant



Prioritizing these solutions in terms of their ability to unlock value and their ease of implementation, six potential interventions emerge as strong candidates to pursue further. Each of these solutions was ranked according to two dimensions:

Ability to unlock value across segments: this takes into account the number of segments a solution is applicable to (as per the exhibit above), the importance of the solution in addressing key financing needs of players in relevant segments, and the ability of players to be able to access the solution (i.e., if enterprises can easily use the mechanism).

Ease of implementation: this takes into account the path that would be required to bring the solution from theory to reality and to scale it up in the context of the RE sector. As such, it considers the complexity of the activities required, the number of stakeholders required, the need for changes in the enabling environment, the timeline that it would take to that would be required to design the solution, and the risks and challenges with adapting it to the RE sector.

Mapping these solutions, solutions can be identified and prioritized across different “implementation horizons” (high, medium and low) as demonstrated in the exhibit below.

Assessment and prioritization of enterprise financing solutions Exhibit 10

Pote

ntia

l to

unlo

ck v

alue

1

Ease of implementation2

Equity/hybrid products recommended for further analysis

Debt products recommended for further analysis

Other products recommended for further analysis

Size of the bubble indicates estimated demand for financing in USD3

High

Hig

h

Medium

Med

ium

Low

Secured transactionfacility

Grants(scale up)

Convertible debt(scale up)

Mezzanine financing(scale up)

Mini-project finance pilot

Lease finance pilot

WC credit line

Unsecured loan(scale up)

Soft loan credit line

Low

Source: Interviews with RE MSMEs; Interviews with FIs; Interviews with experts; Dalberg analysis

Note: 1 Potential to unlock value captures the number of segments a solution is applicable to, importance of the solution in addressing key financing needs of players in relevant segments, as well as expected level of outreach of the solution; 2 Ease of implementation measures the expected role of engagement of other stakeholders (e.g. RBI), primary activity part of the solution (knowledge and awareness, design of new financial product, policy change, etc.), and past experience with a similar financial solution; 3 Based on stakeholder interviews; indicative only;

Pledge guaranteefacility

High ease of implementation: two primary solutions emerge here as high potential to pursue further: convertible debt scale-up and mezzanine financing scale-up. However, given that mezzanine is still a new product for MSMEs in India, and the overall potential market demand for financing is not as high, focusing on convertible debt in the short-term would likely yield greater results and impact

Medium ease of implementation: there are two primary solutions that emerge here: (i) setting up a pledge guarantee facility to address the delayed disbursement of subsidies, (ii) developing a credit line to scale up access to working capital loans and soft loans. Scaling up access to unsecured loans is also included here, but because it has a lower demand for financing, it does emerge as a strong solution to pursue further

Low ease of implementation: In this section, there are two potential solutions which emerge strongly: (i) a lease finance pilot, (ii) developing a mini-project

finance product which can be used to unlock value for specific DRE utility projects in particular. Secured transactions are also a valuable intervention, but because of the difficulty in implementing that solution in particular, even in the long-term, it is not prioritized for further analysis

Based on applicability across segments and potential for impact, four solutions are explored in further detail in Annex 4: (i) lease financing, (ii) mini project finance, (iii) developing a credit line, and (iv) a pledge guarantee facility. For each product, the analysis includes a more detailed description and rationale for the solution, guidance on how it would work in practice and who the key stakeholders need to be, the impact that this solution is likely to have on different segments, likely risks and mitigation strategies and next steps required to scale up the solution.



6Consumer finance: Summary of findings

Growing the base for RE consumer products is primarily due to a lack of consumer awareness rather than limitations in consumer financing products. However, consumer financing can play an important role in making the market more attractive for different segments of the population. As the market for consumer products grows, through consumer awareness programs for example, there will remain parts of the population for whom it will be difficult to afford products without the aid of consumer financing options. In addition, financing options can also make the market more attractive to potential consumers who are “on the fence” about the purchase decision. It is therefore still valid to consider the needs, barriers and solutions for consumer finance – this forms the basis of the analysis of this section of the report.

Current state of consumer finance providers in the marketWhile there are many of consumer finance providers in the market, few have deep engagement across the sector. The exhibit demonstrates the current activity of players in the market based on interviews with enterprises and consumer finance providers. Much as with enterprise finance providers, these providers can be

segmented using history of consumer financing activities, and targeted interviews with financial institutions to test interest and perception of the market in the future. In doing so, three groups of stakeholders emerge: (i) Group 1: those who already engaged in the sector and whose participation is likely to continue, (ii) Group 2: those whose presence is limited today, but could be scaled up in the medium-term (within 3-5 years), and (ii) Group 3: financial institutions who are unlikely to enter the market in its current form. Details of each of these groups is included in further detail below.

Consumer finance: Summary of findings

Presence of consumer finance providers across market segmentsExhibit 11

CP1

Cross market players in cookstoves for less than $120

CP2

Cross market players in SPLs for less than $120

Mic

rofin

ance

In

stitu

tions

Regi

onal

Rur

al

Bank

s

NA

BARD

loan

s

CSR

dona

tions

Phila

nthr

opic

fo

unda

tions

RE p

rodu

ctsu

pplie

r

Mob

ile s

ervi

ce

prov

ider

s

Publ

ic s

ecto

rba

nk

Priv

ate

sect

orba

nk

Fore

ign

bank



Breakup of mode of purchase of solar products across different price categories1 N = 164

Consumer�nance solution

Free of cost

Own savings orpersonal loans

Source: As per �eld surveys conducted by Dalberg on solar lighting products across �ve states in India (June-July 2013); Dalberg analysis

Note: The table on the right hand side indicates use of �nancial products only. In addition, enterprises have tried innovative business models such as rental model, pay-as-you-go model, etc. but these have not been captured in the above table.

< USD 25 USD 25 - 100 USD 300 - 600USD 100 - 300 USD 600+

Dat

a no

t ava

ilabl

e

56%82%

67%73%

20%7% 1%

16%44%33%

Presence of consumer finance providers across market segments

CP3


CP4


CP5


Mic

rofin

ance

In

stitu

tions

Regi

onal

Rur

al

Bank

s

NA

BARD

loan

s

CSR

dona

tions

Phila

nthr

opic

fo

unda

tions

RE p

rodu

ctsu

pplie

r

Mob

ile s

ervi

ce

prov

ider

s

Publ

ic s

ecto

rba

nk

Priv

ate

sect

orba

nk

Fore

ign

bank


Source: Interviews with market players; Interviews with FIs; Interviews with experts; Dalberg analysis

Medium presenceLow presenceNo presence High presence

Exhibit 11 (contd.)

Note: Ratings are based on the number of FIs currently active in that market segment on discussion with MNSEs. “Low presense” indicates only one player has accessed consumer financing from that source, “medium presense’ has two players, and “high presense” indicates that 3 or more expertises have been able to access consumer financing from that source.

Philanthropic foundations have typically provided grants to RE MSMEs to allow them to supply their products to consumers at reduced prices. These could continue to be an important source of consumer finance in the short-term. However, their sustainability and effectiveness in addressing the long-term concern due to consumer finance are not expected to be high. Ex. Shell Foundation.

CSR donations have been primarily restricted to the cookstoves sector. The short-term could witness an increased flow of corporate donations to the sector as companies gear up to implement the CSR bill. However, similar to philanthropic foundations, CSR donations are not expected to be a long-term solution for consumer financing for the sector.

Group 2: Financial players expected to have higher levels of engagement in the medium-long term. This category includes two actors who could be leveraged, although in the medium-long term only. These players presently do not have a presence in the sector due to various barriers (as discussed in section 6.2) and are unlikely to engage in the short-term. This category comprises the following players:

Public sector banks are currently not involved in providing consumer finance for RE products for to multiple reasons. The ticket size for RE consumer products is usually too small to make business sense and abundance of sub-par products and lack of quality standards have further restricted their involvement. Getting public sector banks on-board through the SHGs linked to their branches would require addressing these issues effectively – as such, this remains a medium to long-term solution (more than 2-3 years away).

Group 1: Financial players likely to have high levels of engagement in the short-term. This group includes financial players who presently provide consumer financing for RE products and have the potential to increase their footprint in the sector in the short-term. This category is made up of the following key players:

Microfinance institutions are an important source of consumer finance although they are not expected to be the silver bullet for RE consumer finance. Most MFIs have a strong localized presence in select areas and interactions with them indicate that they are looking to increase their presence in this space. However, this is contingent upon three critical factors – knowledge about quality RE products, availability of quality after sales service from manufacturers, and independence from responsibilities such as marketing and servicing of RE appliances. MFIs have generally suggested that they would like to increase their presence in the sector provided these challenges are addressed. Ex. SKS, Fullerton, Muthoot.

Mobile service providers are expected to be involved as a channel for payment rather than as a source of finance. As per current RBI regulations, the mobile banking/ payment services are restricted to existing bank customers and are further subject to other requirements such as KYC (Know Your Customer), which has restricted the growth of m-payments in India. Moreover, studies indicate that security of transactions and reliability of technology are other key barriers facing the growth of this sector. This solution would require significant efforts in policy advocacy and knowledge dissemination, and remains a longer-term solution.

Group 3: Financial players expected to have little or no engagement even in the long term. This category includes players who do not have a footprint in the sector and are unlikely to engage even in the long term. This category comprises two financial players:

Private sector and foreign banks both look for relatively safe borrowers and collateral coverage to secure their loans. These barriers, in addition to the ones included in the discussion on public sector banks are most likely to prevent any engagement of these players even in the long term.

Demand for consumer financing productsThe majority of consumers still rely on personal or informal savings as the primary mode of financing consumer products. Based on a field survey across five states in India, over half (and up to 82%) of consumers identified used personal savings or personal loans (i.e., from neighbours, family, etc.) to purchase the CP in question. Formal consumer financing solutions, particularly for RE products, are not yet entrenched in the market.

Regional rural banks have been involved in the sector to a limited extent so far and there remains potential to increase their presence through their bank linked SHG programme. Their level of engagement has been restricted largely due to technical expertise and knowledge about the sector – addressing these gaps would be instrumental in scaling their footprint. Ex. Karnataka Grameen Vikas Bank, Aryavrat Grameen Bank.

Government agencies have played an important role in CP sector, especially for products such as SWPs, which would be too expensive in the absence of subsidies. As the penetration of these products increases over the next few years, governments will have an increasingly important role in maintaining the flow of subsidies and disbursing them on a timely basis to help increase uptake of these products. Interviews with relevant stakeholders indicate that subsidies for RE products are not likely to be phased out in the short-term.

Consumer financing sources used for purchase of solar lights across five states in IndiaExhibit 12



Of the limited consumer financing options available, there are six primary types of products that are currently offered. The first is the traditional micro-loan that can either be for individual or group in nature. Second, there are examples of trade finance wherein credit is extended from the retailer or distributor to the consumer. Third, for specific segments, there are consumer subsidies which exist to help offset costs. Fourth, certain segments have used a “pay-as-you-go” model allowing consumers to pay for the product in instalments. Grants from philanthropic sources, donors and government institutions are also used in the market to improve affordability – these can either be structured

MFI loans: to date, they are the most commonly used formal source for consumer finance and have presence across all segments, with a particularly strong footprint in SPL (CP-2) and SHS (CP-3) segments. MFI microloans often tend to be “top-ups” on existing loan structures due to the small ticket size of most RE products - this is typically seen for low-priced product categories such as cookstoves and SPLs. However, a few larger ticket size RE products can have specific loans attached to them as well – this is typically applicable for high-priced RE appliances such as SHSs and SWPs.

RRB loans: these loans have been limited to high ticket RE products such as SHSs (CP-3) and SWPs (CP-4). This is largely due to unfavourable economics of low-ticket loans and a general lack of credit history among individual borrowers. However, there remains high potential to scale up RRB involvement in the sector, particularly by facilitating group loans to bank-linked SHGs. This is further explored in Section 8 of the report.

Micro-savings accounts are highlighted as having potential in the market given the reliance on informal or personal savings to purchase the CPs. However, they are not currently used extensively for reasons explored in further detail in the section below. Trade financeAt its core, trade finance involves provision of credit to the end consumer by the seller or the distributor. Interviews with RE enterprises and field surveys indicate that trade finance is restricted to the SPL (CP-2) and SHS (CP-3) segments at this stage – initial evidence suggests that it is more prevalent for SHSs. The few RE MSMEs that are interested in providing credit to their consumers typically route it through their distributors – they typically extend a line of credit to the distributor, who then provides credit to the consumer. This could potentially be a useful mechanism to provide consumer finance but its scalability remains challenging primarily due to financing constraints (particularly in working capital) faced by RE MSMEs themselves. As such, it is not in high demand from most of the MSMEs interviewed.

SubsidiesSubsidies have also been an important source of consumer financing for selected segments – notably the SHS (CP-3) and SWP (CP-4) segments. As such, MSMEs in these segments continue to prioritize them as a key need. For both of these segments, the subsidies have been routed through the government. In the case of SWPs,

as one-off disbursements or as interest rate subsidies routed through other consumer finance providers.

The primary need or demand is for micro-loans and savings products across a number of segments. Based on conversations with MSMEs, the primary need for consumer financing product remains the traditional micro-loan or savings product. Select segments – such as those operating in SHS or SWPs which already avail of subsidies – prioritized the continuation of consumer subsidies. Pay as you go models were also highlighted as a potential mechanism by which to spread the cost for the end-consumers. This is summarized in the exhibit below.

they can provide up to 85% of the consumer subsidy, and up to 30% of the cost of the SHSs. Given that the success of these product sectors is in linked to the availability of these subsidies in the short-term, they are in significant demand from these enterprises.

Pay-as-you-goAt its core, the pay-as-you-go system involves the seller or distributor selling the product for an upfront payment covering 10-20% of the product’s price. After this initial payment, the consumer pays the company depending regularly based on the energy usage – part of these recurring payments are used to meet the price of the product and the balance goes to the company as profits. Initial evidence suggests that the model has been tried out in the SHS (CP-3) segment but is yet to reach high usage and would be primarily helpful for higher ticket items – such as SHSs or SWPs. As such, there is demand for this type of model in these two segments.

GrantsMSMEs have been able to access grants in the past, usually in one of three forms. The first is as a corporate grant typically in the form of CSR initiatives – a large company will bulk purchase the product and provide it at a fraction of the cost to the end-consumer. These have been used by select RE enterprises in the cookstoves space (CP-1). This is not a very prevalent model in the market, but may grow in popularity as a result of the CSR mandate under the Companies Act. The second is through philanthropic grants which are typically routed in the form of a grant or donation to the MSME and the benefit is reaped by the consumer. The third is in the form of an interest rate subsidy that is routed through other consumer finance providers and enables the consumer to access MFI loans (or other loans) at a discounted rate. Grants are not typically used (they have only been used in the cookstove segment (CP-1)) and are not prioritized by enterprises as an area to prioritize in terms of solutions.

Addressing these financing needs first requires an understanding of the barriers that currently exist in the market. These barriers include the ones faced by (i) financial institutions in more actively participating in the sector, and by (ii) consumers in being able to access the finance they seek. This is explored in the next section.

Enterprises’ stated need for consumer financing product typesExhibit 13

CP1

Cross market players in cookstoves for less than $120

CP2

Cross market players in SPLs for less than $120

CP3


CP4


CP5


Micro-loans and savings

Trade finance Subsidies Pay as you go model

Grants


Medium/low presenceNo stated need High need

Micro-loans and savingsThe primary stated need across all segments is for traditional micro-loans and savings products. Micro-loans have been used in the market before and have been used across all RE product segments included in this study. Although microloans are typically designed as individual

loans, they have also been structured as group-based loans, generally to low-income groups that lack credit history or collateral. This allows the group members take a joint responsibility for loan repayment, reducing the default risk. There are two types of micro-loans that are primarily used and demanded by MSMEs and their consumers:



Consumer finance: Barriers to the supply and access to different financial productsThis section discusses various barriers that have restricted access to specific financial products for RE consumers. These barriers take into account the perspective of

both consumers as well as the relevant FIs. The table below evaluates microloans (from MFIs and RRBs), microsavings, trade credit, mobile-based pay-as-you-go systems, and subsidies.



Microloans Limited penetration of MFIs in key geographies: Most MFIs tend to have a strong footprint in the southern states26 and have a limited presence in states with high need such as Uttar Pradesh, Bihar, Jharkhand, and Chhattisgarh. These states are important for two reasons: first, they represent a large number of under/ unelectrified households in India, and therefore, a large potential market for RE products. Secondly, households in these states typically have lower incomes than those in the southern states and are more in need of financial assistance. However, due to the limited footprint of MFIs in these states, microloans continue to be unavailable for a large part of their population.

Emphasis on credit history of individual borrowers: RRBs typically require borrowers to be able to provide a credit history to avail of consumer loans. As such, most borrowers have had no prior interaction with a banking institution, and do not have a credit history. This limits their ability to access consumer loans from RRBs.

Cost of borrowing considered too high by potential RE consumers: Microloans are typically priced at 13 – 18%, which is considered too high by potential RE users - the desired rate would likely be in the range of 10 – 12%. This cost of RE loans is considered particularly high with respect to the perceived value of the RE product for most consumers. Further, rural households generally find it difficult to service these loans, because their incomes often tend to be both low, as well as variable (e.g. seasonal in nature).

Lack of customized financing products around savings to facilitate purchase of RE products: Field surveys conducted by Dalberg indicate that majority of solar lights users rely on informal savings systems to finance their RE products. As such, there exists a gap in the availability of savings oriented financing products for potential RE consumers, making it hard for them to access these solutions.

Lack of trust among households in depositing their savings: Research by MicroSave27 indicates that there is a lack of tracking and auditing provisions for the management of group savings at

Ticket sizes considered too low for certain RE products: Most FIs are reluctant to provide loans for small-ticket RE products - this is particularly true for products such as cookstoves, SPLs, and certain SHSs that are priced at less than $120. The high transaction costs on these small ticket items limit the margins for MFIs, limiting their incentives to engage in the sector. Unwillingness of MFIs to be last-mile delivery agents or after sales service providers: One of the key factors limiting MFI engagement in the sector is the role they are expected to play. Most MFIs see themselves primarily as financiers, and not as last-mile distributors or as sales service agencies. However, enterprises often expect MFIs to take on both of these responsibilities, limiting the potential for their engagement. This is indicated in the limited scalability of MFI based partnership models in India so far – most MFIs typically do not have the bandwidth to sell, finance, and service RE products. However, there are early indications that certain MFIs are now looking to establish dedicated distribution channels for a variety of RE products, but this remains restricted to large MFIs with a large client base.

Misperception among FIs that the cost of serving microsaving accounts makes them unviable: Studies28 indicate that the cost of serving savings accounts with balance less than USD 100 could be 250-300% of the account value. To that extent, serving these accounts is unviable for FIs. However, studies by CGAP indicate that these accounts are indeed profitable – loan sizes taken out by microsavings clients exceeded their savings balances by a factor of 70 or more. Therefore, their combined effect is able to mitigate the profitability concerns of standalone microsavings accounts.

Microsavings



Trade finance

Pay-as-you-go

both the SHG and the partner organization level. This makes households wary of depositing their savings and they prefer informal savings systems. Further, chit funds offer a potential solution but the unregulated nature of this market and past frauds have given it a poor reputation, limiting consumer interest. Tying savings to a tangible product can help to alleviate some of these concerns.

N/A

Limited prevalence of pay-as-you-go payment system in the Indian RE market: Very few RE MSMEs presently offer the pay-as-you-go system to their consumers. This has affected the uptake of this system in two ways– low awareness among potential consumers and a lack of opportunities for consumers to avail of it.

Lack of enabling environment to encourage microsavings products: Most FIs cite the lack of a supporting environment as the primary reason for not rolling out microsaving products to their customers. Regulations in India place restrictions on the ability of NGOs and NBFCs to take deposits, and as such, only 254 NBFCs in India are allowed to take deposits.29

Low demand for formal savings systems from households due to seasonal incomes: Most rural households in India have seasonal incomes and there is a high propensity to spend in months with high incomes. Moreover, there is little opportunity to save during low income periods. Both of these factors contribute to the prevalence of informal savings and low demand for savings oriented financial products. Therefore, FIs have little incentive to develop these products.

Unwillingness of RE MSMEs to provide financing solutions to consumers: Several RE MSMEs indicated a strong preference for restricting their role to RE product development and sales only. Most of these players do not see themselves as financiers and are not keen on playing that role.

Working capital constraints for RE MSMEs across the sector: As discussed in the section on enterprise financing, RE MSMEs (including distributors) are typically faced with their own working capital constraints. As a result, they are generally not in a position to extend financing to their customers.

Financial constraints for RE MSMEs, including enterprises and distributors: Most RE enterprises in the CP space have working capital constraints and prefer to receive their payments upfront from consumers. The pay-as-you-go model would reduce their upfront revenue to about 10-30% of the product price, thereby increasing their working capital requirement. For this reason, most RE enterprises do not offer a pay-as-you-go system to their consumers.

Limited uptake of mobile-based payment platforms used for recharge payments: Mobile based payment systems are yet to take off in India due to a combination of the regulatory barriers and unreliable technology. These systems are not the preferred payment mode for most consumers, especially in rural areas. This restricts the uptake of the pay-as-you-go system, since it relies on mobile-based payments from the user to the company.

The southern states together represent more than 50% of total MFI clients in India and nearly 70% of total MFI loan portfolios, Map of Microfinance Distribution in India (Centre for Microfinance, IFMR)MicroSave, “Who says you can’t do MicroSavings in India?”, July 2010The Economics of Microsavings: High-yield loans as the lynchpin of deposit-driven microfinance, Daniel Rozas (2012) RBI List of NBFCs holding Certification of Registration to accept public deposits

26

2728 29





Lack of clarity on the subsidy application and approval process: Customers generally tend to be unaware of the subsidy application process under various schemes of MNRE (JNNSM) and information regarding these schemes is generally not easily available. This creates a knowledge gap, limiting the ability of RE consumers to access MNRE subsidies.

Perceived uncertainty and delay in subsidy disbursement: As with RE enterprises, a key concern for consumers relying on subsidies is the lack of timeliness in which subsidies are disbursed. Further, there is no system to allow consumers to track the status of their subsidy applications, restricting the flow of subsidies for the consumers.

Lack of resources dedicated to processing of subsidy applications at MNRE: Initial interviews indicate a lack of resources involved in processing RE subsidy applications and ensuring that they are error-free and conform to the guidelines. This creates a bottleneck in the process, creating disbursement delays.

Subsidy

In addition to the products discussed above, grants have also been used to provide consumer finance - this is particularly prevalent in the cookstoves (CP-1) segment. Grant funds are typically provided by donor agencies or corporates (as part of their CSR initiatives) and are routed through the enterprises. These entities provide grants to RE MSMEs in order to enable them to offer their products at discounted prices to end consumers. Grants could be a useful tool to provide consumer finance and to increase uptake of RE products in the short-term. However, their sustainability and effectiveness in addressing the long-term barrier to consumer finance remain questionable. Therefore, they have not been prioritized in the discussion in this section or in the solution set for consumer finance.

Broader non-product specific solutions also limit the supply of finance, particularly for commercial sources:

Limited consumer awareness of the benefits of RE products: As mentioned at the beginning of this section, awareness of the value proposition of RE products is generally low among target consumers. Due to this lack of awareness, there is little demand among consumers and RE products continue to be “push” products. FIs prefer engaging in product sectors that have high demand from the target audience, and therefore, are disinclined to engage in the RE appliance space.

Lack of high quality after sales services for RE products: This is one of the primary reasons for limited engagement of FIs in the RE consumer financing space. The lack of after sales service leads to consumer dissatisfaction in case of product failure and they

hold the FI responsible for providing them with sub-standard products. Therefore, FIs are forced to assume the risk associated with product failure and expose themselves to reputational risks. This acts as a strong disincentive for FIs (especially MFIs) to get more involved in the space.

Lack of national quality standards and regulations: National quality standards are either incomplete for certain products (e.g. MNRE standards for cookstoves cover only efficiency and emission reduction) or are not enforced in the Indian market (e.g. SPLs). As such, there remains a high prevalence of sub-standard RE products in the market – this has the potential to negatively impact sector perception for both consumers as well as for financiers, reducing their confidence in the sector, and stemming the flow of finance.

Limited technical expertise to evaluate opportunities in the RE space: Interviews conducted for this study indicate that FIs generally tend to lack a strong understanding of RE products available, prevalent technologies, as well as credentials of RE enterprises. In the absence of reliable market data and past precedents, FIs are unable to assess RE opportunities and often decide not to engage at this stage.

Lack of a centralized information source: Information regarding various policies and regulations applicable to the small-scale RE sector is generally spread across multiple sources and is difficult to gather and analyse. For this reason, there continue to be information gaps in the market, limiting investor interest.



7Consumer finance: Segment specific profiles

In the following section, segment-specific consumer finance profiles are included. The profiles do not replicate the information included in the enterprise finance section – instead, they focus primarily on information/analysis related to consumer finance and answers the following questions:

Which consumer financing products are currently used in the market?Which consumer financing products are in high, medium and low demand?What are there barriers to access and supply?What are some high-priority product-specific and cross-cutting solutions that exist to addressing this barriers?

These profiles are meant to provide a short summary of the findings and are by design, brief. They are supplemented by more detailed profiles that are included in the Annex.

Note: for each segment, the consumer finance products are ordered in terms of highest need/priority as stated by the enterprises (i.e., from high to low based on answers to question 2 above)

Consumer finance: Segment specific profiles


CP-1: Cross-market players in cookstoves less than $120


Product type Sub-types Relative product availability Stated need for product

Low/ MediumLowNone

Establish comprehensive national standards for cookstoves to allow MFIs and RRBs/Public banks to benchmark product quality


Conduct knowledge workshops for investor forums and FIs to increase the understanding of improved cookstove technologies and benefits for financial institutions and investors through targeted workshops.



Establish marketing drives for end-customers to increase awareness of improved cookstoves through a national marketing campaign

Micro- loans and savings

Pay-as-you go

Grants

MSMEs would prefer additional micro-loans and savings options to be made available

MSMEs did not mention pay-as-you go directly; however all MSMEs stated the need to diversify and expand consumer finance options

Most MSMEs would prefer to move to a model of commercial consumer finance solutions

Individual micro-loansGroup/ individual top-up loans

Equated monthly instalments (EMI)Mobile-based models

Philanthropic or CSR subsidies

Targeted MSMEs were able to access specific loans for their consumers, however access is limited

No MSME provides a direct pay-as-you go option to consumers

A majority of MSMEs were able to access donations from HNIs and foundations as well as targeted CSR programs

Low awareness among end-users of improved cookstoves and their benefitsLack of knowledge and access to information among financial institutionsLack of incentives for RRBs and MFIs to engage in lendingLack of regulation on product quality

Lack of distributor finance and capacity to provide consumer finance Lack of knowledge and access to information among financial institutionsLack of regulation on product quality

N/A

Pilot launch of micro-savings account modelScale up lending to SHGs through RRBs and commercial banksFacilitate and scale up partnerships between MFIs and MSMEs

Pilot a mobile-based credit pay-as-you go model

N/A





Low/ MediumLowNone

Establish national standards or certifications for SPL MSMEs to allow MFIs to benchmark product quality

Additional non-financial product oriented solutions that can help unlock value in the sector include the following:

Establish marketing drives for end-customers to increase awareness of SPLs through a national marketing campaign



Conduct knowledge workshops for investor forums and RRB bank managers to increase the understanding of SPL technologies for financial institutions and investors through targeted workshops


Pay-as-you go

Trade Credit

MSMEs would prefer additional consumer financing options to be made available

Targeted MSMEs mentioned interest in rolling out this option but had no financial ability to do so

MSMEs are not interested in extending credit to end-consumers due to limited existing enterprise finance


Equal monthly instalmentsMobile-based models

Extension of credit to end-consumer

Most MSMEs were able to access specific loans for their consumers by connecting them with MFIs and SHGs

No MSME provides a direct pay-as-you go option to consumers

Very few SPL MSMEs extend credit to end-consumers due to financial constraints

Low awareness among end-users of SPLsLack of knowledge and access to information among financial institutionsLack of incentives for RRBs and MFIs to engage in lendingLack of regulation on product qualityHigh cost of consumer loansLow penetration of MFIs in areas of high need

Lack of distributor finance and capacity to provide consumer finance Lack of knowledge and access to information among financial institutionsLack of regulation on product quality

Lack of distributor finance and capacity to provide consumer finance Lack of knowledge and access to information among financial institutions

Pilot launch of micro-savings account modelFacilitate and scale up partnerships between MFIs and MSMEsScale up lending to SHGs through RRBs and commercial banks


N/A




CP-3: Cross-market players in SHSs from $120 – $600


Low/ MediumLowNone

Conduct knowledge workshops for investor forums and RRB bank managers to increase the understanding of SHS technologies for financial institutions and investors through targeted workshops.


Establish marketing drives for end-customers to increase awareness of SHS through a national marketing campaign




Subsidies

Pay-as-you go

Trade Credit

All MSMEs stated a need for increased access to micro-savings and loans for their consumer base

A majority of MSMEs wished to access subsidies but due to significant challenges were hesitant to pursue this option

Targeted MSMEs mentioned interest in rolling out a mobile-based pay-as you go option (and one had already done so in other countries)

Only one MSME mentioned their continued need to access finance to supply a line of credit to their distributors


NABARD subsidies under the JNNSM scheme

Equated monthly instalments (EMI)Mobile-based models

Line of credit to distributor

Targeted MSMEs were able to connect their end consumers to micro-loans through MFIs

A group of SHS MSMEs are currently accessing bank loan subsidies through RRBs and rural Gramin banks

One MSME launched a pay-as-you go or ‘rent to own’ model where the consumer pays an initial 30% down-payment followed by daily usage charges. The consumer owns the SHS after a period of 1-3 years.

A few MSMEs provided a line of credit to their distributors who in turn provided micro-loans to the lowest tier of their BoP consumers.

Low awareness among end-users of SHSLack of knowledge and access to information among financial institutionsLack of incentives for RRBs and MFIs to engage in lendingEmphasis on credit historyHigh cost of consumer loansLow penetration of MFIs in areas of high need

Difficulty in accessing consumer subsidies (i.e., reluctance of RRBs/public banks to provide or disburse NABARD subsidies, delays in disbursement of subsidy)Misalignment of JNNSM policies with ground realitiesLack of clear communication and misinterpretation of MNRE guidelines by banks

Lack of distributor finance and capacity to provide consumer finance Lack of knowledge and access to information among financial institutionsLow awareness among end-users of SHS

Lack of distributor finance and capacity to provide consumer financeLack of knowledge and access to information among financial institutions

Pilot launch of micro-savings account modelFacilitate and scale up partnerships between MFIs and MSMEsScale up lending to SHGs through RRBs and commercial banksMSME facilitated RRB consumer loans

Establish a pledge guarantee fund


N/A






Low/ MediumLowNone

Improve product quality regulations through updated MNRE tender process to address the challenge of low-quality SWP products entering the market through the MNRE tender process. This would furthermore allow MFIs and RRBs/Public banks to benchmark product quality.


Updating the MNRE technical specifications to incentivize the development of small scale technology adaptation. Specifically, updating the SWP wattage amount to include pumps below 1HP which would in turn decrease the upfront cost and increase access to SWPs for marginal or smallholding farmer.



Developing communication outreach and training for RRB branch managers to increase the understanding of RE technologies, benchmark costs of products, and the ticket size of consumer loans needed for RE consumer products in particular for SWP.


Subsidies

Pay-as-you go

Despite challenges market MSMEs want to increase access, ease, and availability of consumer loans

All MSMEs stated their current and continued need for government-based subsidies

The rental model has high potential for all SWP MSMEs and consumers

Group/ individual loans from public banks or RRBs


Rental of product on a daily/weekly or seasonal basis

Targeted MSMEs were able to connect their end consumers RRB loans

A large majority of MSMEs were able to access SWP subsidies

No MSME currently provides a pay-as-you go or SWP rental option to consumers

Lack of incentives for RRBs to engage in lendingEmphasis on credit historyHigh cost of consumer loans Lack of regulation on product qualityLack of knowledge and access to information among financial institutionsLow awareness among end-users of SWP products and their benefits

Misalignment of JNNSM policies with ground realitiesLack of clear communication and misinterpretation of MNRE guidelines by banks

Lack of knowledge and access to information among financial institutionsLack of regulation on product qualityLow awareness among end-users of SWP products and their benefits

Pilot launch of micro-savings account modelFacilitate MFI partnerships with RE MSMEsSupport RRBs in scaling up RE lending to SHGs

Establish a pledge guarantee fund

Establish a SWP rental model through VLEsPilot a mobile-based credit pay-as-you go model




CP-5: Distributors of RE consumer products (across price ranges)


Low/ MediumLowNone

Establish national standards for RE products to allow MFIs and RRBs/public banks to benchmark product quality to allow MFIs and RRBs/Public banks to benchmark product quality


Communication outreach and training for RRB branch managers to increase the understanding of RE technologies, benchmark costs of products, and the ticket size of consumer loans needed for various RE consumer products.




Pay-as-you go

Subsidies

Strong desire to expand the availability of microloans and micro-savings accounts for lower cost RE products, as well as for RRB loans for SHS and SWPs

MSMEs indicated that they want to expand and/or diversify their pay-as-you go models

Could be a potentially strong avenue to pursue if barriers to accessing subsidies were reduced

Loans from public banks or RRBsGroup/ individual micro-loans from SHGs or MFIsMicro-savings accounts

Equated monthly instalments (EMI)Rental of RE product on a daily basis


A majority of MSMEs were able to connect their consumers with micro-loans through MFIs, bank-linked SHGs and a few for RRB-linked loans

EMIs were the most commonly used form. In addition, a few distributors provided daily rentals of SPLs to their end consumers

Selected distributors assist their consumers in availing of subsidy loans from RRBs (most frequently for SHS)

Lack of incentives for RRBs to engage in lendingEmphasis on credit historyLack of regulation on product qualityEnd-users are largely unaware of consumer finance optionsLow awareness among end-users of RE products and their benefitsLack of knowledge and access to information among financial institutions

Lack of knowledge and access to information among financial institutionsLack of regulation on product qualityLow awareness among end-users of SWP products and their benefits

Loss of customers due to subsidy process and delaysEnd-users are largely unaware of consumer finance optionsLack of regulation on product quality

Provide a partial-credit guarantee for MFI and RRB consumer loansPilot micro-savings account model through bank-linked SHGsScale-up lending to SHGs through RRBs Facilitate MFI partnerships with RE MSMEs

Best practice sharing among distributors on existing ‘pay-as-you-go’ models (for rentals and EMI)Pilot a mobile-based credit pay-as-you go model

See ‘non-financial product’ solutions below




8

Consumer finance: Implications for solutions to pursue further

Consumer finance: Implications for solutions to pursue furtherThe solutions to address the consumer financing barrier can be broadly categorized into two categories: financial products and business models. The financial products category comprises existing/ new financial products that could mitigate this barrier. The business model approach, on the other hand, includes innovative business models that are developed in a manner that the consumer finance barrier is addressed in the model design itself. The report first explores financial products that could help address barriers to consumer finance and the subsequent discussion details business models that could be adopted by RE MSMEs.

Financial product solutions for consumer financeThere are multiple financial solutions that can be considered in order to address barriers in supply

and access to consumer finance. These solutions can be categorized across four broad product categories: individual microloans, group microloans, microsavings, and subsidies. Of these products, only the microsavings product has not been tried out in the small-scale RE sector in India. The other products – microloans (individual and group) and subsidies have been implemented by select RE MSMEs, although to varying degrees of success.

The table below details out specific solutions that can be used to bring each of these products to the market for various CPs. For certain financial products, more than one solution is presented to account for the diversity of strategies that are available.

Products Solution(s) RationalePrimary action required

Individual microloans


Investing in knowledge and awareness

Establish a line of credit to RE MSMEs. Microloans can help individual consumers afford products. A line of credit from a development agency to one or more RE enterprises would be used to extend consumer loans for RE consumer products.

Developing partnerships between RRBs and RE MSMEs to facilitate consumer loans. This solution would scale up provision to consumer loans for RE products under partnerships between RE enterprises and RRBs. A development agency would facilitate this process by

This would give allow MSMEs to extend credit to consumers and provide them with an additional funding pool to do so (enabling them to avoid using their limited available financing which they are reluctant to do).

This would allow MSMEs to facilitate consumer loans without having to seek additional funds for this purpose. In addition, it would avoid them having to underwrite the risk of loan default. Moreover, certain RRBs have demonstrated an interest in scaling their presence in the sector

In order to be viable, the products need to have a minimum ticket size such that the individual transaction costs can be covered by the loan size itself. As such, it is most relevant for CP-3 (SHS) and CP-4 (SWPs).

This product would only be viable for products of a minimum ticket size in order to ensure that the transaction cost can be covered by the loan size itself. As such, it is most relevant for CP-3 (SHS) and CP-4 (SWPs).



Products ProductsSolution(s) Solution(s)Rationale RationalePrimary action required

Primary action required







highlighting best practices of existing RE MSMEs using this model to RRBs and assisting them in identifying high quality RE MSMEs to partner with.

Scale up MFI partnership with RE MSMEs. There is often a disconnect between MFIs and MSMEs which hinders access to consumer finance. This solution would help address that by having a development agency facilitate partnerships between high-quality RE enterprises and interested MFIs in order to promote provision of MFI loans towards RE products.

Scale up mobile based credit payments. A development agency would identify specific policy advocacy areas to bridge gaps that have prevented take-off of mobile based payment systems in India. Moreover, in partnership with a selected foundation (e.g., Shell Foundation), and a telecom company (e.g., Vodafone), the agency could help design the program.

Support RRBs in scaling up RE lending to SHGs. Group microloans are helpful because they help mitigate individual risk on a loan. This solution would leverage groups, through the SHG network, and a development agency/MNRE would facilitate partnerships between RRBs and selected SHG networks. In order for this partnership to work, a targeted awareness campaign would also be needed to increase visibility of high-quality RE MSMEs and their products to RRBs.

Developing an REproduct linked savings system. This solution would allow consumers to save small amounts of money in a structured manner to purchase RE products this would be achieved by making regular contributions to a savings account with the specific objective of purchasing an RE product.

Endorse corporate or philanthropic subsidies.Consumer subsidies, while unsustainable, can be a useful form of finance in the short-term. In order to scale this up further, a development agency/ MNRE would undertake an awareness campaign to attract donors and corporate organizations to direct their CSR funds or philanthropic donations to MSMEs. These donations would be earmarked for subsidizing and offsetting the cost of solutions forend-consumer.

Establish a pledgeguarantee fund.Delays in the disbursement of consumer subsidies can limit access. A pledge guarantee fund, set up by a development agency, would help to accelerate the process and delays in could be reducedsignificantly. RE enterprises would be able receive funds from commercial banks based on the initial approval of subsidy. These banks would be able to tap into the pledge fund to recover the amount lent before the amount is actually disbursed into the fund by MNRE.

and this would provide them with this opportunity through high quality RE enterprises.

This solution aims to tap into the MFI network and scale up availability of loans in areas where they have a strong presence. The partnership agreement would require RE MSMEs to address barriers such as after sales service to encourage further engagement of MFIs.

This solution would leverage the extensive penetration of mobile phones in India and allow households to make pay for their RE products using the mobile-payment platforms. This would also lower the transaction fee, improving the viability of the overall proposition.

This would tap into the extensive network of bank-linked SHGs in India, increasing outreach to geographies where other FIs are not present. Further, group loans would increase the ticket size to a level considered feasible by RRBs (as opposed to small ticket individual loans) and negate the requirement for credit history of individual borrowers – RRBs would be able to provide loans based on the credit history of the SHG instead.

Consumers are already using savings to purchase products – and field surveys indicate that households tend to be reluctant to take loans for RE products due to possibility of default. Developing a savings oriented product would leverage an existing trends, eliminate the risk of default for households, and ultimately encourage more households to take up RE products.

This would be a short-term solution to continue the flow of subsidies for RE consumers. This solution would be helpful until more formal consumer financing options evolve and would be phased out in the medium to long-term.

This would mitigate the risk due to unexpected delays in disbursement of subsidies by the MNRE, improving the overall financial health of the sector.

This solution can be broadly applicable across segments and depends on negotiations between individual MFIs and RE MSMEs.

Broadly applicable to all segments as mobile phone usage is not restricted to users of any particular RE product.

This product would be most applicable for products with a low individual price – this would allow the provision of a group loan of a size that would enable all group members to each purchase a product. As such, it is most relevant for CP-1 (cookstoves), CP-2 (SPLs), and CP-5 (RE distributors) – the latter because they typically offer a portfolio of products, across price ranges.

There are no minimum ticket sizes required for this solution – as such it can be broadly applicable across different segments.

Subsidies would be most applicable to high price RE products – CP-3 (SHS) and CP-4 (SWPs), which simply remain unaffordable for most consumers. Corporate subsidies could also play a role in subsidizing cookstoves (CP-1) and SPLs (CP-2) with the introduction of the CSR mandate – as such, this remains a stop gap solution for these segments.

The applicability of this solution is limited to segments which already benefit from government subsidies – namely CP-3 (SHS) and CP-4 (SWP).



Group microloans

Microsavings

Subsidies



Each of these solutions has the potential to unlock value across a number of different segments. As with the enterprise financing solutions, not every consumer financing solution outlined above will be applicable to each of the market segments. As the exhibit below demonstrates, micro-savings is the only solution which has the potential to be applicable across market segments because it can be scaled depending on the level of financing that is required, and can still be profitable even

Prioritizing these solutions in terms of their ability to unlock value and their ease of implementation, enables decision makers to identify which solutions to pursue further. Each consumer finance solution considered was ranked according to two dimensions:

Ability to unlock value across segments: this takes into account the number of segments a solution is applicable to (as per the exhibit above), the importance of the solution in addressing key financing needs of players in relevant segments, and the ability of players to be able to access the solution (i.e., if enterprises can easily use the mechanism)

for lower ticket items. Other solutions – such as RRB facilitated consumer loans and partnerships between MFIs and MSMEs – are likely only to be applicable for segments focused on SHS and SWPs because they will rely on minimum ticket sizes in order to be economically viable. Others, such as the pledge guarantee for subsidies, will only be valid for segments which are dependent on subsidies currently (such as SWPs in particular).

Ease of implementation: this takes into account the path that would be required to bring the solution from theory to reality and to scale it up in the context of the RE sector. As such, it considers the complexity of the activities required, the number of stakeholders required, the need for changes in the enabling environment, the timeline that it would take to that would be required to design the solution, and the risks and challenges with adapting it to the RE sector.

Applicability of consumer finance solutions across market segmentsExhibit 14

CP1

Cross market cookstoves players, less than $120

CP2

Cross market SPL players, less than $120

CP3


CP4


CP5


Line

of c

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t for

RE

MSM

Es

MSM

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ated

RR

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ans

Scal

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par

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FIs

and

MSM

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Mob

ile-b

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cre

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paym

ents

Scal

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RRB

lend

ing

to b

ank-

linke

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Gs

Dev

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prod

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Esta

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Micro - Loan and Savings Others


Medium relevanceLow relevanceNot relevant High relevance

Note: The applicability of solutions to a segment is based both on the stated need for a product from the market players in that segment, as well as an analysis of which products are best suited to unlock value in the sector in the short-term. For each segment, a shortlist of solutions was selected as “highly relevant” based on the shortlist of products available.

Assessment and prioritization of consumer financing solutionsExhibit 15

Pote

ntia

l to

unlo

ck im

pact

fo

r con

sum

er fi

nanc

e 1

Ease of implementation

MFI partnerships with MSMEs

Line of creditto MSMEs

RRBs to partner with MSMEs

High potential solutions to pursue further

Bubble size indicates applicability across segments

High

Hig

h

Medium

Med

ium

Low

Low

Note: Potential to unlock value captures the importance of the solution in addressing key financing needs of players in relevant segments, as well as expected level of outreach of the solution. Ease of implementation measures the expected role of engagement of other stakeholders, primary activity part of the solution (knowledge and awareness, design of new pilot/product, policy change, etc.), and past experience with a similar financial solution.


Product-linked savings account through SHGs

RRBs to scaleRE lending to SHGs

Endorse corporate/ philanthropic subsidies

Pledge guarantee fund

M-payment based credit payments



High ease of implementation: one solution here emerges as high potential to pursue further: corporate/ philanthropic subsidies. However, because they are inherently variable and are not a sustainable source of finance, they have not been considered as a solution to prioritize for further analysis. Medium ease of implementation: there are four primary solutions that emerge here: (i) scaling up of RRB lending to SHGs, (ii) product linked savings accounts through SHGs, (iii) facilitating consumer loans through partnerships between RE MSMEs and RRBs, and (iv) developing partnerships between RE MSMEs and MFIs. Scaling up of loans from RRBs to SHGs has two distinct advantages – it taps into the huge network of bank-linked SHGs, increasing outreach to potential target consumers and it does not need individual borrowers to demonstrate their credit history as RRBs can lend on the basis of the SHGs credit history instead. Product-linked savings accounts, aim to formalize the current savings systems of rural households for the specific purpose of purchasing RE products. This solution is extremely relevant for the sector since surveys indicate that most consumers continue to rely on personal savings to finance RE products.

Low ease of implementation: In this section, there are three potential solutions which emerge: (i) mobile based credit payment, (ii) pledge guarantee fund, and (iii) credit lines for RE consumer loans. These solutions typically tend to be longer term solutions due to their low ease of implementation, and as such, have not been prioritized for further analysis in this report.

Across the results, two solutions – scaling RRB lending to SHGs, and developing product-linked savings accounts – emerge as strong candidates for further analysis. They are both explored in greater detail in Annex 4. For each solution, the analysis includes a more detailed description and rationale for the solution, guidance on how it would work in practice and who the key stakeholders need to be, the impact that this solution is likely to have on different segments, likely risks and mitigation strategies and next steps required to scale up the solution.

Business model solutions to address consumer financeIn addition to the financial products/ solutions discussed above, there are three innovative business models that would help mitigate the barrier to consumer financing. While two of these business models – VLE rental model

and pay-as-you-go model have been tried in India, they are yet to reach a high penetration. In addition, there is the one-stop-shop solution, which has been successful in Bangladesh but has not been tried in India. A brief description of these business models is given below:

Standard pay-as-you-go model: Consumers are required to pay an upfront 10 – 30% down payment on the RE product for its installation. After this payment, customers pay a regular fee based on the energy credit they want to buy. Part of this fee goes towards meeting the purchase price of the product, and remainder goes to the RE MSME as profit. Customers eventually gain ownership of the product through these fee payments over 2 – 3 years. The model relies on mobile-based payment systems to ease the payment process for end consumers and to reduce transaction costs.

VLE rental model: Under this model, RE MSMEs would identify local VLEs to buy their RE products and rent them out to end consumers. The RE MSME would facilitate financing for identified VLEs, and also train them to maintain the RE appliances, perform minor repairs, etc. End consumers would be charged a daily fee as rent for the product - a small fee that is affordable for them.

One-stop-shop model: Under this model, an organization would provide both RE products and finance to the end consumer without any partnerships with external FIs. This model would provide the consumer with the product and finance under one-roof, mitigating barrier related to limited availability of finance.

These business models can be brought to the Indian market in different ways, and vary in their potential to impact the sector. The table below discusses solutions to scale each of the three models and their potential for the RE consumer products market in India:

Business model

SolutionType of solution

Standard pay-as-you-go model

VLE rental model

One-stop-shop model




Designing a new business model

A development agency would assist RE MSMEs in designing outreach activities to highlight the attractiveness of the model to potential customers. RE enterprises such as SIMPA have shown early indications of success and are trying to scale up this model. As part of its assistance, the agency could also provide financial support to enterprises, considering their financing challenges.

A development agency would identify specific policy advocacy areas to bridge gaps that have prevented an increased uptake of mobile based payment systems in India. Moreover, in partnership with a selected foundation (e.g., Shell Foundation), and a telecom company (e.g., Vodafone), the agency could help design the program.

As with the pay-as-you-go model, a development agency would help RE MSMEs in capacity building activities for potential VLEs. These activities would involve knowledge on available RE products, details of the business model, and basic training on maintaining and repairing RE appliances.

A development agency could assist the launch of a one-stop shop business model. The agency could identify an interested RE MSME and provide a pool of funds to extend as consumer finance.

Medium. The pay-as-you-go model reduces the upfront expense for the end consumer to 10 – 30% of the product’s purchase price. A key barrier to scaling up is the mobile based payment platform, which has seen limited success in India due to the policy and regulatory environment.

Medium. Challenges related to finding and developing skilled VLEs typically restrict the scalability of this model. However, the measured success of SPL rental models in India indicates this model may have medium potential for the Indian market.

Low. Interviews with RE firms indicate two key issues that would prevent the uptake of this business model – enterprises are not keen to engage as financiers for end consumers and they don’t have the financial bandwidth to extend consumer loans. Therefore, this model is unlikely to take off in the short-medium term.

Potential for the Indian market

The business models discussed above could potentially be useful tools to mitigate the barrier to consumer finance. However, their implementation and success would depend strongly on the supporting environment – this limits their utility for the sector in the short-term. As such, these business models remain longer-term solutions for the sector and therefore, have not been prioritized for deeper analysis in this report.



9Cross-cutting solutions to unlock access to and supply of financeIn addition to the financial solutions outlined above and further explored in detail in the Annex, there are a number of cross-cutting solutions that can help unlock the value of the sector. These are initiatives that can be implemented irrespective of the financial solution utilized and they address challenges faced by numerous segments in the sector. These solutions can be divided into three categories: (i) those focused on unlocking the value of actors by building their capacity, awareness and ability to engage deeper in the sector, (across both RE enterprises as well as FIs); (ii) those solutions focused on unlocking the value of the market as a whole and enable it to mature more rapidly; and (iii) solutions which help improve the policy and regulatory framework in order to enable them to better support the needs of the sector.

Unlocking the value of actorsInvest in capacity building and national discussion forums and workshops to highlight case studies of successful investments in RE MSMEs. As FIs have had limited experience financing the sector, they perceive it to be very risky, limiting the flow of capital. Even traditional impact investors and seed funds have not had much sector involvement as they do not perceive it to be “impactful”. Capacity building measures can be implemented through broad measures (such as national level discussion forums) and targeted measures (such as technical assistance to FIs). There are multiple ways in which these mechanisms could be helpful: (i) in disseminating information about technologies, business models, and expected returns to help investors better understand and evaluate potential investment opportunities in the sector (i.e., impact-minded angel investors may be interested in the sector if they were better informed about financially sustainable, high impact RE MSMEs), (ii) in bringing new FIs into the sector or expanding the portfolio of currently active FIs to technologies that may be overlooked (i.e., helping RRBs consider cookstove segments in a more constructive

manner), and (iii) in supporting awareness generation of existing or new specific financial solutions that may be available for enterprises in the sector (i.e., credit lines for WC loans).

Conduct workshops and develop a knowledge bank for RE enterprises on suitability of investors and financial products to different enterprises in the sector. Many RE enterprises often lack a strong understanding of the diversity and nuances of available financial products, and priorities of different investors, which results in their inability to secure formal finance. This manifests itself in one of two ways: (i) either players are unaware of financial solutions available to them, as evidenced through a number of discussions where RE MSMEs were not aware of schemes such as the CGTMSE, or (ii) players have misperceptions of the implications that different investment types will have (i.e., many RE MSMEs view equity investments negatively because they consider it primarily to be a way for others to take over the enterprise). To address these knowledge gaps and misperceptions, it is necessary to invest in workshops for RE MSMEs which would explicitly focus on arming enterprises with an understanding of financial products available to them, the requirements that different investment types have, (e.g. equity investors look for business potential but banks look to minimize the downside of their loan), and an understanding of how to access these different types of financing. The knowledge base will allow RE MSMEs to identify investors best suited to meet their financing requirements, along with financial products that are most applicable to them.

Invest in marketing drives for end-customers to increase awareness of RE products. Surveys with consumers and MFIs indicate that many RE consumer products continue to be “push” products, and there is limited sustained awareness and demand. This is one of the biggest issues which limits the participation of FIs in



the sector – in both enterprise and consumer finance – as they are concerned by the consumer uptake and many formal FIs do not consider the market sustainable. While this can be partially addressed through workshops for FIs, a more integrated consumer awareness campaign – using both above the line and below the line marketing approaches – would help to raise awareness among the general population on the benefits of these products and by extension spur the growth of the sector. Consumer interest will also incentivize investors to provide more finance to the sector, and manufacturers to develop affordable, high quality products.

Unlocking the value of the marketCreate a secondary market for RE consumer products and equipment used in RE mini-grids. RE consumer products and equipment currently have a limited resale value in the market, which makes lenders sceptical of financing the sector. An established buy-back facility would allow RE enterprises to access debt form commercial banks by using movable goods such as inventory and plant equipment as collateral instead

of relying on fixed assets for this purpose. A secondary market for RE goods would also help unlock new financial products such as lease financing. This would also allow higher utilization of other forms of debt such as working capital loans by RE MSMEs since they can then provide other forms of collateral (e.g. inventory). This system could work with an external agency setting up a facility to buy back RE products that meet a specific quality criteria at a specified percentage of the final price of the product. Based on the existence of this facility, FIs would be more willing to lend to the enterprise. In the case of a default, the bank would recover the quality inventory assets and sell it at the agreed upon rate to the external agency. The agency could then sell the quality assured products to other institutions (i.e., MFIs or NGOs) who are interesting in developing programs which focus on scaling up access to energy for marginalized populations. The success of this initiative is heavily dependent on effective quality standards being in place and ensuring that there can be some after-sales servicing of repurchased inventory.

Secondary buy-back facility for RE products Exhibit 16

Commercial bank

Multilateral agency

Partner MFI/ NGO

End customer

RE MSME

Bank lends to market player using inventory as collateral since multilateral agency agrees to buy stock at 80% of F.O.B.

Multilateral agency acquires inventory from the bank

Multilateral agency sells inventory to partner MFI/ NGO at discounted price

Partner MFI/ NGO sells stock of equipment/ products to end customers

Company pays back the loan on time

Company defaults on the loan

Bank continues recovery process from the market player and sells inventory to multilateral agency, recovering 80% of amount

1

2b

2a

5

4

6

3

Secondary buy-back facility for RE products Exhibit 16 (contd.)

Key questions to be addressed:

What financing challenge is addressed by inventory buy-back scheme?

Inventory buy-back establishes a secondary market for RE equipment and products. This allows lenders to use inventory as collateral to lend to market players, instead of insisting on fixed assets which these players often lack, limiting their ability to access formal debt

Which financial products would be affected by this scheme?

The inventory buy back scheme would encourage lending from banks to RE MSMEs in general. Specifically, we expect a significant impact on working capital loans, soft loans, and lease finance

What challenges are associated with the implementation of this scheme?

Provision of warranty on repurchased inventory remains uncertain since the agency will get possession of inventory after a certain period of time only. In the absence of warranty, customers may refuse to buy these products, even at a discounted priceThere is a need to develop a tracking system to monitor individual units used as collateral by the bank. Further, there will be inventory holding costs that will have to be borne by the market player


Develop and enforce national standards for RE products to allow FIs to benchmark product quality. There are either no standards for certain products (i.e., SPLs and mini-utility components) or there are incomplete standards for products (i.e., cookstoves), which are improperly enforced. This has a number of implications: (i) in many cases (most prominently for SPLs and cookstoves) there are concerns of market spoilage as consumers have used poor quality products and are “turned off” from using the product again, (ii) new consumers are more wary about purchasing the product as they are not sure if it will be of a high enough quality, particularly since it is a new product, and (iii) investors are unwilling to lend to the sector because they are not sure if they are investing in a quality product or whether they will be burdened with a poor quality product in the case of a default. The lack of complete and properly enforced standards underpins many of the challenges currently facing the sector. Developing a set of quality ratings which can be applied to individual technologies (in the way that many appliances are currently rated for energy efficiency through an EnergyStar rating), will help consumers be more aware of the product they are purchasing growing the consumer base, will help investors understand the technology they are investing in spurring more finance to the sector, and strengthen the market overall by weeding out low quality products.

Unlocking the effectiveness of the policy framework Introduction of an online tracking system to allow RE enterprises to track the status of their subsidy application along with expected time to disbursement. Many RE enterprises are dis-incentivized from accessing subsidies for one or multiple of three reasons: the perceived burden of documentation required, the lack of transparency during the application process, and the delay in the disbursement of the funds, often by up to 6 months. All three combined imply that specific RE enterprises can often be disillusioned from using subsidies, and to those dependent on subsidies it can result in significant constraints on the enterprise’s WC needs. While in the short-term, a pledge guarantee solution may be helpful (explored in greater detail in Annex 5), this is merely a stop-gap solution. Providing greater clarity on the subsidy application and evaluation process through an online portal would be a more effective longer-term solution. This intervention would allow RE enterprises and investors to include subsidies in their calculations and plan their finances as per the timeline reflected in the tracker. Clarity on the expected date of subsidy disbursement will allow more investors and enterprises to factor them into project financials, improving projected returns from these projects. This would make the sector more attractive than it is perceived to be at this stage, attracting more investments in the future.



Clarifying policy priorities within the Rural Energy Access Programme. The new policy, is expected to reshape the way that rural energy policy is currently pursued in India. However, there are three key areas that need to be addressed in order to ensure that the RE MSME sector (particularly those focusing on the off-grid utilities) can be supported effectively:

Clarifying grid extension policy: the majority of both RE enterprises and FIs interviewed indicated that a lack of policy clarity as one of the key reasons for their limited sector engagement. One area of concern is in the lack of clarity on the extension of the grid – FIs believe that this lack of clarity creates uncertainty around long-term plant viability, which makes them less comfortable to finance DRE utility projects. This issue is set to be outlined in the next policy document released, but it is important that the planned strategy is maintained and implemented. Ensuring an equitable tendering process: the current draft of the document indicates that most off-grid utility projects will be sourced according to a tender process with approved partners. If that is to be the case, then MSMEs would find it hard to compete against the larger players who may have more resources (but perhaps less expertise) to execute these projects. Ensuring provisions that enable an equitable participation of MSMEs – either through a revision of the evaluation criteria, or through a much lighter

touch tendering process which doesn’t select the firm but rather identifies specific areas in which firms with a minimum set of requirements can be partnered with.

Ensuring long-term sustainability of off-grid utilities: a final concern is on the sustainability challenges for DRE utilities who are looking to interact with the grid when it extends. The challenge arises with the policy towards utilities in remote, unelectrified areas, where the grid is unlikely to extend – for these firms, there is a capital subsidy of 90%. By highly subsidizing the overall utility costs, there is a risk of creating adverse incentives for DRE utility operators by making it much easier for them to recoup their initial investment and some profits, and then exit early. This could possibly lead to the failure of many utilities, and eventually a loss of faith of rural households in RE technologies. To avert such a situation, there are a few suggestion one could consider: (i) limiting the upfront subsidy to a lower amount (i.e., 50%) would imply that a DRE utility operator would need to operate the plant over a longer period to recoup initial investment, which could help ensure a longer functioning life of the utility, (ii) providing the subsidy as a partial grant and partial soft loan would increase the functioning life of the utility due to repayment obligations. Both of these would help to ensure the sustainability of the sector in the long-run.


Access to Finance for MSMEs in the Renewable Energy Sector in India91 92

Annex 1Market segmentation methodology and results

No MSME players run “B” business models in this segment as there is a lack of local technical expertise in utility maintenance.

Only large players and not-for-profit foundations comprise this segment .

The majority of MSME players prefer to run BOM models for solar utilities primarily due to the difficulty involved in identifying appropriate VLEs.

No MSME players run “B” business models in this segment, possibly since the technology is not well understood.

This segment is preferred by MSMEs running wind-solar utilities, which usually do not transfer plants to individual VLEs; these players usually set up both micro and mini plants.

This segment mainly consists of MSMEs running solar utilities, primarily due to the difficulty involved in identifying appropriate VLEs.

No MSME players run “B” business models in this segment, possibly since the technology is not well understood.

This segment primarily consists of MSMEs running wind-solar utilities; these players usually set up both micro and mini plants.

No MSME players run “BOM” business models in this segment possibly as these are mostly wind-solar players which are averse to the difficulties around operations in a BOM model.

There are no MSME players active in these segments primarily since small plants exceed the demand of the areas that MSMES usually serve.

No players exist in the lower size ranges due to diseconomies of scale of pico and micro biomass utilities.

No MSME players run “B” business models in this segment.

Two players have a few 25 kW plants but this is a small part of their portfolio.

No MSME players run “B” business models in this segment.

Very few MSME players have been able to successfully utilize a “BM” model, due to the difficulty of finding a VLE although many players wish to do so.

The majority of players utilize a “BOM” model in this segment.

The majority of players utilize a “B” model in this segment.

No MSME players run “BM” or “BOM” business models in this segment as they are generally less profitable than a “B” model within the current policy environment.

The majority of players utilize a “B” model in this segment; these players usually are active in micro, mini and small utilities.

<2 kW(pico)

2-10 kW(micro)

10-25 kW(mini)

26-100 kW(small)

<2 kW(pico)

2-10 kW(micro)

10-25 kW(mini)

26-100 kW(small)

<2 kW(pico)

2-10 kW(micro)

B

BM

BOM

B

BM

BOM

B

BM

B

BM

BOM

B

BM

BOM

B

BM

BOM

B

BM

BOM

B

BM

BOM

B

BM

BOM

B

<2

<2

2+

<2

2+

2+

<2

2+

<2

<2

<2

<2

<2

<2

<2

2+

2+

<2

<2

2+

Technology

Technology

(contd.)

Solar/Wind-solar

Size

Size

Business model

Business model

Number of MSME players35


Comments

Comments

Segment name

Segment name

These include only the MSMEs considered for the purpose of this analysis. Players that are active across sizes have been counted across all the sizes that they operate in.For the MSMEs considered for this study, there are no wind-solar pico utilities that utilize BOM models. B- Build, BM- Build Maintain, BOM- Build Own Maintain

3536

DRE1: Solar pico utilities, operating a BOM model36

DRE3: Wind-solar micro and mini utilities, operating a BM model

DRE2: Solar micro utilities, operating a BOM model

DRE3: Wind-solar micro and mini utilities, operating a BM model

Biomass

Hydro

DRE4: Biomass small utilities, operating a BOM model

DRE5: Hydro utilities, operating a B model


Annex 1







The majority of cookstoves players fall in this segment; these players undertake some of their R&D (or partner with entities that directly provide them with this information), assemble the product, and either distribute their cookstoves directly and/or oversee the distribution process through partnerships with independent distributors, NGOs or VLEs.

There are no dedicated cookstoves players that utilize these business models. No player solely procures a finished product and sells it. As a model, solely distributing cookstoves is less profitable than being a cross-market player; distribution is undertaken by other agencies or organizations (e.g., distributors, NGOs, etc.)

10-25 kW(mini)

26-100 kW(small)

BM

BOM

B

BM

BOM

B

BM

Cross-market players

Procurement and sales

Distribution only

Cookstoves less than $120

<2

<2

2+

<2

<2

2+

<2

15+

<2

<2

Technology

(contd.)

Technolgy-price

Size Business model

Business model


Number of MSME players

Comments

Comments

Segment name

Segment name



CP1: Cross market players in cookstoves less than $120

Consumer products

The majority of SPL players fall in thissegment. These players undertake R&D,assembly and sales.

There are no SPL players that utilizethese business models as these twobusiness models are less profitable thanbeing a cross-market player.

Consists of most fairly well establishedSHS players that design, assemble anddistribute their SHSs.

There are no SHS players that utilizethese business models as these businessmodels are less profitable than being across-market player.

There are no SWP players that utilize a cross-market business model as 90% of players utilize government subsidies (and therefore have no need to undertake end-consumer distribution directly).

The majority of SWP players fall under this segment. Most do not undertake individual R&D, although a few players do so to improve distinct parts of their pumps. Sales are undertaken through tenders or through government-subsidized projects. Only a few players undertake a few direct sales to NGOs or international agencies serving marginalized farmers.

There are no SWP players that focus on distribution only as the majority of distribution is undertaken directly by the MNRE/government through tenders or distributors

All RE product distributors fall under this category; Distributors mainly focus the distribution of solar products and provision of related services such as marketing and facilitating consumer finance.



Distribution only



Distribution only



Distribution only



Distribution only

SPLs less than $120

SHSs between $120 – $600

SWPs (above $600

Multiple technologies and price ranges

15+

<2

<2

5+

<2

<2

<2

5+

N/A

N/A

N/A

2+

Technolgy-price

(contd.)

Business model Number of MSME players

Comments Segment name

CP2: Cross market players in SPLs for less than $120

CP3: Cross-market players in SHSs from $120 – $600

CP4: SWP procurers

CP5: Distributors of RE consumer products (across price ranges)

Annex 1

B- Build, BM- Build Maintain, BOM- Build Own Maintain


Annex 2Description and prioritization of enterprise financing products

Given the unique nature of MSMEs, only a specific subset of financial products can be applicable to support their scaling and growth. MSMEs in general have certain preferences in terms of finance they typically seek. Among others, these preferences include relatively low ticket sizes, high tenure, and low collateral requirement. However, MSMEs operating in the small-scale RE sector have additional constraints due to the following reasons:

New and diverse technologies and business models: The small-scale RE sector is still nascent and companies are still experimenting with their technologies and a diversity of business models. These factors make it difficult for FIs to evaluate potential investment opportunities in RE MSMEs.

Early stage of operations: FIs have eligibility criteria that include the need for market players to have at least 3 years of positive cash flows, presence of a credit history, and proven profitability. However, market players in this sector find it difficult to meet these requirements as they are still in the early stage of operations and rarely meet the aforementioned criteria.

Limited “formal” value of assets: RE MSMEs usually lack fixed assets such as property, manufacturing facility, etc. and most assets held by them include inventory, RE equipment, etc. Since these assets do not have a formal secondary market, they are not accepted by financial institutions as collateral, limiting access to debt for RE MSMEs.

Uncertain cash flows: Seasonal variations in resource availability combined with difficulties around rural operations and collection of payments result in unstable cash flows, and by extension, limited repayment capacity of DRE mini-utility market players.

Of the product portfolio currently available, 13 products emerge as strong potential financial solutions to pursue further that are applicable to MSMEs. In order

to shortlist the financial products that are best suited to potentially serve the market, the existing portfolio was evaluated across two dimensions:

Potential applicability of the product: Potential applicability of a financial product has been ascertained on the basis of its ability to meet the financing needs of RE MSMEs as well as the ability of market players to access these products considering the product’s eligibility criteria.

Level of customization required: The level of customization required for a financial product measures the extent to which the product needs to be modified in order to be adapted for RE MSMEs. For example, soft loans are already well set up to serve the MSME sector so limited customization would be required, whereas lease finance is a very new product and has only been tried primarily in the agricultural sector and would have to be adapted significantly in order for it to be relevant for enterprises in this sector.

Prioritization of financial products for enterprise finance for RE MSMEsExhibit 17

Level of customization required

High

Hig

h

Medium

Med

ium

Low

Low

Convertible debt

Grants

Mezzanine

Unsecured loan

Angel investmentPatient equity

Soft loan Standard collateral backed loan

Trade financeWorking capital loan

Lease finance

Secured transaction

Project finance

Carbon finance

Demand dividend note

Subsidies

Viability gap funding

Bridge loan

Venture debt

Venture capital

Traditional PE

Potential applicability of product1

GROUP 1 : Immediately applicable: Financial products that are well-suited for RE MSMEs in their current design and can likely be rolled out “as is”

GROUP 2: Customization needed: Financial products that have advantageous characteristics but further adaptation is needed before they can be used by MSMEs.

”Pot

entia

l app

licab

ility

” is d

efine

d as

the

fit o

f the

pro

duct

to th

e fiv

e cr

iteri

a de

taile

d on

the

prev

ious

pag

e; se

e an

nex

for d

etai

led

asse

ssm

ent;


13 products emerge across all types of products that can be segmented into two groups as demonstrated in the exhibit above: (i) those that can be immediately applicable to the sector and need to be scaled further, and (ii) those that need to be adapted to be applicable to the MSME sector.

Annex 2

Debt product Pure equity product Hybrid product Others


Type DescriptionProduct name

Debt

Equity/Hybrid

Others

Lease finance

Mini-project finance

Soft loan

Trade finance

Unsecured loan


Pure patient capital

Angel investment

Convertible debt

Mezzanine financing

Grants

Subsidies


Enabling borrower to pay the cost of the underlying asset (such as plant & machinery) over the term of the loan and not upfront at the time of asset purchase

A non-recourse financing vehicle which extends financing on the merits of a specific project, or series of projects (and not to the enterprise as a whole)

A longer term loan with lower interest rates so they are more accessible for start-up enterprises to be used primary for asset generation

Enabling enterprises to use forms of receivables (i.e., contracts for pending sales) to access debt from formal institutions

A collateral-free loan for those enterprises who do not have access to formal collateral (i.e., property) that can be used for any purpose

A debt product that is exclusively used to service expenses related to the operations of an organization

Longer-term and lower rate of return equity investments that is focused on creating both financial returns and social impact

Early stage capital, usually from high net worth individuals, looking to create high returns in a short period of time

A debt instrument which has slightly higher returns, but based on success of the enterprise, can be converted to equity in a company after a specified period of time; it enables companies to finance working capital as well as asset purchases

A hybrid debt/equity investment that acts as debt capital and allows the lender to convert it into ownership or equity if the loan is not paid back

Standard zero-cost capital that are primarily focused on helping socially-oriented enterprises establish themselves over initial seed-stage growth

Financial support extended for specific products or enterprises that reduce the overall cost of the product

A regulatory system which registers non-traditional collateral and allows for it to be used as support for any debt financing

Annex 3Profiles of key financial institutions

There are a number of players who need to be involved in designing and/or scaling up access to prioritized financial products for both enterprise and consumer finance. Based on the type of financing and activities they undertake, these players can broadly be grouped into four categories: (i) banks, (ii) NBFCs, (iii) equity investors, and

(iv) other public sector actors. Individual actors differ in their relevance for the sector, primarily due to the type of finance their offer, their risk appetite and previous engagement with the sector. The indicative list of these actors operating in India are considered below:

Type of player

Consumer finance products that it can offer

Relevance for sector

Enterprise finance products that it can offer

Public sector bank

Regional rural bank (RRB)

Domestic private sector bank

Lease finance

Project finance

Soft loan

Term loan

Unsecured loan (for RE MSMEs and VLEs)


N/A

Lease finance

Project finance

Soft loan

Term loan Unsecured loan (for RE MSMEs and VLEs)


N/A

Individual loans for rural and semi-urban consumers

Group loans to bank-linked self-help groups (SHG)

RE product-linked savings product

Unsecured loans (under CGTMSE) for purchase of DRE utility

High. These banks have demonstrated a willingness to engage in “new economy” sectors such as small-scale RE and have a greater risk appetite than private sector banks; they also look to finance sectors, which are in the national/ development interest of the country; in addition, many such banks already have some lending history of RE projects.

Medium-High. The purpose of RRBs is to provide credit to consumers in rural and semi-urban areas; however, their areas of operation are limited, as decided by the government, limiting their potential scale of impact.

Medium. Domestic private sector banks have a high collateral requirement, require past profitability, and expect firms to be able to repay their loan in 3 years; most RE firms are unable to fulfil these requirements.

State Bank of India (SBI)

Bank of Baroda

Canara Bank

Syndicate Bank

Bank of India

Prathama Bank

Bangiya Gramin Vikash Bank

Karnataka Grameen Vikas Bank

ICICI Bank

Yes Bank

HDFC Bank

Examples

Banks

Annex 3


Type of player




Foreign private sector bank

Government banked institutions

Private sector NBFC

Microfinance institution (MFI)

Impact investor

Angel investor

Lease finance

Project finance

Soft loan

Term loan

Unsecured loan


Lease finance

Mezzanine finance

Project finance

Soft loan

Lease finance

Mezzanine finance

Project finance

N/A

Convertible debt

Mezzanine finance

Pure equity

Convertible debt

Cumulative convertible preference shares

Mezzanine finance

Pure equity

N/A

N/A

N/A

Individual microloans

Group microloans

Micro-savings products

Mobile based payment systems

N/A

N/A

Low. Foreign private sector banks have a very low risk appetite and do not lend when there is >1-2% chance of default; RE projects are very risky, making most firms ineligible for lending from these banks.

High. Government-backed institutions like SIDBI and NABARD specialize in providing loans to rural development projects, and have been actively involved the RE sector.

Low. Private sector NBFCs look for investments with larger ticket sizes and higher returns than the needs and possibilities of typical RE firms.

High. MFIs are key lenders to rural consumers; however, they are hesitant to engage in the RE sector due to a lack of quality products and after-sales service.

High. Ticket sizes and exit periods of these investors’ investments match RE firms’ needs and expectations; impact investors are already highly involved in the sector.

Medium. Angel investors invest in risky projects and have ticket sizes that match RE firms’ needs; however, they look for higher returns than what typical RE firms provide.

Standard Chartered Bank

Citibank

Barclays

NABARD

SIDBI

IREDA

Tata Cleantech Capital

Reliance Capital

SKS

NEED

Utkarsh

Acumen Fund

Bamboo Finance

Insitor Management

Indian Angel Network

India Innovation Fund

Mumbai Angels

Examples

Banks (contd.)

Other Lending Institutions

Equity Investors

Type of player




Private equity investor (PE) / venture capitalist (VC)

Donor agency

Multilateral development bank

Philanthropic foundation

CSR wing/ Corporate foundation

Convertible debt

Cumulative convertible preference shares

Mezzanine finance

Pure equity

Partial credit guarantee

Grant

Line of credit


Partial credit guarantee

Grant

Equity

Line of credit


Soft loan

Term loan

Grant – one time, or milestone based

Grant – one time, or milestone based

N/A

N/A

N/A

N/A

Subsidy towards consumer purchase of consumer products

Low. These investors have higher ticket sizes, and shorter exit periods and invest primarily in mature firms, making them unsuitable for RE firms.

High. Donor agencies have been highly involved in the small-scale RE sector and have potential to provide capacity building and technical assistance to firms as well as liaison with the government.

High. These banks have the financial capacity to facilitate others players to finance firms in the sector.

High. Foundations have played an important role at the early stage of RE firms by providing grants for pilot projects and initial operations.

Medium. RE firms would be suitable for CSR funding, but there has been limited activity in the sector due to lack of awareness about the sector among CSR funders.

Riverstone

Impax Asset Management

Sequoia Capital

DFID

USAID

KfW

IFC

ADB

Bill & Melinda Gates Foundation

Michael & Susan Dell Foundation

Shell Foundation

Tata Group

Mahindra & Mahindra

Examples

Equity Investors (contd.)

Other public sector actors

Annex 3


Annex 4Detailed profiles: Enterprise finance and consumer finance solutions

Enterprise financing solution: Lease finance

Introduction and rationaleHigh costs of RE equipment have been identified by several market segments in the mini-grids space as one of the key barriers to growth. Barriers due to high costs have implications for two actors: for enterprises due to their limited ability to pay setup costs for new mini-utilities and for VLEs due to their limited ability to purchase the mini-grid from the enterprise. In both cases, the scalability of the companies is affected either because companies can install only a few plants given limited finance or because VLEs are not in a position to purchase these mini-utilities.

Lease financing is an effective tool to mitigate the barrier due to high setup costs of RE projects. Lease finance is a debt instrument that allows the borrower to pay the cost of the underlying asset (such as plant & machinery) over the term of the loan and not upfront at the time of asset purchase. The borrower gains ownership of the asset upon completion of the loan repayment, till which point its ownership remains with the lender. In the context of the small-scale RE sector, leasing is a useful tool to reduce upfront expense required for small-scale RE projects and can unlock potential in several market segments.

Description of solutionLease finance can be implemented in two ways depending on whether the target borrower is the VLE or the RE enterprise: Lease finance model for VLEs: In this model, a development agency would provide funds and TA to RE enterprises for extending lease loans to VLEs either through a leasing company or through the enterprise itself. The choice between these two options depends primarily on the business model of the enterprise. An enterprise working only on the BM business model is likely to benefit from a leasing company, whereas an enterprise using multiple business models (including BM) is likely to benefit from an internal lease finance team. As the VLE completes repayment over the term of the loan, it will gain ownership of the utility. In case of default, the leasing company/ RE enterprise would obtain ownership of the utility, and they can resell it in the secondary market to recover the loan amount. The repayment period for the lease loan would likely be 3 - 5 years and would be priced at prevailing market interest rates (i.e. 12 – 15%). The table below provides certain design parameters of a lease loan for VLEs, although the exact design remains to be explored further

Typical ticket size

Typical ticket size

Average interest rate

Average interest rate

Typical tenure

Typical tenure

Lease loan for VLE

Lease loan for enterprises

$10,000 - $50,000

$20,000 - $100,000

12 – 15%

12 – 15%

3 - 5 years

1 - 3 years

VLE lease finance modelExhibit 18

Bilateral aid agency RE Enterprise

Leasing team/ company

VLE

The agency provides funds and technical assistance an identified RE enterprise, helping them set up a leasing company

RE enterprise sets up leasing company (optional) or an internal team dedicated to lease finance depending on business models it implements

Leasing company extends lease loan to VLE in exchange for utility in case of default

VLE repays loan as per loan terms

VLE defaults, RE enterprise gets possession of the plant

4b 4a

2

3

1


Lease finance model for RE enterprises: In this model, a development agency would assist the setting up of an independent leasing company in partnership with major manufacturers of RE machinery. This company would then extend lease finance to RE enterprises that procure plant & machinery from partner suppliers. As the RE enterprise makes repayments, it will gain ownership of the asset being leased. In case of default, the leasing

company would take over the assets for sale in the secondary market. The repayment period for the lease loan would likely be 1 - 3 years and would be priced at prevailing market interest rates (i.e. 12 – 15%). The table below provides certain design parameters of a lease loan for RE enterprises, although the exact design remains to be explored further.

Annex 4


RE enterprise lease finance model

Potential impact of lease finance on small-scale RE sector

Exhibit 19

Exhibit 20

Bilateral aid agency

RE equipment suppliers

Leasing team/ company

RE enterprise

RE enterprises procures plant and machinery (asset) from supplier

Leasing company allows RE enterprise to lease equipment provided by partner suppliers

Enterprise repays loan as per loan terms, takes ownership of asset

Enterprise defaults, leasing companies gets ownership of asset

Partnership agreement between leasing company and specific suppliers

The agency provides funds and technical assistance an identified RE enterprise, helping them set up a leasing company

4b

4a 23

1


Potential for impact Lease finance has particularly high utility for specific market segments such as solar/ wind-solar and biomass

mini-utilities. The exhibit below takes note of segments where lease finance could potentially unlock high value and segments where it may not be as relevant.

Pote

ntia

l to

unlo

ck v

alue


Priority segments

Size of the bubble indicates demand for lease financing in the segment as percentage of total demand for lease finance in the sector

High

High priority segments:

DRE-1: Solar pico utilities (<2kW), utilizing a BOM model

DRE-2: Solar micro utilities (2-10kW), utilizing a BOM model

DRE-3: Solar/wind-solar mini utilities (11-25kW), utilizing a BM model

DRE-4: Biomass small-utilities (26-100kW), utilizing a BOM model

Hig

h

Medium

Med

ium

Low

Low


Lease finance has high applicability for pico solar (DRE-1), micro-solar (DRE-2), and small biomass (DRE-4) utilities, depending on the lease finance model being implemented. The lease model would help scale up BOM business model across both solar and biomass sectors (segments DRE-1, DRE-2, and DRE-4) by reducing set up costs for RE enterprises. The leasing model would achieve this by allowing RE enterprises to lease key equipment such as solar panels, batteries, etc., which can cover more than 50% of their setup costs. An important point to note, particularly for the DRE-2 segment, is that enterprises in this segment did not prioritize any debt instruments during the interviews. However, analysis indicates that the lease finance model holds potential for this segment and could potentially help unlock value here.

Lease finance has medium applicability for micro/ mini solar and wind-solar (DRE-3) and SWP players (CP-4). This model could be applicable to the DRE-3 segment but given current state of this segment, it is unlikely that this model would be able to unlock significant value for these enterprises. SWPs tend to be expensive consumer products and these players could potentially use lease finance to help increase uptake by end-users. However, these products are highly subsidized by the governments (as much as 85% in certain states), and the dependence on subsides may reduce interest levels of FIs. This could also reduce ticket sizes to below a level that would be feasible for FIs. Moreover, monitoring of individual pumps may be considered a huge challenge by most FIs, possibly restricting their engagement in leasing these products.

Lease finance has low applicability for hydro mini-grid players (DRE-5), enterprises in cookstoves (CP-1), SPLs (CP-2), and SHS sectors (CP-3), and RE product distributors (CP-5). The hydro mini-grid sector is still in the process of establishing robust technological standards, is highly dominated by the government, and faces a generally negative outlook from investors. FIs are unlikely to consider lease financing as a viable solution in this case since this sector is not considered credible enough as of now. RE enterprises involved in consumer products such as cookstoves, SPLs, and SHSs are primarily in need of WC finance to fund their sales cycle and a lease finance product does not meet their key financing need. Further, even though consumer finance continues to be a challenge for RE products, the ticket size for any of these products would most likely be too small to be feasible for leasing. Finally, RE distributors are also typically looking for WC finance and lease finance does not fit either their financing needs or the barriers they face in scaling their business.

Key risks and potential mitigation strategiesThe introduction of a novel financing concept to a nascent sector is expected to face important risks in implementation and scaling. These risks can be mitigated by incorporating them in the design process itself and seeking support from relevant stakeholders to address issues beyond product design. The table below includes some key risks faced by the lease financing model and potential strategies that could help address these risks.

Key risk Potential risk mitigation strategy

Low resale value of RE plant and machinery could expose FIs to high losses in case of repayment default, possibly deterring them from rolling out lease finance for the sector.

The lack of trained VLEs could result in high failure rates of mini-utilities, causing high repayment defaults and ruining market perception.

Monitoring and resale of individual mini-utilities located in remote, rural areas could prove to be a challenge for most FIs.

Lack of available quality standards in the RE sector (which comprises a variety of products

The establishment of a secondary market for RE products (possibly through a buyback facility) would encourage FIs to lease RE assets, since it will enable them to sell RE equipment easily and recover the loan amount. Details on the secondary market have been discussed in section 9 of the report.

Development agencies and RE enterprises should invest in TA and skill building of VLEs. These skills would include project management skills, recommended procedures for operation & maintenance, etc. However, given the difficulty of reaching VLEs, the training should be structured such that it can be delivered by RE enterprises.

The lease agreement could include a provision to address the leasing company’s presence in a particular geography and difficulties in seizing assets in a remote location. In such cases, the clause could mandate the responsibility of transportation of the equipment to the closest urban centre to the lessee. Further, low cost geographic location tracking devices could be used to track the status of the asset remotely.

Development agencies and RE enterprises should advocate the development of national standards for products and equipment across

Annex 4

DRE4

DRE5

DRE3

CP3CP5

CP4

CP1 - CP2

DRE1 - DRE2



and equipment) could create confusion for FIs regarding “quality” RE assets that can be leased.

Prevailing tax laws in India could provide disincentives for leasing of assets as opposed to directly purchasing them. These include tax benefits on account of higher depreciation rates for companies that own assets.

technologies to help identify relevant quality benchmarks for FIs.

Development agencies and MNRE should consult relevant government bodies to introduce tax incentives (such as accelerated depreciation benefits) specifically for leasing RE equipment. Further research is required to ascertain if the benefits of lease finance outweigh taxation benefits of asset purchase. However, in the case that it does, incentives in the form of tax credits could incentivize leasing of RE equipment.

Next stepsConsidering that lease finance is a relatively new concept for the sector, it is important to test it through a pilot project. For the pilot, the VLE lease finance model in ship with a solar company that operates on BM business model is recommended. The VLE model is recommended for pilot because it would be easier to implement than the enterprise model, which would require an extensive process of establishing a leasing company in partnership with major suppliers of RE equipment. Further, an RE MSME operating on BM business model is recommended because it would have prior experience of implementing a mini-utility project involving a VLE.

As part of the pilot, the development agency would identify the partner organization and facilitate provision of a lease finance loan to a local VLE for purchase of the mini-utility.

This pilot project can be rolled out in the short-term itself (under 6 months) and learnings from the pilot can be applied to develop a commercial lease finance product for the small-scale RE sector over the medium - long term.

Enterprise financing solution: Mini project finance

Introduction and rationaleA major issue faced by many RE MSMEs seeking debt is the lack of fixed assets that can be collateralized. In addition, many RE MSMEs interviewed consider sourcing finance as one of their top business priorities. This prevents them from focusing more on developing RE projects, which is their core competence. There is potential to replicate the traditional project finance model in the small-scale RE sector to mitigate these barriers.

Adapting project finance would allow project

proponents to access funds for multiple projects with one financing instrument without facing collateral related barriers. Project finance traditionally has been used for large-scale infrastructure projects and relies on cash flows generated by the project for loan repayment. It does not require the borrower to have assets on the balance sheet, as is required by other debt instruments. The non-recourse property of project finance makes it well-suited for RE MSMEs since they typically lack fixed assets that can be used as collateral. Further, the ability to access funds for multiple projects with one financing instrument would allow these enterprises to focus on developing new projects, helping them scale faster. Therefore, project finance could be a high potential financial product for certain segments in the small-scale RE sector.

Description of solutionThe traditional project finance model would be adapted to develop a “mini-project finance” model suited for the small-scale RE sector. Mini-project finance would retain one key characteristic of a traditional project finance model - as with the traditional model, the entity seeking mini-project finance would set up a limited liability Special Purpose Vehicle (SPV) to ensure that the lender’s claim is restricted to project assets. The SPV would ensure that mini-project finance is a non-recourse debt instrument to be repaid from cash flows generated by the proposed project.

However, there would be modifications required to adapt the traditional model to ensure its applicability for the sector. This is because the ticket size for small-scale RE projects is much lower than that for traditional projects that avail of project finance. This has two implications for applying mini-project finance to the sector: first, the instrument would need to be for a bundle of projects (e.g. requiring a total investment of exceeding INR 5 - 10 crores) instead of one large project. Second, because the

ticket size for the instrument is lower, a syndicate of FIs may not be needed – rather one FI may be best positioned to provide mini-project finance.

The mini-project finance setup could function as follows. First, the FI would provide funds to the SPV created by the RE MSME. The RE MSME would use these funds to implement the proposed RE projects through the SPV. In the event that a proposed project is successful, the SPV would use cash flows from the project to repay the loan amount. However, in case of default, the SPV would be faced with two options: either repay the loan from cash flows generated by other projects or allow the FI to take possession of project assets for sale in secondary market. If the SPV is not able to meet repayment obligations using cash flows from other projects, the FI would take over

It may be advisable to institute a partial guarantee cover (possibly through a development agency), for the FI particularly in the short-term - resale value of RE equipment may not be very high because in the short-term, limiting an FI’s ability to sell RE assets to recover the loan amount. The guarantee cover would limit the

project assets and sell them in the secondary market to recover the loan amount.

The mini-project financing would typically cover a fixed percentage (e.g. 60 - 70%) of the costs of projects that the company intends to implement over a period of time (e.g. 1 - 2 years). This financial product would be a relatively long-term debt instrument (e.g. 5 - 7 years) and market interest rates (e.g. 12 – 15%) would be applicable. As discussed above, only the project assets would serve as collateral for the loan. The table below provides certain design parameters of the mini-project finance instrument, although the exact design remains to be explored further.

Typical ticket size Average interest rate Typical tenure

Mini-project finance $1 million - $2 million 12 – 15% 5 - 7 years

downside for FIs and incentivize them to provide mini-project finance to RE MSMEs. However, over time, as the secondary market is established, FIs would be able to sell RE assets more easily to recover the loan amount. As this process takes place, the guarantee cover can be gradually phased out over time.

Structure of mini-project financeExhibit 21

Secondary market for sale of RE equipment


FI

SPV set up by RE MSME

RE project executed by RE MSME


1

2

3a

4b

3b

FI finances identified RE MSME through SPV created for this purpose

RE MSME implements the projects through the SPV

SPV uses project cash flows to repay loan amount

RE MSME either:Repays loan using cash flows from other projects, orAllows FI to take over project assets

Project implemented fails to generate cash flows

Best case scenario

Worst case scenario

6bAsset resale does not generate high value. Bilateral aid agency provides partial guarantee to FI for initial provision of project finance

5bRE MSE fails to repay loan from other projects; FI sells project assets in secondary market to recover loan amount

Annex 4


Potential for impact Mini-project finance has restricted utility for the RE consumer products sector but could be a high enabler for

Mini-project finance has high potential for enterprises in one segment in the small-scale RE sector - small biomass (DRE-4) enterprises. A majority of enterprises in this segment are typically looking for capital to finance business expansion. Biomass mini-utility players have a fairly well established track record of projects and can also seek mini-project finance for a low number of installations considering high ticket size requirement for individual projects. A long-term, non-recourse debt instrument that allows access to funds for a group of projects is ideal for these enterprises.

Mini-project finance has medium potential for solar micro utilities (DRE-2). Enterprises in this segment typically install plants of lower sizes (2 kW – 10 kW) than that by enterprises in segment DRE-3. Due to lower size of plants, these players require lower investments per plant. Therefore, in order to increase the ticket size to be suitable for mini-project finance, these players will require a large number of projects. However, research indicates that majority of these players are not in a position to commission a high number of projects at this

certain segments in the mini-grids space. The following discussion highlights the segments where project finance could hold the key to unlocking segment potential:

stage. This limits the utility of mini-project finance for players in segment DRE-2 in the short-term.

Mini-project finance has low potential for solar pico utilities (DRE-1), solar/ wind-solar players using BM business model (DRE-3), and hydro utilities (DRE-5), and RE consumer product segments (CP-1 – CP-5). Requirement of a large number of new installations as described above is the primary reason that mini-project finance is not relevant for solar pico utilities (which involve project sizes typically less than 2 kW). Hydro utilities have been around for a long time but these projects are yet to achieve commercial viability, making them unlikely recipients of mini-project finance at this stage. Finally, consumer product segments are also unlikely to benefit from project finance due to misalignment between their financing requirements and value proposition of mini-project finance.

Key risks and potential mitigation strategiesProject finance is a new concept for the small-scale RE sector and faces several risks for the financier: As a

Potential impact of mini-project finance for RE MSMEsExhibit 22

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lock

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entia

l


Priority segments


High


DRE-4: Biomass small-utilities (26-100kW), utilizing a BOM modelH

igh

Medium

Med

ium

Low

Low


financing mechanism, project finance has traditionally been restricted to large-scale infrastructure projects with low operational/ implementation related risks. Its

implementation in the relatively nascent small-scale RE sector faces certain risks, which can be mitigated as discussed in the table below:


Unwillingness of FIs to provide project finance for a relatively new sector with limited track record

Low resale value of RE project assets in case the borrower defaults

Delays in implementation of projects financed by project finance

Limited technical capacity of RE MSMEs to set up and operate SPVs

In the short-term, external actors (e.g. development agencies) could provide TA to FIs and possibly extend guarantee cover on project finance provided to RE MSMEs. Once the sector credentials are better established, FIs will be more confident and both the guarantee cover and TA can be rolled back.

A secondary market would allow FIs to sell RE equipment and recover loan amount in case of default. Further details on the secondary market have been included under the section 9 of the report (cross-cutting solutions).

In order to incentivize enterprises to complete projects on time, FIs could consider charging an interest rate penalty on delays beyond a certain point (e.g. 4 – 6 months).

External actors (e.g. development agencies) could provide TA to RE MSMEs regarding laws pertaining to SPVs, procedure for setting up an SPV, its benefits, as well as challenges associated with its operation. This guidance would help familiarize RE MSMEs with the concept of SPVs and increase uptake of mini-project finance.

Next stepsConsidering that project finance is a relatively new concept for the sector, it is important to test it through a pilot project. As part of the pilot project, a development agency would provide TA to a commercial bank/ NBFC willing to provide project finance to an RE MSME. The TA would involve identification of a high potential mini-grid player, appraisal of its business model, evaluation of its growth prospects, etc. Upon completion of the appraisal process, the loan would be disbursed by the FI. For the purpose of the pilot, the development agency could consider providing a partial guarantee (e.g. 60%) to the FI as well. This is to limit the downside for the FI since the absence of a secondary market for RE equipment will prevent high resale value of machinery in case of default.

Enterprise financing solution: Developing a credit line for soft loans/working capital

Introduction and rationaleMost RE enterprises across numerous segments face challenges in accessing debt products provided by formal FIs. In particular, there are two financial products that they seek but which are out of their reach: WC loans, and soft loans. Both these types of loans are riskier by nature for FIs as MSME borrowers lack collateral and credit history, or because these products are loaned out at lower than market interest rates. As such, most FIs are unwilling

to provide these products to RE MSMEs.

A dedicated credit line could help increase the flow of specific financial products that remain inaccessible for RE MSMEs. A credit line with a partner bank and a specific mandate to direct more of these two financial products to this sector could address the barrier related to low availability of finance. Since the development agency typically bears the loss due to bad debt in the credit line, it incentivizes the partner bank to lend more freely to the sector. However, risk mitigation measures including quarterly update reports and agency’s involvement in the due diligence process help institute accountability for the partner bank. Further, the eligibility criteria for the credit line can be tailored to mitigate barriers that have traditionally restricted availability of finance for RE MSMEs.

While credit lines have been deployed in the Indian RE sector in the past, many of them were not targeted at specific segments or loan types. Moreover, due to implementation challenges, many of them have not been able to deploy the entire pool of allocated funds. Various credit lines in the past have also failed to catalyse long-term finance for the sector, raising questions on a sustainable impact of instituting credit lines. Taking these challenges into account, the solution presented below tweaks the design of the traditional credit line to ensure broad uptake and effective implementation.

Annex 4

DRE4

DRE5

DRE2

DRE1

DRE3

CP1 - CP5


Description of solutionAt its core, a credit line is a pool of funds that is used to incentivize an FI lend to a specific sector or for a specific product. Typically, an external actor (e.g. development agency) provides low-cost funds to an identified banking partner with a mandate to increase financing to a particular sector. The bank uses these funds to extend loans (at specified terms and conditions) to companies that meet the defined eligibility criteria. As the FI receives repayments from the borrower, it pays back the development agency. In the event of a default, the FI recovers part of the loan amount by taking over the assets of the borrower. Losses due to the remaining amount on the loan are borne by the development agency. This process continues over the term of the credit line (e.g. 5 years) or until the credit line has been utilized completely.

In order to ensure the most effective functioning of the credit line, there are several best practices one can consider.

Charge the banking partner an upfront fee to access the credit line. It is recommended that the agency charge an upfront fee (e.g. 1 – 2% of committed funds) to partner banks to access the credit line. This fee would ensure that only those banks that actually intend to utilize the line of credit would demonstrate interest in partnering with the agency.

Incorporate a Technical Assistance (TA) component. This would involve assistance for partner banks from the development agency in assessing potential RE investment opportunities and building their knowledge base for the sector. There are two reasons why this is important in the context of the proposed solution – first, FIs typically lack the technical expertise needed to evaluate RE investments and require external support to do so. Second, it is important that FIs develop a deeper understanding of the sector since their ability to independently evaluate RE opportunities would be critical in sustaining flow of finance to the sector in the long-run once the credit line is rolled back.

Select banking partners through a highly targeted outreach process. This would involve assessing partners based on their outlook for the credit line and other specific criteria (discussed later in the section).

As part of the process, the agency could also share business models and profiles of enterprises they intend to finance through the credit line. This will ensure that the agency and the banking partner are aligned on the prospective borrowers under the credit line.

Mandate sub-sector lending targets for the credit line. Past data indicates that credit lines that reach out to multiple sub-sectors may stimulate the flow of finance to relatively more attractive segments only. A sub-sector level target will ensure that even sub-sectors that may not be perceived as attractive as others by investors on a relative basis benefit from the proposed credit line as well. For example, if a credit line includes both cookstove and SPL enterprises, investors are most likely to prefer investing in SPL enterprises over cookstove companies. In such a case, the credit line would not be able to increase finance for cookstove players.

Conduct capacity building workshops for RE MSMEs. This will involve providing information on the objectives of the credit line, eligibility criteria, and the process for availing of loans. This will ensure high levels of awareness about the credit line among target segments, and subsequently its higher level of utilization.

Institute separate credit lines for working capital loans/ soft loans. Identified market segments have varying financing needs, and therefore, differing preferences for soft loans/ WC loans. Establishing separate credit lines for these products would allow the implementing parties to be more targeted and focused in providing relevant financing products to each of the target segments. A common credit line for the small-scale RE sector, on the other hand, could have two drawbacks that would limit the effectiveness of the proposed credit line: specific focus on market segments considered attractive by partner banks and focus on one of the two financial products considered better by the partner bank.

The table below provides certain design parameters of the proposed credit line – this is not specific to either of the two financial products considered (soft loans and WC loans) but provides an indicative estimate of the gap in RE MSME financing needs. The exact design of the credit lines remains to be explored further.

Typical ticket size Average interest rate Typical tenure

Credit lines for soft loans/ WC loans

$10 million - $15 million 12 – 15% 5 – 7 years

Potential for impact The potential impact of the credit line will depend on which financial product (soft loan or WC loan) is

A soft loan credit line has high potential for various market segments in the small-scale RE sector. In the mini-grids space, soft loan is a high potential product for pico-solar (DRE-1) and small biomass (DRE-4) segments. Within the RE consumer products space, SPL (CP-2), SHS (CP-3), and SWP enterprises (CP-4) stand to benefit the most from being able to access soft loans. Enterprises in the mini-grid segments included above operate on the BOM business model, in which they are responsible for the mini-utility for its lifetime. These players are now looking to increase up their operations and are seeking low cost, long-term capital to achieve this. Soft loans provide both of these characteristics and therefore, are well positioned to meet this financing requirement. A similar reason

disbursed under the credit line. The following discussion assesses the potential impact of a soft loan credit line first and then the potential impact of a WC loan credit line.

dictates the high relevance of soft loans for SPL, SHS, and SWP sectors. Enterprises in all these consumer products segments indicated high need for low cost, long tenure debt product as well to scale up existing operations. Therefore, soft loans are high potential financial products for these consumer product segments as well.

A soft loan credit line has medium potential for players in the micro wind-solar utilities (DRE-3), hydro mini-utility players (DRE-5), cookstove players (CP-1), and RE product distributors (CP-5). The wind-solar players included above typically operate on the BM business model, which involves plant setup and transfer to a VLE. They have two primary financing needs – plant setup

Potential impact of a soft loan credit line for RE MSMEsExhibit 23

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DRE2

DRE5DRE3

CP1

Priority segments


High


DRE-1: Solar pico utilities (<2kW), utilizing a BOM model




CP-4: SWP procurers

Hig

h

Medium

Med

ium

Low

Low


CP5

CP4

CP2 - CP3

DRE4

DRE1

Credit line for soft loans

Annex 4


costs and finance for VLE to enable them to purchase the plant. While soft loans could potentially help enterprises meet these requirements, but given the current state of the wind-solar sector, their implement would likely face challenges. Enterprises in the hydro sector indicated that they can, at best, service debt at below the market interest rates. Considering that long-term, low cost finance is needed for the sector to grow, soft loans is one of the available options – although grants are better suited to create the enabling environment for the sector. Cookstove players are in a similar situation, with requirement for long-term, low cost finance. However, a lack of supporting environment would limit the impact created by availability of soft loans. RE distributors may

A WC loan credit line has high potential for various market segments across both mini-utilities as well as RE CP sectors. These high potential segments include small biomass mini-grid players (DRE-4), enterprises in SPL (CP-2), SHS (CP-3), and SWP sub-sectors (CP-4), and RE consumer product distributors (CP-5). Biomass mini-grid players rate WC as their top financing need but face difficulties accessing WC finance. A WC loan credit line would address one of their key financing needs, allowing

also benefit from soft loans since they can use these to meet their WC requirements. However, they indicated a higher preference specifically for WC loans.

A soft loan credit line has low potential for the micro-solar mini-utility segment (DRE-2). Enterprises in this segment emphasized their inability to service any kind of debt including soft loans. These players tend to be heavily dependent on subsidies (and are seeking an increase in subsidies, if possible) and indicated that their business is unviable in the absence of subsidies. Therefore, a soft loan credit line is unlikely to be relevant for enterprises in this segment at this stage.

Credit line for working capital loans

Potential impact of a credit line for working capital loans for RE MSMEsExhibit 24

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DRE5

CP1 CP5

CP4

Priority segments


High





CP-4: SWP procurers

CP-5: Distributors of RE products

Hig

h

Medium

Med

ium

Low

Low


CP2 - CP3

DRE4

DRE1 - DRE 3

them to scale faster. Enterprises across SPL and SHS sectors do not require finance for setup costs but have WC requirements to finance their sales cycles. Access to WC loans across these segments will resolve the biggest barrier to their growth, spurring growth for both of these. SWP players are dependent on government subsidies for most of their revenues (almost 85% in certain states), which often tend to be delayed. Therefore, these players typically have high WC requirement, and require a

WC loan credit line. Finally, RE distributors need WC loans to finance their sales cycles to enable them to pay their suppliers on time and to possibly extend credit to retailers/ consumers. As a result, a WC loan credit line has high potential for RE product distributors as well.

A WC loan credit line has medium potential for enterprises in the cookstoves sector (CP-1). Cookstove enterprises do face a WC crunch and are seeking loans to address this need. To that extent, the credit line does hold potential for this segment. However, there continue to be other issues such as poor quality of cookstoves, low levels of end-user awareness, and lack of product quality standards that are preventing the growth of this segment. In the present scenario, availability of WC loans for these players will only have a limited impact on the sector.

A WC loan credit line has low potential for mini-grid players across solar (DRE-1 – DRE-2), wind-solar (DRE-3), and hydro (DRE-5) segments. Interviews with enterprises in the solar/ wind-solar segments indicate that setup cost is their primary financing need and that utilities based on

these technologies do not involve high WC expense. As a result, a WC loan credit line is not very relevant for these segments. The hydro sector, on the other hand, is highly dependent on government funds, which often tend to be delayed. To that extent, WC loans may ease the financial strain on these players. However, the hydro sector is still in the process of establishing itself with respect to issues such as poor quality equipment, lack of technical expertise, and delays in land allocation. In the present scenario, a WC loan credit line would be expected to have low impact on this segment.

Key risks and potential mitigation strategiesCredit lines are a fairly well-established solution but there remains potential to improve their efficacy: As mentioned earlier, various development agencies have implemented credit lines in the past. However, the continued shortage of funds in sector is attributable to both growing demand for finance as well as limited impact of past credit lines. Some of the design specifications discussed under solution description could be useful potential risk mitigation strategies, as discussed in the table below:


Low utilization of credit lines by partner banks

Limited outreach of partner bank to RE MSMEs, resulting in low impact of the proposed credit line

Misalignment between priorities of the bilateral aid agency and partner bank on which RE MSMEs receive loans under the credit line

Willingness of partner bank to lend only to a specific sub-segment eligible under the credit line

Lack of awareness among RE MSMEs regarding the existence of the new credit line

Reduction in flow of finance to the sector once the credit line has been rolled back

By charging an upfront fee to access the credit line, the development agency would ensure that only those FIs that actually intend to use the credit line would pay for it. The agency could also consider lowering the fee charged per transaction on the credit line to keep it financially attractive for partner FIs.

There needs to be targeted outreach to specific banks which could play a significant role in scaling up the credit line. These partners would be chosen on the basis of a set of criteria which are further elaborated below. A public sector bank such as SBI may be a high potential partner to leverage, although this remains to be explored further.

Targeted outreach to specific banks would help address any issues related to misalignment of priorities. Further, the agency could consider sharing business models and profiles of RE MSMEs they are interested in funding with the potential partner banks. Agreement on profiles and business models of target organizations will ensure alignment between both entities on the issue.

Sub-sector lending targets under the credit line would ensure that funds are not directed towards specific sub-sectors only.

Focused capacity building workshops with enterprises in target segments would ensure awareness about the proposed credit line. These workshops would help familiarize RE MSMEs with the purpose, eligibility criteria, as well as application process for availing loans under the credit line.

The TA component of the solution will help build technical expertise at FIs to evaluate opportunities in the RE sector. Once the credit line is exhausted, FIs would have gained necessary skills and knowledge to independently assess and invest in RE opportunities. This will ensure that the credit line has a sustainable, long-term impact on the sector.

Annex 4


Next stepsThe immediate next steps for the implementation of a new credit line are detailed below:

Identify the design of the proposed credit line(s). Before proceeding further, the agency in charge of the credit line needs to develop an effective design for the credit line. Key decisions to be taken by the agency include the financial product to be prioritized, RE market segments to be targeted, size and term of the credit line, tenure and interest rates charged to borrowers by the partner bank, sub-sector lending targets for the partner bank, etc.

Identify banking partners. As discussed above, the development agency would identify a banking partner based on a targeted outreach process. Criteria for selection of a banking partner should include geographic coverage of bank branches, present levels of engagement with MSMEs, current levels of engagement and outlook on future involvement in the small-scale RE sector, etc.

Capacity building workshop to roll-out the credit line: The credit line should be rolled out by conducting a highly targeted outreach initiatives for target enterprises. A capacity building workshop with the banking partner and enterprises in the target segments to discuss the objectives of the credit line, eligibility criteria, application process, etc. would ensure that target RE MSMEs are aware of the credit line and of the process to avail loans under its terms. This, in turn, would encourage higher demand for loans under the proposed credit line once it is formally rolled out.

Enterprise financing solution: Pledge guarantee facility

Introduction and rationaleOne of the biggest barriers faced by several RE enterprises is delays in disbursement of subsidies by MNRE. These delays create uncertainty around future cash flows of enterprises and often result in unexpected financing requirements (such as WC). This also has an adverse impact on the enterprise’s financial performance and makes enterprises and investors wary of relying on subsidies.

A pledge guarantee facility could mitigate the barrier posed by unexpected delays in subsidy disbursement by MNRE. The pledge guarantee system would allow

RE MSMEs to access subsidies through commercial banks before these are actually disbursed by MNRE. This would benefit market segments that are dependent on subsidies, helping them plan their finances around expected disbursement timelines and reducing the stress on their liquidity.

The pledge fund was first implemented by the UN Foundation in the healthcare sector to reduce delays in access to grants. More recently, a solution similar to pledge fund called Special Banking Arrangement (SBA) was implemented in the Indian fertilizer sector by the Fertilizer Association of India (FAI)37 . Importantly, the pledge fund is expected to be a stopgap facility due to current inefficiencies in the subsidy disbursement process and will seek to provide a temporary solution that can be rolled back in the long run.

Description of solutionIn summary, the pledge fund would involve a commitment of funds from the development agency to set up the initial pool of finance. The agency would be required to establish partnerships with a consortium of banks operating in India and interested in increasing their level of engagement in the small-scale RE sector. RE enterprises awaiting receipt of subsidies after approval by MNRE would be eligible to use the pledge fund. The detailed step-by-step process for the pledge fund is discussed below.

An entity independent of the MNRE would be required to manage the pledge fund to maximize its effectiveness. External stakeholders such as development agencies are best positioned to do so considering their experience in the sector and ability to work closely with the MNRE and other relevant government bodies when needed.

In the first step of the pledge fund’s operation, the MNRE would issue a letter of comfort to an RE MSME after approving their subsidy application. This letter would assure the partner bank that subsidies for the particular enterprise have been approved and would be disbursed after completion of internal procedures. The RE MSME would then use the letter of comfort to take out the subsidy amount from any of the partner banks in the consortium. The partner bank would be allowed to charge market interest rates (12 – 15%) on the amount lent to the RE MSME. This interest would be charged for the period

The FAI has developed the SBA, which is similar to the pledge guarantee except that it does not involve a development agency. The SBA allows fertilizer enterprises access low cost loans (2 – 3%) from commercial banks against subsidy receivables, a process which essentially reduces delays in access to subsidies approved by the government at a minimal charge.

37

till which the bank receives the subsidy amount from the pledge fund (e.g. 2 – 3 months). This total interest obligation to the partner bank could be met as per the following design parameters:

The RE MSME may be charged a nominal interest rate (e.g. 2 – 3%) by the bank, as in included under the terms of the SBA of the FAI. However, in this specific case, the development agency may decide to waive off this interest obligation for the RE enterprise.

The remaining interest (10 – 12%) may be met by the MNRE alone or jointly by MNRE and the development agency, although the exact structure shall be determined through negotiations between MNRE and the development agency. It is important to note that while the interest payment obligation for MNRE would incentivize them to increase system efficiency, it would also add to their subsidy burden, which may create budgetary challenges.

As the next step, the partner bank would receive the amount lent to RE MSME from the pledge fund after the specified period of 2 – 3 months. Finally, as MNRE completes the disbursement process, the subsidy amount would be deposited back to the pledge fund for future use by other banks. In addition, the development agency may charge the MNRE additional interest (e.g. 4 – 5%) for any delays in subsidy disbursement to the fund beyond a specified amount of time (e.g. 4 – 6 months).

The pledge fund would be supplemented by a TA programme to improve the subsidy disbursement process over the medium – long term. As the system efficiency increases and disbursement delays are reduced over the medium – long term, the pledge guarantee could be diminished until such point where it is eliminated entirely.

Potential for impact The pledge guarantee fund has particularly high applicability for three market segments: SWP enterprises (CP-4), solar micro utilities (DRE-2), and biomass mini-utility players (DRE-4). There are other segments to which it is applicable but does not have a similar potential to unlock value. These include SPL (CP-2) and SHS (CP-3)

Pledge guarantee facilityExhibit 25

Pledge fund (managed by multilateral agency)

MNRE

RE MSME

Commercial bank


23

4

5

RE MSME approaches partner bank to receive subsidy amount. Bank provides funds to the market player based on letter of comfort and may charge nominal interest for the period till it receives money from the pledge fund

Interest payment (to be determined)

MNRE disburses subsidy amount directly to pledge fund after completion of internal procedures

MNRE issues letter of comfort to a particular market player

The bank recovers amount lent to market player from the pledge fund after a specific period

market segments. Further, there are market segments that have a minimal dependence on subsidies and the pledge fund has limited relevance for them. The segment-wise potential of pledge guarantee is discussed below:

1

Annex 4


Potential impact of pledge guarantee on RE MSMEsExhibit 26Va

lue

unlo

ck p

oten

tial


DRE5

DRE3

DRE1

CP1

CP4

CP5

Priority segments


High


DRE-2: Solar micro utilities (2-10kW), utilizing a BOM model


CP-4: SWP procurers

Hig

h

Medium

Med

ium

Low

Low


CP2 - CP3

DRE4

DRE2

Pledge guarantee has high potential for enterprises in the micro solar (DRE-2), small biomass (DRE-4), and SWP (CP-4) sectors. The SWP sector is highly subsidy driven, with the government subsidizing more than 85% of the costs in certain states. Revenues for these firms are highly dependent on the government, and therefore, any delays in release of payments cause WC stress for these players. Timely disbursement of subsidies will help these players grow much faster and increase investor confidence in the sector. Similarly, biomass players have high WC requirements (due to high variable input costs) in addition to set up costs. Timely disbursement of subsidies will reduce liquidity stress for these players as well. Finally, enterprises in segment DRE-2 indicated a high dependence on subsidies, even suggesting that their business model may not be viable without MNRE subsidies. For these players, it is very critical to access subsidies on a timely basis and therefore, a pledge fund may hold the key to unlocking their potential.

Pledge guarantee has medium potential for enterprises in the hydro (DRE-5) mini-grids segment and solar lighting devices (CP-2 – CP-3) space. Subsidies would have an important role in play for hydro mini-utility enterprises, although the challenges faced by this sector are likely to limit their potential impact. In the CP

space, the pledge guarantee could be a useful solution to scale finance for the SHS (CP-3) segment in particular. Enterprises in the consumer products segments indicated that WC represents their key financing need. However, they typically demonstrated a limited dependence on MNRE subsidies and needed WC largely to finance their sales cycle (including payments to suppliers and possible extension of credit to downstream distributors). Considering that disbursement delays may pose a barrier only for select players that rely on subsidies, the pledge guarantee holds “medium” potential for this segment.

Pledge guarantee has low potential for cookstove enterprises (CP-1), RE consumer product distributors (CP-5), players in the pico solar (DRE-1), and micro solar/ wind-solar (DRE-3) segments. All enterprises in these segments have limited reliance on subsidies and are unlikely to benefit from the pledge facility. In addition, there are more pressing issues for some of these segments that have limited access to finance. For cookstoves, a lack of high product quality, distribution channels, and product are key barriers to sector growth. For, RE distributors need for sales cycle finance is the primary financing need. The one exception in this category is the hydro mini-grid segment which depends heavily on government funds but is yet to demonstrate commercial

and technical viability. Therefore, the pledge facility is not expected to be a game changer for this segment either.

Key risks and potential mitigation strategiesThe pledge guarantee is a new financing concept and its implementation faces various risks and challenges: Considering that a pledge fund involves

the implementation of a relatively new concept and requires co-ordination among various stakeholders (development agency, MNRE, partner banks, etc.), it faces risks pertaining to both implementation and efficient operation. However, it is possible to mitigate these risks by relevant strategies as discussed in the table below.


Co-ordination failure among various stakeholders including MNRE, development agency, partner banks, and RE enterprises

Unwillingness of banks to partner in the program due to uncertainty associated with disbursement of funds by pledge fund, and possible implications on their financial performance

Failure of implementing parties to come to an understanding on who takes responsibility for payment of interest payable to partner banks

Large delays in securing the letter of comfort from MNRE

Limited potential impact of the pledge facility on the sector since it would be relevant only for RE MSMEs that seek subsidies from MNRE

This risk can be mitigated in two ways:

Develop well-defined roles and responsibilities as well as timelines for each of the parties involved in the process at the outset of the initiative.

Develop clear processes and standardized templates for each step of the fund’s operation

These steps will ensure clarity to various stakeholders and standardize the process across all operational levels, helping reduce any procedural delays.

This risk can also be mitigated in two ways:

Developing a consortium of banking partners that share the same vision for the fund and have agreed through previous negotiations to honour the terms of the agreement

Crafting, in collaboration with the bank, financial terms that will compel them to participate, i.e. allowing banks to charge market interest rates (12 – 15%) on amount lent to RE MSME for the period till the bank receives the subsidy amount from the pledge fund.

In order to avoid moral hazard issues, it is advisable that the interest payment obligation to partner banks be with MNRE. Although the exact responsibilities shall be determined based on negotiations between MNRE and the development agency, the SBA example demonstrates that the relevant ministry could take the obligation for interest payment in case of subsidy disbursement delays.

The TA component of the solution would help mitigate this risk. TA would help cut down delays in obtaining the letter of comfort in two ways:

Capacity building for RE MSMEs on the eligibility and application process for subsidies. This would help players in submitting the complete documentation for MNRE at the initial stage itself. This will help avoid multiple iterations to the paperwork, which often leads to delays in approval.

Resolution of bottlenecks in the approval process at MNRE. This would expedite the process of obtaining the letter of comfort from MNRE. Possible interventions could include reduction in documentation required, Standard Operating Procedures for addressing particular issues, institution of a central team dedicated for subsidy approvals, etc.

Interviews indicate that uncertainty in disbursement of subsidies discourages several enterprises from factoring subsidies in their financial calculations. This lowers projected returns from their projects, deterring higher investor engagement in the sector. In case the disbursement process is streamlined, more players may look at subsidies as a financing mechanism and factor these in their calculations. This would help increase projected returns from their

Annex 4



The pledge fund may create a perception of subsidizing inefficiencies in government systems

projects, making a stronger case for RE among investors. This may help increasing flow of finance to the sector in the long-run by the time the pledge fund is rolled back.

The pledge fund shall be coupled with a TA program to improve system efficiency in the medium – long term. The pledge fund shall be promoted as a temporary solution, with the eventual aim of the program to identify and resolve bottlenecks in the subsidy disbursement procedure. The pledge fund itself is not designed to replace the subsidy process in the long run.

Next stepsAs discussed above, the pledge guarantee facility is a new financing concept and requires co-ordination among various stakeholders. It is critical to have partners that are aligned on the objectives, design, as well as implementation of the facility. Interviews with RE MSMEs provided initial indications that such a facility would indeed be extremely helpful in reducing subsidy disbursement delays. The next steps for implementation of the pledge fund would involve the following steps:

Design the pledge facility to maintain a balance between incentives and accountability: During design stage of the facility, the implementing agencies will select subsidy schemes that will be covered, roles and responsibilities for each of the players involved, procedures to be followed at each step of the operation of the fund, and technical design parameters. The technical parameters will involve decisions on interest rates chargeable by partner banks, interest rate payable by MNRE, as well as the expected timelines for disbursement of funds by partner banks and MNRE. These design parameters will be critical in striking a balance between holding the stakeholders accountable, as well as incentivizing them for efficiency.

Identify banking partners with a similar outlook: The development agency would then need to identify banking partners that share its vision and outlook for the proposed pledge fund. Public sector banks are likely to be best positioned to be partnered with for a variety of reasons – they have a larger branch network that private sector/ foreign banks, they are more likely to have existing relationships with RE MSMEs, and they have demonstrated a higher level of interest in getting further engaged in the sector. Therefore, public sector banks (such as SBI) could help maximize the impact of the pledge facility.

Roll out on a pilot basis: Considering that the pledge fund will be a massive undertaking, it is recommended that it first be piloted in a limited area to identify operational challenges that might be encountered later. It would be ideal to pilot the pledge fund in partnership with select branches of the identified partner bank. These branches could be selected on the basis of their interest, willingness to be a part of the process, and past relationships with RE MSMEs. The pilot project over a few months will allow the implementing authorities to identify potential bottlenecks that can then be addressed before the pledge facility is rolled out across geographies.

Consumer financing solution: Product-linked savings accounts

Introduction and rationaleLack of consumer finance continues to be an important barrier to adoption of RE products because of their ‘upfront’ costs. While new debt products would go a long way in mitigating the consumer finance barrier, personal savings are expected to play an equally important role in addressing it. At present, personal savings continue to be informal in nature and this has limited their impact on the sector. This is evidenced in studies38 that indicate that households with variable income find it difficult to save regularly across seasons because there is high propensity to spend when earnings are high. However, with a formal saving system, these households are able to increase their annual savings by more than 80%. Therefore, there remains potential to bridge the gap in consumer finance by developing a formal financial product around savings.

An RE product-linked savings product would allow consumers to save small amounts of money in a structured manner to purchase RE products. At its core, an RE product-linked savings product would involve

Behavioural Design: A New Approach to Development Policy, Center for Global Development (2012)38

regular contributions (e.g. monthly) by an individual to a savings account with a specific target to purchase an RE product. The need for such a financial product for RE consumer products was reflected in recently conducted field survey by Dalberg39 . This survey indicates that more than two-thirds of RE product users (restricted to SPL and SHS users for the study) financed their purchases using informal financing sources such as personal savings. Moreover, nearly 40% of the surveyed population indicated reluctance to take loans for purchasing RE products because of uncertain product quality and the possibility of default. Both of these findings indicate that personal savings would continue to be an important source of financing for RE products in the short-medium term. Developing a formal financing product around personal savings would address this need.

Description of solutionThe product-linked savings solution is new to the Indian market and would need to be designed and rolled out to meet the local context. The primary actor in the solution would be an FI (RRB/ CB/ co-operative bank) that is interested in providing an RE product-linked savings product to its customers. However, as noted below, an external agency would play a critical role in the short-term.

The first step would be for a development agency or a technical expert to provide Technical Assistance (TA) to FIs in developing the financial product considering a general lack of sector awareness among them. TA would help the FI to define key parameters of the savings product, i.e. the selection of RE products to be made available to consumers, minimum amounts to be deposited periodically, the time period for which deposits need to be made, etc. Next, the agency would assist the FI in identifying RE MSMEs that provide RE products covered under the financial product and have a proven track record, high product quality, and availability of after sales networks. The role of TA would be critical especially in the short-term to guide the thought process at the FI and would be phased out as FIs develop sector expertise.

Once the solution is rolled out, consumers would be able to choose which RE product they are interested in purchasing from the set of shortlisted RE enterprises’ products. Depending on the amount required for the product, the consumer would contribute to a restricted savings account at the bank for the required period (e.g. 6 – 18 months). These amount deposited by the consumer

Dalberg consumer survey on solar lighting products, 201339

would be kept flexible, so as to account for their income variability. However, consumers would be required to deposit a minimum amount every month to develop the habit of saving regularly. Further, the FI would also pay an interest premium (e.g. 1 – 2%) to consumers availing of the proposed solution to incentivize them to switch to the proposed solution.

As the savings process continues, the FI would inform the consumer once the purchase price of the product has been accumulated in the account. At this point, the FI would either transfer the amount to the RE MSME along with details of the product the consumer intends to purchase or allow the borrowers to draw out their savings to purchase the product themselves. In case the savings are transferred to an RE MSME, the enterprise would deliver the product at the FI’s branch, from where it would be collected by the end consumer. This delivery mechanism may not work for certain products such as SHS and solar water pumps, which require technical expertise at the last mile for setup and installation. For these products, the RE MSME would need to deliver the product directly to the end consumer.

In addition to the structure discussed above, there are several best practices to consider:

Interest premium for consumers availing of the RE product-linked savings product. The FI would offer consumers an interest premium (e.g. 1 – 2%) to incentivize them to deposit their savings for RE products. The concept of interest premium is not standard but it would be a key enabler for customers to switch from an informal savings process to the proposed solution.

Flexible deposit mechanisms to account for a potential consumer’s income variability (e.g. due to seasonal employment). This would allow consumers to deposit more during months with high income and reduce deposits during months with low income. However, they would still be required to deposit a minimum amount every month and complete the savings process within a fixed period as stipulated by the FI. This would ensure that consumers get into the habit of making regular deposits without getting burdened in months with particularly low incomes.

Flexibility for the consumers to procure the RE product themselves or through the FI’s partner

Annex 4


MSMEs. The proposed solution would allow the consumer to either draw out savings from the account to purchase the RE product themselves, or allow the bank to transfer accumulated funds to the RE MSME for supplying the product. While the first option would

Potential for impact In terms of product categories, the proposed solution would be broadly applicable to all product types across the RE consumer products space – cookstoves, SPLs, SHSs, and SWPs. However, it is expected to be especially useful for plug-and-play devices such as cookstoves and SPLs because these do not require technical personnel for setup and installation. As such, delivery for these products can be made directly, making the process easier and helping keep costs down for the market player. Appliances such as SHSs and SWPs, on the other hand, require technical expertise for initial setup – this limits the impact of this solution because most market players are not in a position to deliver last-mile services at this time.

In terms of customers, preliminary projections40 based on existing customers with savings accounts suggest that the proposed solution could potentially lead to 1.5 – 2.5 million sales of RE products in the short-term itself. The

provide users more agency and flexibility in selecting an RE appliance from a range of available products, the second option would help consumers work around issues such as quality of products available in the market.

potential of this solution is expected to grow significantly in the long-run as more of the rural population gets access to basic financial services, and in particular, savings accounts. The RBI has indicated that financial inclusion in rural areas is one of its top priorities and is working closely with FIs in India to extend basic financial services across the country.

Key risks and potential mitigation strategiesThe product-linked savings solution faces several risks but these can be mitigated by using certain risk mitigation strategies. The table below includes some key risks faced by the solution and potential strategies that could help address these risks.

Next stepsIt is recommended that the product-linked savings product be piloted to determine potential uptake and to identify key implementation related barriers. The pilot would be led by a development agency and would help in the development of a standard RE product-linked savings solution. The model can then be taken forward by other FIs in their respective geographies.

As part of the pilot, the agency would first identify an FI that is interested in providing the proposed financial product. As part of its TA, the agency would assist the FI in identifying market players that could provide high quality RE products. Considering that the pilot would be used as a learning platform to develop the standard solution, it is recommended that it be implemented for SPLs costing less than $20. This product segment is prioritized for two reasons: first, SPLs comprise the lowest priced RE products and consumers would be able to save for these over a short period of time itself (e.g. 6 months). This would reduce the time needed to incorporate the lessons in tweaking the existing solution. Second, as compared

Structure of RE product-linked savings solutionExhibit 27


CB/RRB/Cooperative bank

RE MSME

Re consumer


2

4

3

1

5

FI identifies RE MSMEs providing RE products covered under their product; select candidates on their criteria

FI transfers funds to RE MSME once the product price has been accumulated; enterprise supplies RE product to FI

Consumer starts contributing to a restricted savings account for purchase of RE product

Bilateral agency assists interested FIs in developing an RE product-linked savings products; also provides technical assistance in selecting products that could be financed using the bank

RE consumer collects the RE product from the FI

Assumes 70 million savings accounts across rural India at present. Assuming 80% outreach to this account holders, interest demonstrated by 20% consumers, 35% penetration of the interested base, and 50% of users completing their contribution to receive the RE product

40


Reluctance of FIs to provide a financing product for RE products due to uncertainty around product quality and availability of after sales services

Reluctance of FIs to operate as “delivery centres” for RE consumer products

Lack of incentives for consumers to switch from informal savings systems to the proposed financial solution

Inability of RE MSMEs to provide after sales services to last mile consumers located in remote areas

Inability of consumers to meet fixed monthly deposit commitments due to variable income during the year

A development agency would provide TA to the FIs in selecting high quality RE products with established after sales service networks. This would help address the FIs’ uncertainty around product quality as well as customer dissatisfaction from purchase of sub-standard RE products.

RE MSMEs could offer fiscal incentives to the FI for playing the role of “delivery centres” for their products in the short-term. This would be a stop-gap solution considering absence of last-mile distribution networks at present. In the medium-long term, RE MSMEs would be better positioned to reach consumers themselves and the role of FIs as collection points would not be needed.

The FI could offer an interest rate premium (e.g. 1 – 2%) on deposits made for purchase of RE products. This would incentivize consumers to switch from an informal savings system to the proposed system.

MSMEs could arrange periodic (weekly/ fortnightly) visits from technicians to have a quick turnaround time in addressing any pending complaints from consumers. This would obviate the need for the market player to have dedicated service centres in multiple geographies. This service model has been used by certain RE MSMEs in the SPL space and has shown early indications of success.

The consumers would be offered flexible deposit mechanisms to account for any income variability (e.g. due to seasonal employment). This would allow them to deposit more amount during months with high income and reduce deposits during months with low income. However, they would still be required to deposit a minimum amount every month and complete the savings process within a fixed period as stipulated by the FI. This would ensure that consumers get into the habit of making regular deposits without getting burdened in months with particularly low incomes.

to cookstoves, the SPL segment has more high quality players with established after sales service networks at this stage – this will allow consumers to purchase high quality RE appliances using their savings.

Finally, it is recommended that the pilot be implemented across branches in different districts (e.g. 3 – 5) so that the results are reliable and not subject to district level unique barriers.

Consumer financing solution: Scale-up lending to Self Help Groups through Regional Rural Banks and Commercial Banks

Introduction and rationale RE appliances typically tend to have high-perceived value due to a limited understanding of their true value proposition. This has resulted in the limited uptake of RE appliances so far. Existing literature and interviews conducted for this study indicate that low incomes limit the ability of consumers to pay for RE products. Further, a limited number of FIs in the RE consumer financing

Annex 4


space restricts their ability to access loans for these products. Market players could provide consumer loans but they typically see themselves as technology experts and not as financiers. However, they could enable FIs such as Regional Rural Banks (RRBs) and Commercial Banks (CBs) to scale their presence in the sector.

Developing partnerships between RRBs/ CBs and consumer product players could increase consumer finance for RE products. These partnerships would address the key challenges faced by each of the following players: (i) market players would get an opportunity to tap into the extensive network of bank linked SHGs, increasing their customer outreach, (ii) RRBs/ CBs would be able to assess product quality and after sales services for products they are financing, and (iii) consumers would get access to loans for high quality RE consumer products. These factors combined together lend high potential to the partnership solution in spurring the growth of the RE consumer products sector.

Description of solutionThe proposed solution advocates the provision of consumer loans under a partnership between an RRB/ CB and an RE consumer products market player.

The process of implementing this solution would start at an RRB/ CB interested in engaging the SHG network to provide consumer loans for RE products. A development agency could provide Technical Assistance (TA) to the RRB/CB in devising eligibility criteria for potential partners. These criteria would include parameters such as the player’s track record, product quality, availability and quality of its after sales service network, etc. Once the criteria set has been developed, the RRB/ CB would identify RE MSMEs to partner with, possibly through an application process. The next step would involve developing the partnership agreement between the FI and the identified market player. This process could be facilitated by the agency considering limited knowledge and expertise about the sector at present.

As part of the proposed solution, NABARD/ a development agency may provide a partial guarantee to cover part of the loan (e.g. 60 – 70%) made by the RRB/ CB in the short-term. Over a period of time, as RE MSMEs gain financial strength, the partial guarantee offered by NABARD/ a development agency can be rolled back and replaced with the guarantee provided by the market player.

Potential for impact In terms of product categories, the proposed solution has high potential for cookstoves, SPLs, and low priced SHSs. One of the key advantages of these products is their relatively lower ticket size as compared to other RE products (e.g. SWPs). A single loan made to an SHG could enable several members to purchase the product together, increasing the potential impact of the solution. Further, purchasing the products in groups may also motivate reluctant group members to follow others and purchase the product.

The product has medium potential for SWPs. These typically tend to be high priced items and are better suited for individual loans than group loans. However, there is a possibility of developing a model where an SHG purchases an SWP that serves farms owned by different SHG members. This could lead to the concept of an “SHG owned SWP”, although the potential for this is limited since it is contingent on the geographic spread of farms owned by SHG members.

The solution has low potential for high priced SHSs. Like SWPs, certain SHSs are also high priced items typically better suited for individual loans. However, the

Once the partnership has been established, the program would be rolled out. As this is done, the RRB/ CB would target SHGs linked to it for provision of consumer loans for RE products. These consumer loans would be provided as per terms agreed upon in the agreement with the market player. The term of loan is expected to vary 1 – 5 years depending on the price of the product purchased. Further, these consumer loans would likely be priced at prevailing market rates (12 – 15%).

After the purchase of the product, the SHG would commence repayment of loan to the RRB/ CB. As mentioned above, the partial guarantee cover would help the RRB/ CB secure part of the loan in case of default.

In addition to the structure above, additional best practices should be incorporated in the proposed solution:

In order to ensure that these loans are used to purchase RE products, the SHG members should be required to submit the receipt of their purchase at the RRB/ CB branch that provided the loan.

Second, outreach activities conducted by the RRB/ CB and market player should form an integral part of the project. The awareness drives would include information dissemination on RE products offered by partner market players, outlets from where these products may be purchased, and loan terms (interest rate charged, tenure, etc.). This would ensure awareness of the program among the target consumers and high levels of uptake once the program is rolled out.

Finally, a development agency should provide TA to both RRBs/ CBs and market players. The agency would assist the RRB/ CB in developing the eligibility criteria for market players, evaluating their credentials, as well as designing an agreement acceptable to both parties. In addition, the agency could also be required to provide a partial guarantee to the RRB/ CB in the short term, and to finance the awareness drives.

Model for scaling up RRB/CB lending to SHGsExhibit 28

RRB/ CB

SHG #1

Bilateral aid agency/ NABARD

RE consumer product market player


2

3

1

4a5b

4b

Loan to SHG, enabling purchase of products offered by the market player

RRB/ CB seeks guarantee cover offered by market player

SHG repays loan amount to RRB/ CB

SHG defaults on the loan

RE MSME seeks out partner RRBs/ CBs to develop the consumer finance program.

Bilateral agency provides technical assistance to RRB/ CB in selection of partner RE MSME; may also provide partial guarantee in the short-term

Approximately 4, 2, and 1 million SHGs are linked to RRBs, CBs, and co-operative banks respectively Status of microfinance in India, 2012-13, (NABARD); the numbers reported here may be self-reported and may need further validation

4142

difference between the two is that SHSs tend to be for individual consumption and not group consumption. Therefore, the concept of an “SHG owned SHS” is not viable and the proposed solution has low potential for the product category.

In terms of consumers, the potential impact of the proposed solution is driven by the coverage that the bank-linked SHG network offers. As per NABARD’s report on status of microfinance in India (2012-13), there are more than 7 million bank-linked SHGs in India41 . Considering the average number of members per SHG as 13, the approximate number of families covered by RRBs and CBs works out to more than 90 million, demonstrating the pan-India potential of this solution.

Even by focusing on the under/ un-electrified states in India, SHGs demonstrate a similar potential to create impact. Looking at the top five Indian states with highest number of unelectrified households, the total number of bank-linked households (through the SHG network) exceeds 20 million42 (exhibit below). Although these numbers are indicative and need to be explored further, the SHG network demonstrates potential to be a game changer for consumer finance.

Annex 4


SHGs linked to CBs

SHGs linked to RRBs

SHGs linked to co-operative banks

Source: Census 2011; Dalberg analysis

Bihar Uttar Pradesh Jharkhand OrissaAssam

Increasing levels of electri�cation

10.4% 23.8% 28.4% 32.3% 35.6%Percentage of rural households using electricity as their primary source of lighting

1.72

3.15

0.12

1.98

5.24

1.79

3.51

0.32 0.36 0.96

3.15

2.68

6.78

1.110.75

2.07

1.13

3.52

Status of bank-linked SHG households in five under electrified states 9 (millions)Exhibit 29

Key risks and potential mitigation strategiesThe project faces several risks but these can be mitigated by using specific risk mitigation strategies.

Next stepsIt is recommended that the RRB/ CB – SHG model be first tested through a pilot project in select districts with high SHG penetration and RRB/ CB presence.The pilot would be led by a development agency and the model can then be taken forward by other RRBs/ CBs in their respective geographies.

As part of the pilot, the agency would first identify an RRB/ CB that has been involved in the provision of loans for purchase of RE consumer products and is looking to increase its footprint in the sector. For the purpose of the pilot, the agency would provide partial guarantee to the

The table below includes some key risks faced by the RRB/ CB – SHG model and potential strategies that could help address these risks.

RRB/ CB for these loans. Next, the agency would assist in developing eligibility criteria for potential partners and identifying a market player that meets these criteria. Once the RRB/ CB and the RE MSME sign the agreement, the pilot would be rolled out. Preferably, the project should be tested in multiple districts (e.g. 3 – 5) so that the results are reliable and not subject to district level unique barriers.

The learnings from the pilot can then be used to devise a robust consumer financial solution, which can then be shared with other RRBs/ CBs.

Key risk

Key risk

Potential risk mitigation strategy

Potential risk mitigation strategy

FIs could vary in terms of their level of interest and ability to implement the proposed solution due to their regulatory environments and internal process requirements

Inability of RE MSMEs’ to offer partial guarantee to RRBs/ CBs in the short-term

Unwillingness of RE MSMEs to provide guarantee cover on loan defaults that are wilful as opposed to defaults due to gaps in service provided

Lack of awareness among end consumers about the availability of consumer loans for RE products from the RRB/ CB

Misuse of loans provided by RRB/ CB for purposes other than purchase of RE products

Unreliability of the pilot project in ascertaining the viability of the proposed solution

Lack of incentives for the market player to be a part of the program once the sale has been made

To mitigate this risk, RRBs could be prioritized over CBs to provide consumer loans to SHGs. RRBs were instituted primarily to accelerate rural finance and their agenda aligns well with that of the proposed solution. However, in geographies where RRBs have a minimal presence/ level of activity, CBs may be considered instead.

NABARD/ a development agency could provide the initial partial guarantee to RRBs/ CBs. As RE MSMEs gradually develop the ability to provide the partial guarantee themselves, the initial guarantee can be phased out in the medium – long term.

The partnership agreement would specify conditions under which the RE MSME would be obligated to provide partial guarantee to the RRB/ CB. These would include underperformance of the product, failure of the enterprise to provide after sales service, etc.

Awareness drives conducted jointly by RRBs/ CBs would help mitigate this barrier. The campaigns would focus on RE products offered by the RE MSME, channels where these products are available, provision of after sales service, and loan terms (tenure, interest rate, etc.) to ensure high awareness and uptake of consumer loans when they are rolled out.

The receipts submitted by SHG members to the RRB/ CB branch would confirm that the borrower has purchased the RE product

The pilot project shall be launched in multiple districts to ensure any factors unique to a particular district do not impact the aggregate results. This will ensure a more reliable estimate of the potential of this program if rolled out in multiple geographic and demographic settings.

The partial guarantee provided by the market player would incentivize it to be a part of the program even after product sale has been completed. The MSME would be obligated to provide guarantee to RRB/ CB in case it fails to provide after sales services and the borrower defaults on the loan as a result.

Annex 4


DRE-1: Solar pico utilities, utilizing a BOM model

Current sources of financeActors in this segment have relied on hybrid products and grants and subsidies as their primary sources of finance to date. There are few firms that have been able to operate without subsidy. The full set of current financing sources for this segment is included below:

Hybrid products: Players have accessed convertible debt for early stage expansion used towards project set-up and R&D. This has been for amounts of up to $1m but was only available after an initial stage of grant financing. The hybrid instruments were typically sourced from impact investors, and the target rate of return was approximately 20%.

Grants: Initial funding for market players in this segment has come from grant funds as the actors are relatively new and are still emerging. These grants are often in the range of $300k-$1m, and are of different modalities – either one time, or milestone-based, and have come primarily from multilateral donor agencies.

Subsidies: Some MSMEs have received subsidies of up to 30% towards utility set-up costs under the Jawaharal Nehru National Solar Mission (JNNSM). However,

Based on this risk-reward profile, it will most likely attract three types of actors:

Angel and impact investors could potentially be further involved if they have more information about the segment. For investors providing hybrid products, there could be a strong market.

Public NBFCs such as NABARD are already involved in the sector, and have potential to be further involved, especially in the provision of soft loans. Private NBFCs could be interested in project finance as some of them have room to increase their exposure to the sector. They could be involved when players have achieved adequate scale and mitigated against risk.

Commercial banks providing traditional debt will likely be turned away because of the high perceived risk of this segment. However, there is potential for public sector banks to enter the sector when firms are more mature and established, and some proven business models emerge.

Need for finance: preferred sources and amount soughtDebt and equity are the primary needs for players in this segment, who are looking to expand their business across different geographies. Specifically, players who have received equity in the past prioritize debt, whereas those with no previous formal financing history prioritize equity. However, access to debt has proven to be notably challenging, even for players with previous rounds of grant and equity finance. Demand for grants and subsidies is not as high a priority and was seen as a “nice to have” source of finance rather than a critical need. Players were also able to operate profitably without subsidies.

some players have moved away from subsidies due to the difficulty involved in access and the delay and uncertainty around disbursement.

Risk-reward profileMedium-high risk, medium-high reward: This segment has a medium-high risk because at the utility level, enterprises operating in this space are relatively new. A particular concern for financial institutions is surrounding the collection of payments which are seen to be risky as they are handled at a household or an individual entrepreneur level. This is compounded by gaps in the policy environment, with respect to the lack of clarity around grid extension and uncertainty and delay in subsidy delivery. However, the expected short-term reward of this segment is expected to be fairly high as there exists a large potential market of rural households and other establishments in unelectrified and underelectrified areas. In addition, the market for solar pico utilities is growing, with players scaling quickly and awareness of solar technology improving, but margins are relatively low and dependent on high volumes. Considering these factors, players are likely to have significant rewards only in the long-run.

Across all players, financing needs are quite frequent, occurring on a nearly annual basis for the first 3 years of operations, largely towards geographic expansion. The typical amount sought by all players was $1-2m from some or all of the different financing sources listed below:

Debt: Majority of players specifically look for long-term debt. Some players are keen to finance a small group of projects (usually 5 or less) using soft loans, as they have a low interest rate and a long tenor. Other firms that had previously received equity, stated that they were able to accommodate market interest rates, but required debt for at least a seven year period. This debt is sought to finance expansion plans. Moreover, the majority of players were keen on accessing lease finance, and some players interested in project finance, if made available to them.

Equity/ hybrid: Players with no previous formal financing actively seek patient equity (including in the form of cumulative convertible preference shares), but are also interested in hybrid products such as convertible debt, from patient capital sources. These players are open to receiving this equity/ hybrid finance for up to the full amount of their financing needs, i.e. $1m-$2m, or in some combination with debt and grants.

Grants: Some players seek grants, especially from CSR funds, towards project set-up. The majority of players are likely to look for one-time or milestone-based grants from philanthropic foundations, multilateral agencies etc., to kick-start their operations, prior to receiving equity.

Subsidies: A few players use capital subsidies to support their projects, but this is more of an exception rather than the rule and few players were interested in accessing it.

Annex 5ADetailed profiles of market segments – enterprise financing

Summary of findings: Segment players have historically sourced finance from grants and hybrid instruments to supplement their own investment. Some players are able to operate without subsidy. As most firms are in their early growth stage, the majority of players are actively seeking to finance their geographic expansion. For this purpose, firms that have received equity in the past are seeking to diversify and prioritize long-term debt, whereas those players without any equity currently are interesting in seeking patient capital in particular.

Most players cannot access debt and equity because investors perceive the sector to be medium-high risk because it is relatively new and its product service offering is so localized. However, existing enterprises have scaled quickly demonstrating that significant returns could be generated in the long-run. In addition, debt is a particular challenge because most firms have a lack of standardly-accepted collateral.

Focusing existing credit lines in the form of soft loans, to meet segment players’ needs, as well as instituting ratings for utilities to judge their technical viability would improve the players’ ability to access finance. A lease finance model can also be adapted for a group of projects, to provide firms with room for expansion. Scaling up access to convertible debt and mezzanine financing could also be beneficial for players in this segment.

Debt Lack of assets that are considered collateral: Majority of players lack fixed assets such as manufacturing facilities and can at best offer solar panels, inverters or batteries as collateral. Lenders hesitate to accept these due to the absence of an established formal secondary market for these goods and the difficulty involved in seizing them from remote rural areas in the case of default. This restricts players’ access to debt products.

Tenor requirement misaligned for debt products: Most firms seek debt which has a tenor of over 7 years, as projects have a long gestation period, implying that firms require some time to develop repayment capacity. However, most lenders of debt consider these projects risky, due to issues around the sustainability of revenues, and are only comfortable providing loans for 3-5 years.

Inability to meet debt eligibility criteria due to early stage of operations: Public and private sector banks and non-banking financial institutions (NBFCs) have certain eligibility criteria which segment players find difficult to meet due to their early stage of operations. These criteria include 3 years of profitable operations, presence of

Annex 5A

Barriers to accessing finance


Equity/hybrid

Grants

Subsidies

Cross-cutting barriers

Equity/ hybrid

Cross-cutting solutions

Debt

a financing history and historical positive cash flows. As mentioned earlier, the majority of the players have not been in operation for that long, and are as such restricted from accessing these debt products.

Unstable cash flows of segment players: Projects in the segment involve difficulties in utility operations, such as defaults by customers and the challenge of accessing remote areas for collection. This contributes to uncertain-ty around cash flow stability, making players less attractive for debt financing particularly, but also for equity or hybrid investors.

Tenor requirement misaligned for equity/ hybrid products: Traditional equity investors and some impact inves-tors seek investments in which they can generate a good exit multiple in a short period of time, usually less than 5 years. However, segment players require a longer period of time (usually over 7 years), to generate such returns. This restricts their access to equity and hybrid instruments.

Unstable cash flows of segment players: See above for detailed description – this is a less important barrier for equity or hybrid finance than for debt financing.

Limited availability of grant funding due to misperceptions of impact: Some players noted that targeted grant funding for players in the sector was not available because of a perception that energy-related initiatives did not have as much of a direct tangible social impact as other initiatives in the sector

Perceived delays and lack of clarity in subsidy disbursement: Due to a lack of transparency and efficiency in provision, firms in the segment often do not receive the stipulated subsidy at all, or within expected timelines. This creates liquidity constraints for firms, which has an adverse impact on profitability and growth. It also renders some business models unviable, restricting the ability of start-ups to scale, and creating entry barriers to the sector.

Knowledge and awarenessFIs’ lack of technical expertise to evaluate investments: Due to the nascency of the segment, FIs lack relevant experience to base their lending operations on. In addition, there are a diversity of business strategies in the seg-ment, none of which are tried and tested, making it difficult for FIs to evaluate the viability of a project or firm.

Lack of reliable sector data in public domain: FI’s are usually hampered by a lack of market data on projects and benchmarks, in terms of player operations (e.g., the level of generation and set-up costs, expected utility lifecycle, etc.) and technology quality (i.e., how reliable a technology can be). As commercial banks have a lower risk appetite than other investors, this lack of information restricts the flow of debt into the sector more than it does for any other source of finance.

Fragmented policy environmentUncertainty around grid extension policy: There is a lack of clarity on grid extension plans and timelines, as well as the implications for utility operations and tariffs if the grid extends to its area of operation. This policy gap often results in the closure of pico utilities due to the provision of cheaper, subsidized grid power when the grid extends. This in turn makes FIs uncertain about long-term utility viability, and limits their segment involvement. It also has the potential to reduce uptake, as there arises resistance to DRE utilities in areas where locals believe that the grid is likely to extend in the near future.

Developing a lease finance model: Such a model could be designed on the lines of the model used for tractors in the agricultural sectors, with modifications to suit segment players. This would help address the barriers of lack of lender-accepted collateral, and allow room for expansion for segment players. However, it would require to be implemented over a longer term as it needs the establishment of a secondary market, or a buyback facility.

Scaling existing productsScaling up convertible debt (CD): This is a strong solution for this segment primarily because it deals with the is-sue of firms being in an early stage of operations and inability of FIs to evaluate the financial viability of start-up firms in such a nascent sector. CD pushes firm valuation to a later stage, when operations are better understood by the investor and firm, mitigating against the issue. Investors of CD also tend to have a longer investment horizon, as desired by firms.

Scaling up mezzanine financing: Much like CD, this solution helps to address the challenges of early valuation and pushes the negotiation of ownership only in the case of a default. In addition, as it is structured as debt capital, it can be flexibly used for a number of purposes including operational expenses.

For both products, it could be possible to scale up access and supply by engaging with these investors by provid-ing them with technical assistance to evaluate these enterprises. This would involve helping them think through the various business models, quality of products, and growth prospects of different enterprises.

Expanding knowledge and awarenessHighlighting case studies of successful investments in DRE MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors as well as public NBFCs.

Instituting ratings for utilities to allow FIs to benchmark utility quality: Presently, FIs face challenges in ascer-taining the quality of utility equipment due to the variety of products available in the market, the absence of rel-evant standards and their lack of relevant financing experience. This intervention would help FIs identify firms using credible technology, and reduce their perceived risk in financing them. It would also help firms source appropriate technology for their utilities and improve the technical viability of their utilities.

Policy solutionsEstablishing a formal secondary market for utility components: Identifying actors to buy back components such as solar panels and inverters, would develop resale value and potential to make these components accepted as collateral, unlocking access to debt products such as lease finance.

Establishing policy clarity on grid extension: Issues like tariff chargeable, and status of utility operations on grid extension, would provide comfort to FIs about the long-term viability of utilities, enabling the flow of finance to the segment.

Designing new financial productsDeveloping new credit lines to meet specific financial needs: Longer-term debt products could allow firms to achieve the scale necessary to reduce their risk and ensure stable cash flows, and therefore meet repayment timelines. However, enterprises in this segment find it difficult to access to these types of products (namely soft loans) in the present scenario. Access could be catalyzed using a credit line with a specific mandate to increase the flow of these products to the sector. This process would involve selecting an aligned banking institution, providing them with the technical assistance on how to evaluate the RE sector, and provide incentives (i.e., charging a fee upfront for banks who intend to access the mechanism) so that the credit lines are actually used. A multilateral agency could also provide technical assistance and support the financial institution. For example, the donor agency would be available to provide guidance on the types of RE segments to focus on, while the due diligence would be conducted by the bank itself (e.g., what ticket size the player needs, and the potential risk/reward profiles for each enterprise).

Implications for solutionsBased on the needs, barriers and eligibility of this

DRE-2: Solar micro utilities, utilizing a BOM model

segment, the following solutions would have a high potential to unlock value in the sector43:

The solutions presented here are only those which address a critical financing need and have a medium-high potential to unlock value.43

Summary of findings: MSMEs in this segment rely on subsidies and/or grants towards utility set-up to ensure projects viability. In their early stage, they have used angel investment to pilot their utilities, grow their business and conduct R&D to improve project viability. Actively seeking a continuous stream of per utility grants for the future, segment players also expressed a desire for increased subsidy provisions to make their utilities self-sustaining. As a sharp contrast to other segments, players were not seeking any debt products to meet their financing needs.

Besides the inherent unviability of their utilities without a grants/subsidy component, issues in the policy environment have posed key challenges to financial access for these MSMEs. Delays and uncertainty around subsidy disbursement as well as a lack of clarity around overlapping Ministry of Power (MoP) and MNRE schemes and grid extension inhibits the scalability of these firms. Therefore, as a high risk, low return segment, accessing sources of finance outside of angel investment, subsidies and grants, is challenging. There may be a case for impact investors to be involved, if players were to seek them out actively.

Overall, developing mechanisms to mitigate against barriers in the policy environment, as well as ensuring finance to help build financially viable utilities could be effective tools to enable the flow of finance into the segment. For example, a pledge guarantee facility could help address liquidity squeezes caused by subsidy delays. Moreover, facilitating the flow of grants for R&D could help firms develop financially viable business models in the medium term.

Annex 5A


Current sources of financeActors in the segment are heavily dependent on subsidies and/or grants towards utility set-up to expand their business. Some firms have received multiple grants for individual utilities and for business operations as well. Beyond these sources of finance, some firms with limited financing needs have sourced adequate funds in the form of angel investment informally through friends. Other firms who seek larger amounts of finance have accessed more formal sources, such as angel investment.

Subsidies: A large majority of players in the segment access subsidies under the JNNSM of up to 30% of utility set-up costs.

Grants: Actors have accessed milestone-based grants of up to $0.5-1m towards early stage expansion, from multilateral donor agencies. There are some actors who rely on per utility grants from CSR funds and high net-worth individuals (HNIs) ranging from $16-35k.

Angel investment: A select few early-stage firms have received relatively large ticket equity from a foreign angel investment, of up to $1m, towards expansion across geography and R&D. In addition, some other firms have sourced funds from individual angel investors to run their business operations.

Risk-reward profileHigh risk, low reward: This segment has a high risk, as projects require a significant component of subsidies and/or grants to be viable which are often unreliable and cause capital constraints. Moreover, most utilities have low profit margins, out of which some even have unstable cash flows. Finally, given the unclear policy environment, investors are further unwilling to invest in these enterprises. Consequently, the expected short term reward is low, despite the existence of a high potential market of unelectrified and underelectrified households.

Based on this risk-reward profile, it will most likely attract three types of actors:

Donors such as multilateral aid agencies and philanthropic foundations could further engage with the sector, providing one time or milestone based grants for early stage companies to expand their business.

Barriers to accessing financeCross-cutting barriers, stemming primarily from a fragmented policy environment, were considered by players to be the primary issue to sector growth, over

There is some opportunity for impact investors to start financing this segment in the near future, if players actively seek out these investors and ensure medium-long term viability of their business models. It is more likely that hybrid instruments would be used over equity in these cases.

Angel investors looking to make social impact, with negligible or conservative return expectations, could increase their sector presence, if segments players can identify these individuals and convince them of their potential impact on the communities they power.

Need for finance: preferred sources and amount soughtThe majority of players in the segment are not actively looking for commercial finance as they were satisfied with their financing sources, given their business plans.44 In particular, players seek grants and subsidies. These can be both in the form of a continuous flow of per-project funding, as well as a grants for business operations. Equity is a secondary need for most players – they were interested in accessing it but were not actively seeking it. However, in sharp contrast to other segments, most actors do not wish to access debt, as they find it to be inappropriate for their segment.45 The full set of financing needs is described below:

Subsidies: Most segment players expressed a desire to increase subsidy provisions. Suggestions from players included raising the JNNSM provision from 30% to 80% subsidy, as well as an additional subsidy of 90% for transmission and distribution (T&D) costs.

Grants: One time and milestone based grants towards utility set-up are top priority for most segment players, as they are seen as a necessity to keep the business model viable. Players seek large milestone-based grants of $0.5-1m at an early stage to fund expansion and R&D activities. The players who receive per-project grants of $16-35k, that supplement or substitute subsidy, look to further access finance from this source.

Equity/hybrid: The majority of firms were open to receiving equity and hybrid investment, especially from patient sources, but weren’t actively seeking it as they had no pressing financing needs.

product-specific barriers that directly limit access to finance. The barriers listed below have been prioritized to reflect this.

It should be noted that the growth plans of MSMEs differ, as some have ambitious expansion strategies, whereas others are re-examining their business strategy.Most players believe that debt was inappropriate for the segment because the cost of servicing debt, even soft loans, is significantly higher than the revenues of the plant.

4445


Subsidies

Grants

Equity/hybrid

Fragmented policy environmentUncertainty around grid extension and interaction policy: There is a lack of clarity on grid extension plans and timelines, as well as the implications for utility operations and tariffs if the grid extends to its area of operation. This policy gap often results in the closure of these utilities due to the provision of cheaper, subsidized grid power when the grid extends. This in turn makes FIs uncertain about long-term utility viability, and limits their segment involvement. It also reduces uptake, as there arises resistance to DRE utilities in areas where locals be-lieve that the grid is likely to extend in the near future. Policy provisions and infrastructure for grid interactivity are not clearly laid out in existing policies, denying players the opportunity to improve financial viability of their utilities by ensuring stable demand, and an additional revenue stream.

Overlapping policy provisions between ministries: Players expressed the belief that the Ministry of Power (MoP) and MNRE had overlapping provisions when it came to certain schemes. For example, the Decentralized Distributed Generation (DDG) scheme of the MoP, MNRE both outline policies for DRE utility operations. This overlap creates uncertainty around relevant policies and disincentivizes other FIs from becoming involved.

Knowledge and awarenessFIs’ lack of technical expertise to evaluate investments: Due to the nascency of the segment, FIs lack relevant experience to base their lending operations on. In addition, there are a diversity of business models and engage-ment strategies in the segment, none of which are tried and tested, making it difficult for FIs to evaluate the viability of a project or firm.

Lack of reliable sector data in public domain: FI’s are usually hampered by a lack of market data on projects and benchmarks, in terms of player operations (e.g., generation and set-up costs, utility lifecycle etc.) and technology quality (i.e., how reliable a technology can be). As commercial banks have a lower risk appetite than other investors, this lack of information restricts the flow of debt into the sector more than it does for any other source of finance.

Delay and uncertainty in subsidy disbursement: Due to a lack of transparency and efficiency in provision, firms in the segment often do not receive the stipulated subsidy at all, or within expected timelines. This creates liquidity constraints for firms, which has an adverse impact on profitability and growth. It also renders some business models unviable, restricting the ability of start-ups to scale, and creating entry barriers to the sector.

Mismatch in type of grant funding required: most MSMEs were seeking grants to support operational expenses and scaling growth, whereas the majority of the funding is focused on furthering the research and academic literature which is not relevant to the needs of the MSMEs.

Limited availability of grant funding due to misperceptions of impact: Some players noted that targeted grant funding for players in the sector was not available because of a perception that energy-related initiatives did not have as much of a tangible social impact as other initiatives in the sector

Inherent unviability of projects without subsidy and/or grants: Many segment players state that their utilities are not financially viable without a subsidy and/or grant component. This makes them less attractive for financ-ing with equity and hybrid investors in particular.

Unstable cash flows of segment players: Projects in the segment involve difficulties in utility operations, such as defaults by customers and the challenge of accessing remote areas for collection. This contributes to uncertain-ty around cash flow stability, making players less attractive for equity or hybrid investors.

Tenor requirement misaligned for equity/ hybrid products: Traditional equity investors and some impact inves-tors seek investments in which they can generate a good exit multiple in a short period of time, usually less than 5 years. However, segment players require a longer period of time (usually over 7 years), to generate such returns. This restricts their access to equity and hybrid instruments.

Annex 5A


Implications for solutionsBased on the needs, barriers and eligibility of this segment, the following solutions would have a high potential to unlock value in the sector46. Since the

Even though debt products were not prioritized by players in this segment, a lease finance model would also be feasible to unlock value for this segment.

primary barriers to the sector are cross-cutting, the solutions to these barriers have been considered before the product-specific ones.



Subsidies

Grants

Expanding knowledge and awarenessInstituting ratings for utilities to allow FIs to benchmark utility quality: Presently, FIs face challenges in ascer-taining the quality of utility equipment due to the variety of products available in the market, the absence of rel-evant standards and their lack of relevant financing experience. This intervention would help FIs identify firms using credible technology, and reduce their perceived risk in financing them. It would also help firms source appropriate technology for their utilities and improve the technical viability of their utilities.

Introducing an online portal for small-scale RE MSMEs to gain information and engage on financing schemes and other issues: Firms in the segment would benefit from a portal that has (i) details on, and eligibility criteria for available subsidies, soft loans and unsecured loans through credit lines etc. and (ii) a forum for market play-ers to engage on issues they face in financial access and other matters such as operations. In particular, it would allow firms to better utilize the existing financial benefits and schemes available to them, and help firms share sector knowledge and collaborate to solve issues they face.

Highlighting case studies of successful investments in DRE MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors as well as public NBFCs.

Policy solutionsEstablishing policy clarity on grid extension and promoting grid interactivity: Issues like tariff chargeable, and status of utility operations on grid extension, which the upcoming REAP should address, would provide comfort to FIs about the long-term viability of utilities, enabling the flow of finance to the segment. Policy clarity on, and the development of infrastructure for grid interactivity could make biomass utilities more attractive for financing by improving their financial viability.

Designing new financial productsDeveloping a pledge guarantee facility: A pledge guarantee fund facility would serve as a “stopgap” funding facility to help speed up subsidy disbursements, mitigating against the disruption of business plans that they cause. Essentially the fund would be developed by a donor agency specifically for players that have pending subsidy disbursements from MNRE or NABARD. Market players would receive funds from commercial banks, which can in turn, tap into the fund to recover the amount lent before actual disbursement by MNRE. This would be a longer term solution for implementation.

Scaling existing productsScaling up access to grants: As mentioned above, there is a strong reliance on subsidies and grants by firms in the segment. Ensuring a flow of grants to the sector in the medium term, would allow these firms to achieve some scale, develop their business model, and carry out R&D to make their utilities more financially viable.

DRE-3: Wind-solar micro and mini utilities, utilizing a BM model

Summary of findings: As wind-solar technology is especially nascent and expensive relative to other technologies, this segment is still emerging. Most segment players are micro-small enterprises, of which there are two major types: (i) mature firms that have completed over 8 years of operations, (ii) early growth-stage firms less than 3 years in operation. The nascent firms have only entered the wind-solar space in the recent past, and have focused on manufacturing wind-only or solar-only technologies throughout their life. They have found it difficult to achieve significant scale during this period.

Early growth stage enterprises have received some formal finance in the form of equity and those looking to stay in the sector are looking for debt or equity in the near future. However, since the sector as a whole is perceived to be stagnating and many firms are existing the sector in favor of other solar-only applications, it is perceived to be high risk. It is also perceived to have low rewards because it enterprises find it difficult to build consistent demand for their utilities and ensure adequate and stable cash flows in a stagnant market. As such, in the short term the primary actors likely to be involved would be aid or grant agencies.

In terms of unlocking value for the sector, solutions can be categorized in three ways: (i) enabling grid interactivity through a policy push could help improve technological and financial viability of utilities, enhancing their scalability; (ii) TA to segment players and FIs would help catalyze the flow of finance to the sector; (iii) financial solutions in the form of credit lines for soft loans and lease finance also have high potential to meet financial needs of players, if developed. These interventions could help the sector grow by allowing players to achieve some scale.

Note: Information in this section is based on a limited number of interviews. Further research may be required to validate this information.

Current sources of financeThe primary sources are equity and debt, but even these remain limited in availability.

Equity: some growth-stage firms have receive equity infusions of $300k towards expansion, from foreign cleantech investors.

Debt: A select few firms have accessed debt of approximately $130k towards expansion, from public sector banks. However, the terms of debt have been very unfavorable with very high collateral requirements.

Risk-reward profileHigh risk, low reward: This segment is perceived to have a high risk. Wind-solar is still a nascent technology, which is not well understood in India. Players involved in wind-solar utilities are still to achieve scale in their wind-solar business, prove the viability of their technology and ensure a sustained demand for their utilities. In addition, some experts suggest that manufacturers of pico-small wind turbines have poor technical capability, leading either to low quality of the wind component of utilities, or the import of expensive wind turbines. Finally, most players are exiting the sector in favor of solar-only applications (which are perceived to have greater success) which adds to the risk profile.

However, this segment has low rewards as enterprises find it difficult to build consistent demand for their utilities and ensure adequate and stable cash flows in a stagnant market.

Based on this risk-reward profile, it will most likely attract four types of donors such as multilateral aid agencies and philanthropic foundations as they are the ones who would be willing to undertake this level of risk. They could provide one time or milestone based grants for early stage companies to conduct R&D and expand their businesses. If the risk of this sector can be mitigated, then other actors could become involved, namely:

Public NBFCs such as NABARD could be involved in the sector, and have the potential to be further involved, especially in the provision of soft loans. Public sector banks may be involved in unsecured lending under the CGTMSE to players with relatively strong finances.

The customer base for most enterprises in this segment includes individual users, and government and private establishments. Serving these customers is typically not considered social impact by impact investors – this disincentivizes them from engaging with most players in this segment. Therefore, only a few players whose wind-solar projects cater to rural communities could potentially access equity/ hybrid instruments from these sources.

Annex 5A


Need for finance: preferred sources and amount soughtThe majority of actors in this segment (across mature and early-stage players) are looking to access finance of between $1m and $2m to expand their businesses. Both types of players prioritize raising a mix of debt and equity for this purpose. Secondary to these needs, players were also interested in accessing grants for R&D and pilot projects. Subsidies were low on priority for some players but were essential for others to ensure utility sale.

In the case of mature manufacturing players, R&D and an increase in production capacity are the major financing needs. On the other hand, growth stage firms seek to acquire funds for business expansion. The full set of financing needs are listed below:

Debt: Most players state a preference for long term debt, especially in the form of soft loans. Some mature manufacturing firms were interested in accessing unsecured loans under the CGTMSE scheme of up to the maximum amount under the scheme (~$170k for a one time loan). However, an awareness of how to access this is limited. Lease finance was an option that most firms wished to explore if made available to them.

Equity/ hybrid: Players with limited rural operations sought equity from large RE or cleantech companies, whereas players with rural operations were also interested in accessing equity from impact investors. A few players that understood the nature of hybrid instruments were open to both equity and hybrid finance. Players usually sought ticket sizes from as low as $500k and up to $1.5m. In addition, medium-large

Implications for solutionsBased on the needs, barriers and eligibility of this segment, the following solutions would have a high potential to unlock value in the sector47:

companies in the RE space, both Indian and foreign, could be involved in part-acquisitions of players.

Subsidies: Players look to access subsidies of 50% of utility costs, not due to a particular like for subsidies but out of the compulsions imposed on them by the market. The introduction of subsidies in the sector was opposed by many mature MSMEs due to its market-distorting effects. However, on being introduced, most customers are unwilling to purchase utilities without availing of the stipulated subsidy. Due to this, players seek capital subsidy of 50% of utility costs to ensure utility sales. Unfortunately, these disbursements have dried up over the last 3 years. Moreover, due to the new subsidy policy for wind-solar systems under the MNRE, only utilities sold to not-for-profit organizations and Government establishments are eligible for subsidy. This is likely to reduce the applicability of subsidy for many players and projects, but the distortionary effect are likely to remain.

Although players did not state a need for other types of finance, grants would also be helpful for this segment to run pilot programs for new technologies and further R&D activities to improve financial viability of utilities.

Barriers to accessing financeNon-product specific barriers, stemming primarily from a lack of knowledge and misinformation were considered by players to be the primary issue to sector growth, over product-specific barriers that directly limit access to finance. The barriers listed below have been re-ordered to reflect this.

Since the primary barriers to the sector are non-product specific, the solutions to these barriers have been considered before the product-specific ones.


Debt

Equity/hybrid

Grants

Subsidies


Debt

Knowledge and awarenessFIs’ lack of technical expertise to evaluate investments: Due to the nascence of the segment, FIs lack relevant experience to base their lending operations on. In addition, there is a diversity of business strategies in the segment, none of which are tried and tested, making it difficult for FIs to evaluate the viability of a project or firm.


Fragmented policy environmentUncertainty around grid interaction policy: Wind-solar projects stand to gain strongly in terms of financial viability, through grid interaction. However, there is a lack of clarity on grid interaction policy, especially with respect to exporting power to the grid. Establishing clear grid interactivity provisions across states, would improve the cost-effectiveness of wind-solar projects, making them more attractive to finance.

Tenor requirement misaligned for debt products: Most firms seek debt which has a tenor of over 7 years, as the sector is nascent and the market is growing slowly, implying that firms require some time to develop loan repayment capacity. However, most lenders of debt consider these projects risky, due to issues around the sustainability of revenues, and are only comfortable providing loans for 3-5 years.

Lack of fixed assets considered collateral by lenders: The majority of players find it difficult to access traditional debt instruments because the assets they have (e.g. wind turbines, solar panels) are not commonly accepted forms of collateral by lenders – this is due to the absence of an established formal secondary market for these goods and the difficulty involved in seizing them from remote rural areas in the case of default. Even for mature players that can offer their small manufacturing facilities for wind turbines as collateral, lenders hesitate to provide debt.

Slow revenue growth due to difficulties in utility sale: The majority of customers (individual users or establishments) are unwilling to purchase the utility, unless they are ensured the stipulated subsidy. As there are general delays in subsidy disbursement, players do not go through with the sale, leading to market failure.

Tenor requirement and expected returns misaligned for equity/ hybrid products: Traditional equity investors and some impact investors seek investments in which they can generate a good exit multiple in a short period of time, usually less than 5 years. However, segment players require a longer period of time (usually over 7 years), to generate such returns. This restricts their access to equity and hybrid instruments.

Slow revenue growth due to difficulties in utility sale: See above in section on debt.

N/A

Delay, uncertainty and limited access to subsidies: Firms in the segment often do not receive the stipulated subsidy at all, or within expected timelines, possibly due to a shortfall in subsidy available. The new MNRE policy has restricted subsidy only for projects by not-for-profit organizations and government establishments, restricting the eligibility of many projects for subsidy given the status quo of player operations – as such, enterprises in this segment have reportedly not received any subsidies in the last three years

Expanding knowledge and awarenessProviding TA to RE MSMEs: Providing TA – in the form of technological expertise or financial management for wind-solar businesses could help some of the enterprises in the sector identify ways in which to make their service offerings more competitive and make them more attractive to potential FIs.

Instituting ratings for utilities to allow FIs to benchmark utility quality: Presently, FIs face challenges in ascertaining the quality of utility equipment due to the variety of products available in the market, the absence of relevant standards, and their lack of relevant financing experience. This intervention would help FIs identify firms using credible technology, and reduce their perceived risk in financing them. It would also help firms source appropriate technology for their utilities and improve the technical viability of their utilities.

Policy solutionsEstablishing a formal secondary market for utility components: Identifying actors to buy back components such as solar panels and wind turbines, would develop resale value and potential to make these components acceptable as collateral, unlocking access to debt instruments such as lease finance, as well as larger ticket size loans.

Establishing clarity on and promoting grid interactivity: Enabling grid-interactivity through policy clarity, infrastructure development, and attractive feed-in tariffs could greatly improve the technical and financial viability of wind-solar projects and firms, making them more scalable, and therefore, more attractive for financing.

Designing new financial productsDeveloping new credit lines to meet specific financial needs: Longer-term debt products could allow firms to achieve the scale necessary to reduce their risk and ensure stable cash flows, and therefore meet repayment timelines. However, enterprises in this segment find it difficult to access to these types of products (namely soft loans) in the present scenario. Access could be catalyzed using a credit line with a specific mandate to increase the flow of these products to the segment. This process would involve selecting an aligned banking institution, providing them with the TA on how to evaluate the RE sector, and provide incentives (i.e., charging a fee upfront

The solutions presented here are only those with a medium-high potential to unlock value for the segment47

Annex 5A


Equity/hybrid

Grants

Subsidies

for banks who intend to access the mechanism) so that the credit lines are actually used. A bilateral aid agency could also provide TA and support the FI. For example, the donor agency would be available to provide guidance on the types of RE segments to focus on, while the due diligence would be conducted by the bank itself (e.g., what ticket size the player needs, and the potential risk/reward profiles for each enterprise).

This is not a high priority need for the sector at present and therefore solutions to this product are not expected to unlock significant value.

Scaling existing productsScaling up access to grants: As mentioned above, there is a strong reliance on subsidies and grants by firms in the segment. Ensuring a flow of grants to the sector in the medium term, would allow these firms to achieve some scale, develop their business model, and carry out R&D to make their utilities more financially viable.

This is not a high priority need for the sector at present and therefore solutions to this product are not expected to unlock significant value.

DRE-4: Biomass small utilities, utilizing a BOM model

Summary of findings: Players in this segment have historically relied on hybrid instruments as well as grants and subsidies as the primary sources of finance. Only a select few mature players, with over 10 years of operations have accessed debt products. A large majority of players in this segment were looking for finance primarily for expanding their businesses. However, a secondary and critical concern was on working capital – most players cited the volatility of input prices and lack of stable cash flow as a key “squeeze” on their operational success and stated a need for working capital finance to support this issue. To address these financing needs, players prioritized long-term debt as it was considered cheaper and safer as a financial product to access. Some players were also interested in equity or quasi-equity type products to finance this growth. However, the majority of players re-affirmed that projects rely on a subsidy and/or grant component to be financially viable.

Most players have difficulty accessing finance, particularly debt, because the sector is perceived to be risky due to the variability in cash flows (due to seasonality of inputs) and the lack of awareness and ability of financial institutions to really understand the long-term rewards of players in the sector, and the lack of clarity in the grid extension policy. In addition, players (like in other segments) have low access to standard collateral so cannot offset the risk perception using property. Finally, as players in this sector rely on subsidies, of which the disbursement is delayed, their ability to finance their operations is further limited.

There are a few new financial solutions that could help unlock value in this segment, including lease finance, mini-project finance, a credit line to enhance access to debt instruments such as working capital or soft loans and a pledge guarantee facility to help speed up the subsidy disbursement process. In addition, developing a secondary buyback facility, implementing product ratings to help financial institutions gauge quality, as well as providing clarity on the grid extension and subsidy disbursement process would help unlock value across the segment.

Current sources of financeActors in this segment have historically relied on hybrid instruments as well as grants and subsidies as the primary sources of finance. Only a select few mature players, with over 10 years of operations have accessed debt products.

Grants: Compared to other segments, grants have indicatively formed a larger proportion of funding for players in this segment since (i) the majority of the actors have the ability to make significant social and economic impact to the communities they power, (ii) sustaining profitability and ensuring growth has proved to be difficult in the segment given the challenges in maintaining steady revenue and cost cycles.

Equity: A minority of players have been able to access foreign impact and domestic private equity (PE) for between $1m and $5m primarily to finance their growth, but also to cover some operational costs.

Debt: A few players with mature businesses have been able to access long-term debt on a per-project basis, although at higher than market interest rates. However, many players find it “practically impossible” to raise debt despite strong financial indicators, due to barriers such as a lack of lender-accepted collateral and pessimism around sector prospects for biomass. These are discussed in detail below.

Risk-reward profileMedium-high risk, low-medium reward: This segment has a medium-high risk because of difficulty in utility-level operations especially due to fluctuating input supply, as well as uncertainty around grid extension policy. However it is mitigated in part by the initial successes that certain firms in the sector have had. The relative reward of this segment is expected to be low-medium in the short-term because of the challenges in utility-level operations mentioned above. This includes volatility in input prices across seasons, high transportation costs, and difficulties in collection of payments. However, there exists an untapped medium potential market of unelectrified and underelectrified regions in areas where biomass input is widely available.

Based on this risk-reward profile, three types of actors are likely to be involved:

Impact investors as well as angel or PE investors with a desire to make social impact could be further involved, provided they had more information about the segment. These investors would require to have modest return expectations (less than 20%) and a long target exit period (over 5 years). Overall, the market for hybrid products is likely to have more potential than pure equity products.

Public non-banking financial institutions (NBFCs) such as NABARD are already involved in the sector, and have potential to be further involved, especially in the provision of soft loans and possibly lease finance. Private NBFCs could be interested in project finance as some of them have room to increase their exposure to the sector.

Donor agencies, philanthropic foundations, and CSR wings of companies have potential to be involved in

Subsidies: Most players rely on, and have successfully accessed MNRE subsidies to finance up to two-thirds of their utility set up costs. These have been critical in ensuring the initial viability of the business model. However, some players have found it difficult to access the subsidy in a timely manner due to uncertainties and delays in the disbursement process. There are also a few grid-connected players in the minority, who have not been able to access subsidy at all.

Hybrid: The majority of players have financed their R&D and expansion in their early growth stage through convertible debt from impact investors. Typical ticket sizes accessed in the past have ranged from as low as $150k all the way to $2m for some of the more mature players.

grant funding towards utility set-up, operations and R&D. CSR funds could also be useful in the form of social impact equity for financing one or more projects.

Need for finance: preferred sources and amount soughtA large majority of actors in this segment are looking for finance primarily for expanding their businesses. However, a secondary and critical concern was on working capital – most players cite the volatility of input prices and lack of stable cash flow as a key “squeeze” on their operational success and state a need for working capital finance to mitigate against this issue. R&D is also a financing need for players, who look to use them towards improving cost-effectiveness of technology, and new utility-level innovations such as solar-biomass hybrid utilities. The range of ticket size sought by established players from most or all of the sources of finance above was $7-15m for a 2-4 year horizon.

To address these financing needs, players prioritize long-term debt as it was considered cheaper and safer as a financial product to access. In addition, players outline the importance of capital subsidy in supporting projects. Secondary to these needs, players are interested in equity or hybrid products to finance their growth, as well as grants towards R&D. Players looking for equity are those who had not yet taken (or had taken very few) previous equity infusions. The full set of financing needs is included below:

Debt: In order to finance growth and expansion plans, a large majority of the players prioritized soft loans for a small group of projects as the long tenor and low cost meet the requirements of small biomass projects. The ticket size of finance sought from soft loans was approximately between $150k and $250k. A select few mature firms also mentioned that they would prefer long-term debt with a one year moratorium, at market rates, on a per-project basis to cover a part of project costs. Debt was also prioritized for working capital needs – players mentioned that they would most prefer if it was built into the existing long-term debt, although some did mention that a separate working capital facility or loan structure would be desirable. Working capital needs are approximately up to $10k annually for one 50 kW plant.

Subsidies: All players interviewed highlighted their continuing dependence on the current subsidies of approximately two-thirds of utility set-up costs to ensure project and business viability.

Annex 5A


Equity/hybrid: Firms without a prior history of equity investment were those who were more interested in pursuing full or quasi equity products in order to finance their growth and operations. Most players with previous history of equity or hybrid financing were not keen on further dilution of their ownership. Interested firms were typically looking for investments from patient capital (in the form of equity or a

hybrid product like convertible debt) in the range of $150k-$2m.

Grants: Nearly all players included grants (one time or milestone-based) as part of their desired financing approach. These could be of any type and based on previous history, could be up to $1-2m and to be used for their expansion and R&D activities.

Debt

Subsidies

Equity/ hybrid

Grants


Lack of assets that are considered collateral: Many firms find it difficult access debt products because the assets they have (e.g. plant equipment, receivables etc.) are not considered as collateral by FIs, due to the absence of an established formal secondary market for these goods and the difficulty involved in seizing them from remote rural areas in the case of default.

Tenor requirement misaligned for debt products: Most firms seek debt which has a tenor of over 7 years, as projects have a long gestation period, implying that firms require some time to develop repayment capacity. However, most lenders of debt consider these projects risky, due to issues around the sustainability of revenues, and are only comfortable providing loans for 3-5 years.

High cost of capital for debt products: Debt is offered to biomass projects at a risk premium over market interest rates, possibly due to the perceived riskiness of the segment by FIs (described above). Many segment players find it difficult to service these loans as the interest rates are higher than what their cash flows can sustain.

Unstable cash flows of segment players: Projects in the segment involve difficulties in utility operations, such as defaults by customers and the challenge of accessing remote areas for collection. This contributes to uncertainty around cash flow stability, making players less attractive for debt financing particularly, but also for equity or hybrid investors.

Pessimism around sector prospects for biomass, especially among debt providers: Relative to other DRE technologies, most lenders have very little recent experience in financing biomass, and are most hesitant to lend to this sector because of the failure of some large-scale projects in the past. Commercial banks that do lend to segment players charge a high risk premium in order to compensate for this perception.

Delay and uncertainty in subsidy disbursement: Due to a lack of transparency and efficiency in provision, firms in the segment often do not receive the stipulated subsidy at all, or within expected timelines. This creates liquidity constraints for firms, which has an adverse impact on profitability and growth. It also renders some business models unviable, restricting the ability of start-ups to scale, and creating entry barriers to the sector.

Tenor requirement misaligned for equity/ hybrid products: Traditional equity investors and some impact investors seek investments in which they can generate a good exit multiple in a short period of time, usually less than 5 years. However, segment players require a longer period of time (usually over 7 years), to generate such returns. This restricts their access to equity and hybrid instruments. This is usually indicative of a larger point that market players and investors have difficulty in negotiating on the true value of the company as well as suitable returns and the adequate exit period.

Unstable cash flows of segment players: See above in the section for debt. This is also a barrier to obtain equity or hybrid finance, although less so than it is for debt.

Mismatch in type of grant funding required: Most MSMEs were seeking grants to support operational expenses and scaling growth, whereas the majority of the funding is focused on furthering the research and academic literature which is not relevant to the needs of the MSMEs.

Limited availability of grant funding due to misperceptions of impact: Some players noted that targeted grant funding for players in the sector was not available because of a perception that energy-related initiatives did not have as much of a tangible social impact as other initiatives in the sector.

Knowledge and awarenessFIs’ lack of technical expertise to evaluate investments: FIs lack relevant experience to base their lending operations on as they have had limited exposure to small-scale biomass technology in the past. In addition, there are a diversity of business strategies in the segment, none of which are tried and tested, making it difficult for FIs to evaluate the viability of a project or firm.

Debt

Subsidies



Fragmented policy environmentUncertainty around grid extension and interaction policy: There is a lack of clarity on grid extension plans and timelines, as well as the implications for utility operations and tariffs if the grid extends to its area of operation. This policy gap often results in the closure of these utilities due to the provision of cheaper, subsidized grid power when the grid extends. This in turn makes FIs uncertain about long-term utility viability, and limits their segment involvement. It also reduces uptake, as there arises resistance to DRE utilities in areas where locals believe that the grid is likely to extend in the near future. Policy provisions and infrastructure for grid interactivity are not clearly laid out in existing policies, denying players the opportunity to improve financial viability of their utilities by ensuring stable demand, and an additional revenue stream.

Designing new financial productsDeveloping new credit lines to meet specific financial needs: Longer-term debt products could allow firms to grow and reach scale. However, players find it difficult to access to these types of products (namely working capital loans and soft loans) in the present scenario. Access could be catalyzed using a credit line with a specific mandate to increase the flow of these products to the sector. This process would involve selecting an aligned banking institution, providing them with the technical assistance on how to evaluate the RE sector, and provide incentives (i.e., charging a fee upfront for banks who intend to access the mechanism) so that the credit lines are actually used. A multilateral agency could also provide technical assistance and support the financial institution. For example, the donor agency would be available to provide guidance on the types of RE segments to focus on, while the due diligence would be conducted by the bank itself (e.g., what ticket size the player needs, and the potential risk/reward profiles for each enterprise).

Developing a lease finance model: Such a model could be designed on the lines of the model used for tractors in the agricultural sectors, with modifications to suit segment players. This would help address the barriers of lack of lender-accepted collateral, and allow players room for expansion. However, this would require to be implemented over a longer term as it requires the establishment of a secondary market, or a buyback facility.

Developing project financing to mini-projects: Project financing is an attractive option for segment players as (i) it provides long-term structured debt for a group of projects, (ii) repayment of the debt is made out of the cash flows of the projects and is not based on the firms’ assets, (iii) it helps FIs spread their risk of financing over multiple projects. Consequently, it addresses the barrier around the short tenor of typical debt products and could reduce FIs’ perceived risk of financing segment players, enabling more sector financing. However, at present, project finance is characteristic to the infrastructure sector, which has projects with a much larger ticket size than most segment utilities, lender-accepted collateral and proven business models. Therefore, these features of project finance will need to be adapted to enable the product to be used in this segment.

Designing new financial productsDeveloping a pledge guarantee facility: A pledge guarantee fund facility would serve as a “stopgap” funding facility to help speed up subsidy disbursements, mitigating against the working capital “squeeze” that they cause. Essentially the fund would be developed by a donor agency specifically for players that have pending subsidy disbursements from MNRE or NABARD. Market players would receive funds from commercial banks, which can in turn, tap into the fund to recover the amount lent before actual disbursement by MNRE. This would be a longer term solution for implementation.

Expanding knowledge and awarenessHighlighting case studies of successful investments in DRE MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and


segment, the following solutions would have a high potential to unlock value in the sector48:


Annex 5A



economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors as well as public NBFCs.

Instituting ratings for utilities to allow FIs to benchmark utility quality: Presently, FIs face challenges in ascertaining the quality of utility equipment due to the variety of products available in the market, the absence of relevant standards and their lack of relevant financing experience. This intervention would help FIs identify firms using credible technology, and reduce their perceived risk in financing them. It would also help firms source appropriate technology for their utilities and improve the technical viability of their utilities.

Introducing an online portal for small-scale RE MSMEs to gain information and engage on financing schemes and other issues: Firms in the segment would benefit from a portal that has (i) details and eligibility criteria for available financing options (i.e., subsidies, grants, etc.). and (ii) a forum for market players to engage on issues they face in financial access and other matters such as operations. In particular, it would allow firms to better utilize the existing financial benefits and schemes available to them, and help firms share sector knowledge and collaborate to solve issues they face.

Policy solutionsEstablishing a formal secondary market for utility components: Identifying actors to buy back utility components would develop resale value and potential to make these components accepted as collateral, unlocking access to debt products such as lease finance. A few players are exploring options to formalize a buyback facility for their utilities, showing that steps are being taken in the right direction.

Introducing an online subsidy tracker: This intervention would help firms mitigate the issue around delay in, and uncertainty around disbursement of subsidy, by allowing firms to track their subsidy application from the time of submission to the time of the final disbursement.

Establishing policy clarity on grid extension and promoting grid interactivity: Issues like tariff chargeable, and status of utility operations on grid extension, would provide comfort to FIs about the long-term viability of utilities, enabling the flow of finance to the segment. In addition, further investments in the development of the new grid or in current technologies to ensure that they can be made interactive with each other could make biomass utilities more attractive for financing by improving their financial viability.

DRE-5: Hydro utilities utilizing a B/BM model

Summary of findings: Of the few players operating in this sector, they have sustained their operations to date relying primarily on subsidies and using short-term debt to finance growth as well as bridging capital when subsidies were not disbursed on time. Going forward, players are continuing to seek primarily debt finance ideally through the CGTMSE scheme and would likely continue using subsidies and grants to help scale up the sector.

However, this sector faces more challenges than most – the sector is tightly controlled through government tenders which makes it difficult for MSMEs to enter, the subsidy disbursement process which plays a primary financing role in the sector suffers from delays, and the technology currently being used in the sector can be made technically superior. As such, it is perceived as a high risk sector and the financial products on the market are not catered to meet the longer gestation period required for hydro projects to demonstrate rewards.

In the short-term, solutions to this sector would be to scale up access to grants and address the inefficiencies in the subsidy mechanism in order to address some of the systemic challenges facing the sector. In addition, support to streamline access to CGTMSE loans would help unlock value for players. However, across the sector, investments in technical assistance as well as in product standardization and policy clarity would be critical to addressing some of the more fundamental challenges of this sector.

Current sources of financeActors in this segment have historically relied on subsidies and short-term debt as the primary sources of finance. The debt was accessed at typical market rates of interest. There is limited evidence to suggest that any players have accessed equity, hybrid instruments or grants.

Debt: Most hydro players were able to obtain short-term recurring debt. Some players accessed an overdraft facility, whereas some others took unsecured loans with annual renewals (under the CGTMSE). This finance was primarily sought to set up new projects, although some firms used it to cover working capital requirements due to delays in the disbursement of subsidies. Ticket sizes for these loans were relatively small at $50-60k. In addition, some players were able to mitigate the working capital constraint, primarily caused by delay in subsidy, by facilitating access to bridge loans to the communities they sell their utilities to. The loans were accessed through credit co-operative societies and had approximate ticket sizes between $8k and $60k for a tenor of 6-24 months, depending on the extent of subsidy delay.

Risk-reward profileThis segment is considered high risk because the application of hydro technology to the small-scale sector is still not well understood, the technology implemented can still be made technically superior and there are significant regulatory challenges with setting up a suitable utility. While in the long-term the reward could be high (given comparable examples in other geographies), the short-term reward is limited because the market is still fragmented and awareness is low, so rapid growth is not expected. In addition, the challenges in gaining regulatory clearances to set-up utilities on those approved sites for hydro plants are significant.

Based on this risk-reward profile, it will most likely attract four types of actors:

Philanthropic foundations, multilateral donor agencies could potentially provide grants to segment players for R&D.

Public sector banks are likely to be involved in the segment, especially in the provision of unsecured loans.

Public NBFCs such as NABARD are also likely to be involved, especially in the provision of soft loans.

Subsidies: While subsidies are not directed directly at the enterprise (they are rather directed at the community that is setting up the micro hydro system), market players cited these as the most important form of financing to help them to set up their systems. The level of subsidy differs by state. They do face challenges with this type of financing however (explored in further detailed below).

Need for finance: preferred sources and amount soughtThe majority of actors in this segment are looking for medium or long-term financing to support their expansion plans, manufacturing costs and R&D to understand and develop technological solutions customized to new consumer segments. To meet these needs, players prioritize debt instruments for expansion and manufacturing. Although not explicitly stated as a preference for players, grants towards TA and early-stage expansion also have high potential to unlock value in the sector. Equity and hybrid instruments are a secondary need as players are interested in accessing it, but are not actively seeking out investors. This is in part due to the fact that equity and hybrid products are not well understood by most players. In addition, players require subsidy towards project costs to be able to sell their utilities upfront to rural communities.

Debt: players are primarily looking for debt financing and open to securing debt in any form, but prioritized medium term debt with lower repayments. They were looking for loans anywhere from $300K to $1.5 million. In particular, they were interested in unsecured loans through the CGTMSE scheme, and would seek to borrow the maximum amount under that scheme (~$170k for a one time loan). Some firms are interested in extensions of the borrowing limit and overall tenor of their overdraft facility, while a few other firms require the continuation of their bridge finance arrangements.

Grants: while players did not actively state a need for other financing needs, grants and more streamlined subsidies would also be helpful for this segment given the continued testing that is required in order to ensure that the technology can be well adapted to the context.

Subsidies: while subsidies form the majority of the financing for today’s players and they are likely to continue depending on them into the future given the prevalence of government tendering, the majority of MSMEs still stated that they viewed subsidies as a “nice to have” solution rather than a product they would prioritize for the long-term.

Equity/ hybrid: Although the majority of firms are seemingly not well-versed with the features of equity and hybrid instruments, they were open to sourcing finance from investors that they believed were aligned with their business and understood the sector (i.e., impact investors). However, this was only seen as an option to meet the gap that could not be serviced through debt financing.

Note: Some patient equity and hybrid investors were initially interested in the segment, but did not go ahead with financing any firms due to barriers in the policy environment. Until these issues are addressed, it is unlikely that these investors, along with other equity investors, such as angels, will be involved.

Annex 5A


Barriers to accessing financeNon-product specific barriers, stemming primarily from a fragmented policy environment, were considered by players to be the primary issue to sector growth, over

Implications for solutionsBased on the needs, barriers and eligibility of this segment, the following solutions would have a high potential to unlock value in the sector50:

product-specific barriers that directly limit access to finance. The barriers listed below have been re-ordered to reflect this49.

Since the primary barriers to the sector are non-product specific, the solutions to these barriers have been considered before the product-specific ones.


Debt

Grants

Subsidies

Equity/hybrid


Debt

Fragmented policy environmentMisalignment and inefficiency in government tendering process: Much of this sector is controlled through government tenders, which have high barriers to entry which most MSMEs cannot meet (i.e., they require a bank guarantee to cover a part of the project costs, which most market players do not have access to). In addition, the government plays a major role in allotting appropriate sites for hydro projects. However, this process tends to be delayed in which time project parameters can change, significantly shifting the project feasibility and viability.

Uncertainty around grid extension and grid interactivity policy: There is a lack of clarity on grid extension plans and timelines, as well as the implications for utility operations and tariffs if the grid extends to its area of operation. This policy gap often results in the closure of some utilities due to the provision of cheaper, subsidized grid power when the grid extends. This a particular challenge for hydro plants because they are not portable and as such are lost assets in the case of unplanned grid extension. Overall, this makes FIs uncertain about long-term utility viability, and limits their segment involvement.

Knowledge and awarenessNascent sector with limited capacity: Most of the market players in this segment are managed by technologists who are focused on ways to improve the functioning of the plant – however, the focus on financial and management capacity has been limited. Without further capacity building in this space, financial institutions will be reluctant to lend to them.

FIs’ lack of technical expertise to evaluate investments: FIs lack relevant experience to base their lending operations on as they have had limited exposure to small-scale hydro technology in the past. In addition, there are a diversity of business strategies in the segment, none of which are tried and tested, making it difficult for FIs to evaluate the viability of a project or firm.


Lack of adequate assets that are considered collateral: Majority of players lack fixed assets despite being manufacturers, as their manufacturing facility is taken on lease. They can at best offer their idle stock of hydro turbines or their utility components as collateral. Lenders are only willing to give out small ticket loans (indicatively up to $70k at best) against these goods, due to the absence of an established secondary market for them and the difficulty involved in seizing utility components from remote rural areas in the case of default. This restricts players’ access to larger ticket debt products.

Unavailability of high risk capital to match “testing” phase: The sector faces two major challenges: (i) the technology currently available is of poor quality and is outdated, and (ii) there is a lack of technical capacity in identifying appropriate sites to install plants resulting in poor performance. Both of these issues require finance to support further research, design and test implementation – indicating upfront capital financing and a long gestation period. However, financing available on the market tends high cost and short term which results in poorly developed small-scale projects further exacerbating the problem.

Slow revenue growth due to difficulties in utility sale: Individual users or establishments that purchase utilities strongly seek a subsidy component for purchase. As this subsidy does not arrive in a timely manner, or at all, players do not go through with the sale, leading to challenges for enterprise who are seeking to scale or to establish new projects. In addition, there is difficulty involved in a community-based model due to the high cost of utilities and the difficulty in accessing finance for the rural community organization, which usually has not collateral or previous lending history.

Mismatch in type of grant funding required: most MSMEs were seeking grants to support operational expenses and scaling growth, whereas the majority of the funding is focused on furthering the research and academic literature which is not relevant to the needs of the MSMEs.

Limited availability of grant funding due to misperceptions of impact: Some players noted that targeted grant funding for players in the sector was not available because of a perception that energy-related initiatives did not have as much of a tangible social impact as other initiatives in the sector.

Delay and uncertainty in subsidy disbursement: While there is debate as to the utility of subsidies in this sector (some believed that they impinged growth, whereas others stated they were necessary to support emerging enterprises), players agreed that the current subsidy mechanisms were a challenge. This is primarily due to a lack of transparency and efficiency in provision of the subsidy. As such, firms in the segment often do not receive the stipulated subsidy within expected timelines which creates working capital requirements for firms, which in turn has an adverse impact on profitability and growth. In addition, this delay results in many firms who are unwilling to sell utilities as they are not confident of receiving the subsidy, resulting in market failure.

Unavailability of high risk capital to match “testing” phase: See above in section on debt.

Tenor requirement misaligned for equity/ hybrid products: Traditional equity investors and some impact investors seek investments in which they can generate a good exit multiple in a short period of time, usually less than 5 years. However, segment players require a longer period of time (usually over 7 years), to generate such returns. This restricts their access to equity and hybrid instruments.

Policy solutionsEstablishing a formal secondary market for utility components: Identifying actors to buy back components such as hydro turbines, would develop resale value and potential to make these components accepted as collateral, unlocking access to different forms of debt with higher ticket sizes, such as term loans.

Establishing policy clarity on grid extension and promoting grid interactivity: Issues like tariff chargeable, and status of utility operations on grid extension, would provide comfort to FIs about the long-term viability of utilities, enabling the flow of finance to the segment. Allowing for grid interactivity would increase the revenues and life of hydro utilities, which typically have a low plant load factor (PLF). This would make them more attractive for financing.

Expanding knowledge and awarenessProviding TA to market players: Providing TA – in the form of technological expertise or financial management for hydro businesses – could help some of the market players in the sector identify ways in which to make their service offerings more competitive and make them more attractive to potential FIs.

Instituting ratings for utilities to allow FIs to benchmark utility quality: Presently, investors face challenges in ascertaining the quality of utility equipment due to a variety of products available in the market and due to the lack of relevant standards. This intervention would help FIs select high quality projects for financing, rather than evaluating poor quality projects.

Introducing an online portal for small-scale RE MSMEs to gain information and engage on financing schemes and other issues: Firms in the segment would benefit from a portal that has (i) details on, and eligibility criteria for available subsidies, soft loans and unsecured loans through credit lines etc. and (ii) a forum for market players to engage on issues they face in financial access and other matters such as operations. In particular, it would allow firms to better utilize the existing financial benefits and schemes available to them, and help firms share knowledge and collaborate to solve issues they face.

Designing new financial products Scaling up unsecured loans and providing a greater ticket size: Currently, some hydro players have been able to access unsecured loans under the CGTMSE scheme. However, the ticket size of these loans has been at one third the ceiling limit under the CGTMSE. Enabling segment players to access larger ticket size unsecured loans would help them expand their business and meet working capital requirements, while mitigating against the issue around collateral requirement. For players that may not have received prior debt financing, unsecured loans would be helpful for similar reasons.

Product-specific barriers have been ordered in terms of greatest perceived need for the segment.49 The solutions presented here are only those which address a critical financing need and have a medium-high potential to unlock value50

Annex 5A


Grants

Subsidies

Scaling existing productsScaling up grants: Grants for R&D activities can be especially helpful for firms in improving the technical viability and cost-effectiveness of their utilities. They could also be strong enablers for firms in helping them choose appropriate sites and utility sizes for projects. This would provide a boost to the lifetime and performance of hydro utilities, making them more attractive for financing.

Designing new financial productsDeveloping a pledge guarantee facility: A pledge guarantee fund facility would serve as a “stopgap” funding facility to help speed up subsidy disbursements, mitigating against the disruption of business plans that they cause. Essentially the fund would be developed by a donor agency specifically for players that have pending subsidy disbursements from MNRE or NABARD. Market players would receive funds from commercial banks, which can in turn, tap into the fund to recover the amount lent before actual disbursement by MNRE. This would be a longer term solution for implementation.

CP-1: Cross-market players in cookstoves for less than $120

Summary of findings: Actors in this segment have historically relied on patient equity and soft loans as primary sources of finance. A minority have been able to secure convertible debt, and most have put their own personal investments into their enterprise. Financing is primarily required to finance working capital and expansion needs, and players prioritized debt in particular to meet both needs. Equity and grants are also needed, but these were subordinated to their debt needs.

The primary challenge that underpins most of the access to finance concerns is the lack of knowledge and awareness of the sector – cookstoves are primarily perceived as “push” products with limited demand from the consumer side and as such, and it is perceived as a relatively high risk, low reward sector. In addition, most enterprises are very early stage and have limited collateral. As such, commercial sources of finance have been difficult to access or are too expensive. Other options – such as the CGTMSE loans, are hard to access as well because banks are unwilling to lend and because banks typically prefer to provide CGTMSE loans for asset generation, it is hard to secure these for working capital needs.

Developing a credit line to enhance access to soft loans or working capital loans through commercial banks may unlock the flow of debt to the sector. In addition, working with patient equity investors to scale up convertible debt, may meet growth needs of the sector. Finally, awareness and capacity building campaigns for many financial institutions in the sector on the merits of the sector as well as development of national quality standards for cookstoves would be important cross-cutting solutions to consider.

Current sources of financeActors in this segment have historically relied on equity and soft loans as primary sources of finance. A minority have been able to secure convertible debt, and most have put their own personal investments into their enterprise. Listed below are current sources of finance accessed by cookstove players:

Patient equity: Players have accessed patient capital from foreign impact investment funds between $1m– 2m. Patient capital has been used for start-up costs, expansion, and HR related costs (e.g., hiring management-level staff members). Players were able to secure convertible debt with a ticket price between $30K-70K with a tenor of 5 years and a rate of return between 7-10% from a foreign investment fund dedicated to social entrepreneurship and supporting enterprises in the start-up phase to fund set-up costs.

Grants (CSR): a select amount of players interviewed form partnerships with local corporations through

Risk-reward profileMedium risk; low reward. Risk is higher in the cookstove sector because there is low product awareness and demand among consumers for the product, which suggests a lower rate of growth for the sector and a great risk in investment (e.g., in the form of equity or debt) for FIs. There is a low expected return due to the fact that cookstoves are a heavy ‘push’ product with little traction in the market, and that margins are limited. Moreover, the majority of cookstove players are in the start-up phase (and consequently lack scale) and are not in a position to provide strong returns until the consumer market is better developed.

Based on this risk-reward profile, there are two primary actors who could be interested in this segment:

Patient equity and impact-oriented angel investors who would like to get involved in a market that is not necessarily growing quickly but has high potential for social impact (i.e., health, environmental and time-savings from collection of wood), but are not looking for high returns. If they provide hybrid products (i.e., convertible debt), there could be a strong investment potential in the sector.

Foundations or donor agencies who are likewise interested in providing start-up grants and or facilitating financing towards funding inventory sales cycles, expansion or marketing efforts by players.

Public sector banks could be involved in order to meet their requirements to lend to the MSME sector, but their involvement would have to be significant de-risked in order for them to consider further participation.

Need for finance: preferred sources and amount soughtThe biggest need for cookstove players is debt in the form of working capital or soft loans or loans with low collateral requirements with an overdraft facility to finance their inventory and expansion needs. Despite the fact that players in this segment access a variety of types of finance, they prioritize the need for only four types of financial support:

Debt: players were open to securing debt in any form, but were particularly seeking debt with low collateral requirements with tenors of at least 5 years. Debt

their corporate social responsibility (CSR) initiatives. These partnerships either offset the cost of cookstoves for the end-consumer, or in another case the fund is paid (with a ticket size between $150K-250K) as an advance for cookstoves sold in a particular region. This fund was used to offset all hardware costs in the production of the cookstoves.

Debt: a minority of players were able to access debt in the form of soft loans, primarily through donors and foreign aid agencies. Typical ticket sizes ranged from $500 to $690K, had long-term tenors of over 5 years, and charged very low interest rates (e.g., one of these loans had an interest rate below 1%). Another form of debt accessed by players were loans ranging between $70K - 85K from a foreign fund that provides SME social enterprises debt finance, with a 16-18% interest rate over two years.

Personal capital was also used as a one-time infusion of informal capital – however this was ad-hoc and very enterprise dependent.

was primarily sought to offset inventory costs as well as expansion of the enterprise. Despite the need for CGTMSE funds, and its attractiveness for the sector due to the fund being collateral free, none of the players interviewed in the cookstove SME segment have been able to access loans under the CGTMSE scheme.

Working capital was the most common form of debt sought by players with a ticket size of $125 – 200K. Working capital would ideally be in the form of an overdraft facility with a tenor of over 5 years, and an interest rate between 10-12%. This type of finance was required to fund the inventory cycle (with an average capital lock-in period of around 30-45 days). Working capital to be used to offset inventory costs is even more critical for players whose manufacturers are in China given that their sales cycle financing is longer51, and it is rare to have credit extended to cookstove players in India by manufacturers abroad (i.e., normally upfront payment is needed).

Players are also seeking soft loans with a ticket size between $15K – 35K with an interest rate below market rates of 7-10%. Players find soft loans attractive given their long-term tenor between 7-10 years and their lower interest rates which reduce repayments and increase profitability. Players wish to use soft loans for multiple purposes including to fund the expansion and scale-up of their enterprise, to offset R&D costs in product development, to expand marketing efforts, and to extend credit to rural energy entrepreneurs for the sale and distribution of their cookstoves.

Equity/hybrid: multiple actors sought patient capital or angel investment for expansion purposes with a ticket size ranging between $100K – $2m USD, with a rate of return that ranged between 10 to 12%. The use of equity is primarily to finance expansion, including expansion and establishment of distribution networks.

Grants: the cookstove segment has the highest demand for large ticket-size grants. The range that cookstove players are seeking is anywhere up to $500K USD. Players wished to use grants to reconfigure and scale up their business model, to enhance their R&D, to increase their procurement of goods and inventory, and to expand their marketing outreach. Other players wished to use 20% of the grant to increase their production,

For many SMEs it is financially advantageous to manufacture outside of India as it is cheaper to do so due to excise taxes being bigger than countervailing duty (CVD). While large companies are exempt from the excise tax, SMEs are not.

51

Annex 5A


and dedicate 80% of the grant received to enhance their distribution networks and marketing efforts.


segment, the following solutions would have a high potential to unlock value in the sector

Debt

Equity/hybrid

Grants


Debt

Equity/hybrid

Grants


Lack of fixed assets that are considered collateral. Cookstove players cannot access debt products because they typically lack fixed assets that are considered to be collateral by the financial institutions. Collateral used by cookstoves players are personal real-estate, offices, and sometimes real-estate owned by board members or family members. Players in this segment are therefore limited by their lack of collateral and are unable to access the amount of debt they need. As a result, debt (in the form of working capital and soft loans) is the biggest unmet need for this segment.

Early stage of operations: This segment has numerous players that are still in the start-up phase. This severely limits the ability of players to access funds from financial institutions such as banks which have eligibility criteria that include the need for market players to have at least 3 years of positive cash flow, presence of a credit history, and proven profitability. Market players in the cookstove sector find it difficult to meet these requirements as they are still in the early stage of operations and typically reinvest any profits to finance business growth.

Lack of access to CGTMSE collateral-free loans: Banks are unwilling to provide CGTMSE collateral-free loans primarily because the recovery process in the case of a default is very lengthy and bank managers have to bear the risk of a loss (including the 25% that is not covered by the guarantee). In addition, banks are usually unwilling to use CGTMSE to fund working capital for these new enterprises – the focus is on providing loans for asset generation (i.e., developing manufacturing facilities, warehouses, etc.) Finally, there is a perceived lack of transparency in the application process which further hinders access on the part of the market players. Due to these barriers these players have not able to access collateral-free loans, which are the most attractive and needed debt product for actors in this segment.

Expected ROI for equity is too high for players to meet: There is an information gap regarding expected returns for investors and a mismatch between the returns equity investors expect to earn when investing in the RE sector (~20%) and the actual returns that companies in the cookstove sector are in a position to provide (<10% returns in the short-medium term). This mismatch has restricted the amount of patient capital invested in the sector.

See ‘cross-cutting barriers’ (below)

Lack of knowledge and awarenessLack of reliable sector data in public domain: FI’s are usually hampered by a lack of market data on cookstove SMEs and benchmarks, in terms of player operations (e.g., business models and set-up costs, expected return on investment, etc.) and technology quality (i.e., how reliable and robust the player’s RE technology can be). As commercial banks have a lower risk appetite than other investors, this lack of information restricts the flow of debt into the sector more than it does for any other source of finance. Nevertheless, this lack of knowledge and access to information also likely restricts equity investments as well as donations in the form of grants to cookstove players.

Limited consumer knowledge of and demand for cookstove products: There is minimal consumer knowledge of the use and benefits of improved cookstoves over free, readily accessible traditional cookstoves. Cookstoves are perceived by investors as a ‘push’ product, and as such cookstoves are not seen as a stand-alone sustainable product or business. Currently cookstove players have limited to no marketing funds, besides minimal outreach with demonstrations through partner MFIs.

Limited understanding of how to approach banks: Actors in the cookstove space often lack the understanding that loan appraisal at banks are driven by the outlook of the branch manager. In case their loan application is rejected at one branch, cookstove players do not approach another branch believing that the bank is not interested in funding their project or enterprise.

Fragmented policy environmentLack of product standards: There is a lack of effective product standards or rating systems in the cookstove sector. This leads to a poor understanding by banks as to the products they are assessing, as well as general confusion in the market place for consumers and MFIs selecting or purchasing cookstoves.

Designing new financial productsDeveloping new credit lines to meet specific financial needs: Developing a line of credit with a specific mandate to direct more working capital loans towards SME cookstove players, could help address the challenges of access to soft loans and the particular needs of this segment for three reasons. First, the line of credit could help incentivize banks who would otherwise be unwilling to provide working capital loans as they would be provided a an external set of funds to lend from. Second, these loans would help cookstoves players with their working capital crunch and would be setup to have lower interest rates which would be easier for the cookstove actor to repay and to manage. This process would involve selecting an aligned banking institution, providing them with the technical assistance on how to evaluate the RE sector, and provide incentives (i.e., charging a fee upfront for banks who intend to access the mechanism) so that the credit lines are actually used.

Scaling existing productsIncrease access to unsecured loans under the CGTMSE scheme: Access to unsecured loans continues to be limited due to unwillingness of lenders to provide collateral free loans. However, availability of these loans could be enhanced by increasing knowledge of the cookstove sector for bank managers in public banks (and specifically those providing CGTSME loans). This could be achieved by providing technical assistance (TA) to bank managers in public banks or RRBs, or those responsible for the disbursement of CGTMSE loans to increase their knowledge and awareness of the RE SME consumer product and cookstove sector through capacity building workshops and circulars. Moreover, to ease CGTMSE provision, the application process could be streamlined and the transparency of the application and disbursement of the CGTMSE loan could be enhanced. For example, efforts could be made to increase the transparency of the application process by creating an online tracking system that market player could access after an initial application to the loan has been submitted.

See knowledge and awareness initiatives below

Scaling existing productsScaling up grants: Grants are expected to play an important role in the cookstove sector in the short to medium term. These funds would be utilized to implement measures to create an enabling environment for the cookstove industry. These measures include implementation of increased awareness and marketing drives for end consumers to bridge the knowledge gap regarding the value proposition of clean cookstoves and quality products available in the market, technical assistance to provide quality after sales services for cookstoves, etc.

Expanding knowledge and awarenessHighlighting case studies of successful investments in cookstove MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors

Technical assistance for financial institutions and investors: A gap in sector knowledge constitutes one of the primary barriers to financing the cookstove sector in India. A lack of technical expertise at financial institutions makes it difficult to assess potential investment opportunities in the sector. The challenge is compounded by a lack of reliable information in the public domain. Potential investors and banks would need technical assistance to help them evaluate investments in the sector through a better understanding of potential risks, growth prospects, business model, etc.

Policy solutionsDevelopment of national quality standards for cookstoves: A significant barrier preventing access to finance and increased uptake of clean cookstoves is the lack of quality standards for clean cookstoves available in the market. In the absence of quality benchmarks, investors are unable to ascertain the potential of investment opportunities in the sector. Further, the variety of cookstoves available in the market creates confusion for the consumer and a range of sub-standard products ruins market perception for them. Going forward, it would be extremely important to have national standards for cookstoves to lend more credibility to the sector.

Annex 5A



CP-2: Cross-market players in SPLs for less than $120

Summary of findings: Players in this segment have used equity in the form of patient equity, preference shares, and angel investments. Few players have been able to access debt from foreign banks. Other current sources of finance for these players include grants from donor agencies. The primary financing need of these players is typical of enterprises in the consumer products space – working capital. To this end, they are seeking debt products such as working capital loans, soft loans, and unsecured loans. Other financing needs include marketing and awareness drives for end customers, for which market players are seeking equity from impact investors.

Access to debt is primarily limited by a lack of collateral and past profitability limit access to formal debt for these players. And a lack of well established distribution channels and quality after sales service raises questions on the sustainability of their business models for other investors. Moreover, in cases when players have been able to access debt, its cost tends to be very high, creating a repayment challenge for the market player. The type of funding that is most needed in this segment is debt in the form of working capital, soft loans, and unsecured loans to offset inventory sales cycles and expansion. This could be achieved by credit lines with a specific mandate to direct more working capital and soft loans to the sector. Impact investors could scale investments in these market players considering their target returns and potential for social impact. These investments could be structured as pure equity, convertible debt, or mezzanine on the agreement between the investor and the entrepreneur, although trends indicate that convertible debt is emerging as the preferred structure for both entrepreneurs and investors. To support these solutions, it would be useful to provide technical assistance to FIs, helping them assess potential investment opportunities in the sector and revise MNRE guidelines so as to promote latest technologies in this space.

Current sources of financeActors in this segment have historically used equity, grants, and debt as their primary sources of finance in addition to personal finance.

Equity: in the form of patient equity, preference shares, and angel investments have been accessed by players. Patient capital has been accessed with a large ticket size range of $50K-530K by various players to finance business expansion. Preference equity between $170K-190K has been accessed by one player in the sector. An exception in ticket size and type was one player who accessed patient equity from an impact investing fund that partnered with a high net worth co-investor who had previously invested in the enterprise. The ticket size for this investment was $4m for a period of 3-5 years at a high target rate of return (>15%). The fund was provided by a dedicated impact investing group with a specialized global solar fund which required partner co-investors; in this case the enterprise had an existing angel investor who was able and willing to partner with the targeted impact investment fund. Equity was used to finance expansion into new geographical regions and to offset operational costs for market players.

Grants: those accessed by players range from $60K-$75K. Sources of these grants include international aid agencies and foundations, either as donation or as prize money to the SPL players. The

a growth in awareness of the benefits of SPLs is expected to result in significant growth for the products. Finally, there have been success stories of companies scaling fairly rapidly in this sector which strengthens the reward potential of an investment.


Patient equity and impact-oriented angel investors who would like to get involved in a market that is growing at a steady pace, but are not necessarily looking for high returns (e.g, ideally providing a rate of return between 5-10%).

Public sector banks and RRBs who are providing debt given the medium risk and return of the sector (i.e., the ability for players to repay debt), however, this is dependent on FIs understanding the SPL sector.

Need for finance: preferred sources and amount soughtThe majority of actors in this segment do not prefer grants and subsidies because they believe these sources of finance tend to distort the market – they are overwhelmingly looking for debt to offset inventory finance and marketing costs.

Debt: players were open to securing debt in any form,

grant money was used by market players to offset general operational costs.

Debt: has been accessed in various forms by only 50% of all SPL players interviewed. For these players, the ticket size ranged from ~$350K to $1.3 million. The type of debt accessed includes working capital from a bank to offset inventory cycles, a term loan at 12 – 15% interest rate with a 7 to 10 year tenor to generate new assets, and a long-term ‘social’ debt product from a foreign bank.

Personal capital was also used as a one-time infusion of informal capital – $40K-$60K was committed towards start-up costs and used by almost all enterprises in the sector.

Risk-reward profileMedium risk; medium-high reward. The perceived risk for investment in the SPL sector can be classified as ‘medium’ – lower than most of the other segments in the consumer products market. This is because there is generally greater consumer awareness of solar products and the benefits that they bring to the consumer. In addition, the technology is better understood by financial institutions and there has been significant activity in the sector over the past few years. From the rewards perspective, there are expected to be medium-high rewards because the cost of the product is expected to decrease as the cost of of LED bulbs and lithium-ion batteries declines (a decrease of 90% and 70%, calculated by cost per lumen, and cost per watt hour respectively). This, combined with

but were particularly seeking debt in the form of unsecured loans under the CGTMSE scheme and soft loans at an interest rate of 7-8% to meet their working capital needs. The range of debt in the form of working capital needed was large – from $400K to $2million.52

In addition to working capital loans, soft loans were sought to support marketing efforts which the majority of players deemed critical to increasing the demand and sales of their SPLs. The ticket size required for soft loans for market players ranged from $200K through to $3million. Other sources of debt being sought by market players include global international banks with a debt impact investment fund.

Collateral free loans are especially important for SPL players considering they have limited fixed assets (acceptable to commercial banks) and these are needed to offset inventory and marketing costs. The CGTMSE loan suits the working capital needs of SHS players with a ticket size of up to $170K (within the range required by SPL actors), a tenor of less than 5 years, and a favorable interest rate of 12 – 15% given that the loan is uncollateralized.

Equity: players stated a need for patient equity and/or convertible debt between $100K to $2m. The primary use of equity is to be used towards fixed costs of geographic expansion as well as capital expenditures.

Debt

Equity/hybrid

Grants

Lack of fixed assets considered as an acceptable form of collateral. Collateral in the form of fixed assets is needed to acquire debt from commercial banks in India. While a few SPL players have been able to access debt products historically, the majority of debt accessed has been from international banks. Collateral available with SPL players includes personal real-estate, offices, and warehouses, which often restricts their ability to access and scale up formal finance. As a result, debt in the form of working capital and soft loans is the biggest unmet need for this segment.

Cost of debt is misaligned: In cases players are able to access debt, the cost of debt is very high for many SPL MSMEs. For example, the cost of debt is around 13-18% instead of a 7-8% interest rate preferred by market players. This affects both their ability to repay the loan, as well as their profitability.

Lack of access to CGTMSE collateral-free loans: Banks are unwilling to provide CGTMSE collateral-free loans due to lack of incentives to do so (i.e., a portion of the risk of default and the burden of proof in the provision of the loan to the SME is borne by the bank manager). Additionally, an inconsistent application of selection criteria leads to limits accessibility. Due to these barriers, few RE and SPL players are able to access collateral-free loans which are the most attractive and needed debt product for actors in this segment.



The ticket size of working capital needed for players was about 20-30% of their annual turnover.52

Annex 5A




Debt

Equity/hybrid


Lack of knowledge and awarenessLack of reliable sector data in public domain: FI’s are usually hampered by a lack of market data on SPL SMEs and benchmarks, in terms of operations (e.g., business models and set-up costs, expected return on investment, etc.) and technology quality (i.e., how reliable and robust the player’s RE technology can be). As commercial banks have a lower risk appetite than other investors, this lack of information restricts the flow of debt into the sector more than it does for any other source of finance. Nevertheless, this lack of knowledge and access to information also likely restricts equity investments as well as donations in the form of grants to SPL players.

Fragmented policy environment Outdated SPL product guidelines and lack of SPL product standards: Current government guidelines do not promote the latest technologies in the SPL space. This allows sub-standard products to enter the market and restricts latest products from being eligible for government programs. Moreover, government schemes involving free distribution of SPLs (e.g., in Bihar and Orissa) increase penetration of sub-standard SPLs, affecting both market perception as well as the willingness of customers to pay for these products. Moreover, there is a general lack of effective product standards or rating systems in the SPL sector. This leads to a poor understanding by banks as to the products they are assessing, as well as general confusion in the market place for consumers and MFIs selecting or purchasing SPLs.

Unpredictable import taxes on products: An SPL/SHS player in this segment stated that there is a major discrepancy of import fees for the same products/materials, which can range from 5% to 32%. The high fluctuations of import fees causes unpredictable variations for the company’s costs and overall profitability.


Scaling existing productsIncrease access to unsecured loans under the CGTMSE scheme: Access to unsecured loans continues to be limited due to unwillingness of lenders to provide collateral free loans. However, availability of these loans could be enhanced by increasing knowledge of the SPL sector for bank managers in public banks (and specifically those providing CGTSME loans). This could be achieved by providing technical assistance (TA) to bank managers in public banks or RRBs, or those responsible for the disbursement of CGTMSE loans to increase their knowledge and awareness of the SPL sector through capacity building workshops and circulars. Moreover, to ease CGTMSE provision, the application process could be streamlined and the transparency of the application and disbursement of the CGTMSE loan could be enhanced. For example, efforts could be made to increase the transparency of the application process by creating an online tracking system that market player could access after an initial application to the loan has been submitted.

Scaling existing productsScaling up convertible debt (CD): This is a strong solution for this segment primarily because it deals with the issue of firms being in an early stage of operations and inability of FIs to evaluate the financial viability of start-up firms in such a nascent sector. CD pushes firm valuation to a later stage, when operations are better understood by the investor and firm, mitigating against the issue. Investors of CD also tend to have a longer investment horizon, as desired by firms.


For both products, it could be possible to scale up access and supply by engaging with these investors by providing them with technical assistance to evaluate these enterprises. This would involve helping them think through the various business models, quality of products, and growth prospects of different enterprises.

Knowledge and awarenessProvide technical assistance for financial institutions and potential investors: A gap in sector knowledge continues to be a barrier to financing the SPL sector in India. Although the gap is not as severe as that for cookstoves, a lack of high technical expertise at financial institutions makes it difficult to assess potential investment opportunities in the sector. The challenge is compounded by a lack of reliable information in the public domain. Potential investors would need technical assistance to help them evaluate investments in the sector through a better understanding of potential risks, growth prospects, business model, etc.

Highlighting case studies of successful investments in SPL MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors.

Policy solutionsEstablish uniform import duty structure: Interviews with market players indicate a non-uniform import and excise duty structure which has an implication on the cost structure for these players. Since these costs cannot be passed on to the consumer, these are absorbed by the market player affecting their profitability. This affects their financial projections, making it difficult for them to access formal forms of finance.

Revision of MNRE guidelines on technical specifications of SPLs: MNRE could consider updating their guidelines on SPLs to create barriers to entry for sub-standard products. This would also encourage higher penetration of latest technologies (e.g. LED based lanterns instead of CFL based devices), setting a high benchmark for product quality in the Indian SPL market

Development of national quality standards for SPL: A barrier preventing the provision of and access to enterprise finance for players, and likely restricting uptake of SPLs by consumers, is the lack of quality standards for SPLs available in the market. In the absence of quality benchmarks, investors are unable to ascertain the potential of investment opportunities in the sector. Going forward, it would be important to establish national standards for SPLs to lend more credibility to the sector.


segment, the following solutions would have a high potential to unlock value in the sector.

Current sources of financePlayers in this space have historically relied on a number of different sources of finance to scale up their operations.

Common sources of funding for these players have included debt, equity, grants, and informal capital (e.g., personal investments during start-up). A minority have

CP-3: Cross-market players providing solar home systems from $120 – 600

Summary of findings: Market players in this segment have traditionally relied on a combination of equity from angels and impact investors as well as grants from donor agencies. The majority of the players have also used informal investments from entrepreneurs as start-up capital. Access to debt has been restricted for most of the players in the segment so far. Going forward, the biggest financing need for players in this segment is working capital to fund the sales cycle. Players are therefore prioritizing debt, either through working capital loans, or through soft loans and unsecured loans.

Players in this space find it difficult to access formal finance because of their lack of collateral and their relatively recent emergence in the space. In addition, the cost of debt (in particular) that they face is fairly high because they are perceived by many financial institutions as a ”new economy” sector, which they are not particularly comfortable lending to. Finally, very few players who seek to access the CGTMSE service have been able to do so because of inefficiencies in the system.

Developing a credit line to enhance access to soft loans or working capital loans through commercial banks may unlock the flow of debt to the sector. In addition, working with patient equity investors to scale up convertible debt, may meet growth needs of the sector. Awareness and capacity building through technical assistance for many financial institutions is important to increase the supply and quality of financial services provided to SMEs in this sector. In addition, the development of the latest national quality standards for SHS’ need to be established, and the technical specifications in MNRE guidelines should be updated. Finally, the development of a uniform import duty structure could be established to ensure that products can be imported easily into India from abroad.

Annex 5A


been able to secure debt, but this is not true for the majority of players. The complete set of current financing sources for this segment is included below.

Equity: this has been accessed in the form of patient capital as well as through impact-oriented angel investments. There is not the same level of need for equity financing as there is for debt financing. For most firms, this was only available after the initial proof of concept had been established, but angel investment was available to one firm at an earlier stage. The ticket size for this investment has quite a large range: from $80K – $3 million. It has been primarily used to finance operational and geographical expansion and drive scale in the company.

Grants: two players have accessed grants in the form of international awards. Grants were used for expansion of offices, operational expenses such as human resources to build out teams, and back-end R&D for the enterprise’s products (which ranged from SPLs to SHSs).

Debt: debt is not particularly available in the sector and is a constraint for many players (see below for further details on this). However, one player was able to access a $50K collateral free term loan through an NBFC for use as working capital. Players in this segment have also created innovative mechanisms to access to soft loans including a trade financing facility and a partnership with a major international bank to access commercial capital at reduced rates. However, these examples are more the exception rather than the norm.

In addition to the sources noted above, half of the players interviewed had provided and used personal funding in the form of a donation from the founders of the enterprise. This finance was primarily used during the startup phase of the enterprise (during the first year or two of the organization’s launch). Ticket sizes ranged between $10K and $85K.

Risk-reward profileLow-medium risk; medium-high reward. The relative risk profile of this segment is low-medium because it is largely made up of mature medium-sized enterprises that have been in operation for over ten years, there is growing demand for the products, and many players have been able to demonstrate profitability in serving their consumers. The expected short-term returns in investing in this segment is expected to be medium-high given

for) expansion that led to and includes the generation of new assets (e.g., warehouses, distribution centers). In this manner, new assets are formed as collateral for debt.

Players also seek debt in the form of unsecured loans to support marketing and awareness campaigns although it may be challenging to secure debt for these purposes. A priority for this segment is to grow consumer awareness of SHS’s through marketing and outreach. To offset costs for marketing campaigns, a mix of debt and

that players are seeking to, and are generally expanding their geographical presence and scaling up their existing operations. Due to the high growth and demand for SHSs this segment has a strong potential to have positive returns, although the scale of these returns are likely limited to 10-14% at the upper end.


Patient equity or impact-oriented angel investors who would like to get involved in a growing market, but are not looking for high returns. If they provided pure equity or hybrid products (i.e., convertible debt) there could be a strong market for this.

Public sector banks who are providing debt given the lower risk of the sector, however, this is dependent on them understanding the sector

Donors would be interested in providing funds in the form of grants in the short-term, but as the segment continues to grow and be self-sustaining, donors would be less interested in investing funds as the unmet need would no longer be as significant.

Need for finance: preferred sources and amount soughtThe most pressing need for all actors in this segment is accessing debt in the form of working capital. In addition, actors seek to access a mix of equity and debt to fund their geographical expansion. For the purposes of increasing consumer awareness and knowledge of SHSs, players want to increase their marketing outreach through debt.

Debt: players were open to securing debt in any form, but were particularly seeking debt in the form of revolving overdraft; structured guarantees, and soft loans. The primary need for this debt was to finance working capital needs, as many companies are unable to balance the demands of geographic expansion and the inventory sales cycle costs (which ranges in length between 4 and 6 months). The ticket size needed ranges from $70K (for players who sell SHS’s that range from $100 to $250) to $600K (for players who are sell SHS’ that cost up to $500). Players indicated that they would ideally like to pay an interest rate between 8-10% but they could also pay slightly higher rates. A secondary need for debt is for geographic expansion and scale up of operations. While equity is also needed for expansion, debt was specifically sought (and best suited

equity is sought to match this need, with an average ticket size of $200K

Equity/hybrid: To expand geographically players primarily seek equity in the form of patient capital, which provides more favorable rate of returns than pure equity or angel investments. The ideal form of patient equity for actors in this segment has an average ticket size of $300-600K with a 5-10% rate of return, and an investment horizon spanning five to ten years.

Debt

Equity/hybrid


MSMEs do not have assets that are considered collateral. Most MSMEs in this segment have assets in the form of their final product (i.e., solar home systems) but this is not considered to be adequate collateral by formal financial institutions. As a substitute, players are forced to use personal real estate (or those of staff/board members) to step in for collateral requirements but do not have enough additional collateral to access loans or working capital needed.

Cost of debt is misaligned: The cost of debt is too high for these actors (e.g., 13-17% instead of an ideal 8-10% interest in the form of loans or working capital, preferred by market players). While players might be willing to pay slightly higher, rates above 14-15% prove very difficult for a MSME SHS player to honor in regular payment intervals.

Lack of access to CGTMSE collateral-free loans: Banks are unwilling to provide CGTMSE collateral-free loans primarily because the recovery process in the case of a default is very lengthy and bank managers have to bear the risk of a loss (including the 25% that is not covered by the guarantee). In addition, banks are usually unwilling to use CGTMSE to fund working capital for these new enterprises – the focus is on providing loans for asset generation (i.e., developing manufacturing facilities, warehouses, etc.) Finally, there is a perceived lack of transparency in the application process which further hinders access on the part of the market players. Due to these barrier no SHS players interviewed were able to access collateral-free loans which are the most attractive and needed debt product for actors in this segment.

Tenor requirement misaligned for debt products: Most companies are looking for loans that are longer than 5 years in order to finance their expansion and operational needs. However, most financial institutions only provide loans with a tenor of 2 to 3 years.

Target ROI of equity is misaligned: Target ROI for equity investors is out of the range that SHS players need or can currently meet. Target returns are expected to be around 17-20% by investors, whereas market players are seeking expected returns between 10-14%. This leads to a mismatch of expectations between players and investors. This mismatch can act as a disincentive for financiers to invest in the sector.

Lack of knowledge and awarenessLack of reliable sector data in public domain: FI’s are usually hampered by a lack of market data on SHS SMEs and benchmarks, in terms of player operations (e.g., business models and set-up costs, expected return on investment, etc.) and technology quality (i.e., how reliable and robust the player’s RE technology is as compared to its competitors). Moreover, most financial institutions – both lending and investment institutions – regard the renewable energy sector as a “new economy” sector and are not well versed in understanding how to assess business models of SME consumer product enterprises. They typically tend to bias towards larger investments where possible, and even in the MSME sector, prefer to focus on investments in sectors such as manufacturing in which they are more comfortable. Specifically equity investors, there is a lack of understanding of the potential returns that the RE consumer product sector can generate. This lack of information and an inability to assess business models make it challenging for SHS market players to attract new investors in the provision of equity.

Fragmented policy environmentLack of SHS product standards: There is a lack of effective product standards or rating systems in the SHS sector. This leads to a poor understanding by banks and investors as to the products they are assessing, as well as general confusion in the market place for consumers and MFIs selecting or purchasing SHS.

Unpredictable import taxes on products: A major SHS player in this segment stated that there is a major discrepancy of import fees for the same products/materials, which can range from 5% to 32%. The high fluctuations of import fees causes unpredictable variations for the company’s costs and overall profitability

Annex 5A



Debt

Equity/hybrid


Subsidy delays increase working capital stress on MSME or distributors of SHS’s: The need to install SHS within the consumers households prior to the release of NABARD subsidies, as mandated by policy, further compounded by the delay in the disbursement of the subsidies (by 6-12 months according to some estimates) causes significant working capital stress. This can be felt by the MSME which has installed the SHS in the consumer’s home, or in some cases on the distributor of the SHS who is selling the product.

Policy solutionsEstablish uniform import duty structure: Interviews with market players indicate a non-uniform import and excise duty structure which has an implication on the cost structure for SHS players. Since these costs cannot be passed on to the consumer, these are absorbed by the market player affecting their profitability. This affects their financial projections, making it difficult for them to access formal forms of finance.

Revision of MNRE guidelines on technical specifications of SHSs: MNRE could consider updating their guidelines on SHSs to create barriers to entry for sub-standard products. This would also encourage higher penetration of latest technologies, setting a high benchmark for product quality in the Indian SHS market.

Development of national quality standards for SHS: A barrier preventing the provision of and access to enterprise finance for players, and potentially restricting uptake of SHS by consumers, is the lack of quality standards for SPLs available in the market. In the absence of quality benchmarks, investors are unable to ascertain the potential of investment opportunities in the sector. Going forward, it would be important to establish national standards for SHS to lend more credibility to the sector.





For both products, it could be possible to scale up access and supply by engaging with these investors by providing them with technical assistance to evaluate SHS market players. This would involve helping them think through the various business models, quality of products, and growth prospects of different enterprises.

Knowledge and awarenessTechnical assistance for financial institutions and potential investors: A gap in sector knowledge continues to be a barrier to financing the SHS sector in India. Although the gap is not as severe as that for cookstoves, a lack of high technical expertise at financial institutions makes it difficult to assess potential investment opportunities in the sector. The challenge is compounded by a lack of reliable information in the public domain. Potential investors and banks would need technical assistance to help them evaluate investments in the sector through a better understanding of potential risks, growth prospects, business model, etc.

Highlighting case studies of successful investments in SHS MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors.


segment, the following solutions would have a high potential to unlock value in the sector:

Current sources of financeActors in this segment rely most heavily on government subsidies, which heavily offset the cost of solar water pumps for end-consumers. The majority of players have infused personal funds during their first two years of operation and some have been able to secure angel investment. A minority have been able to secure formal debt. Listed below are current sources of finance:

Subsidies: are utilized by over 90% of all market players in this sector. Subsidies from MNRE are disbursed for end-users, who pay 15% of the upfront cost of the solar water pump, while the remaining cost is shouldered by the central and state governments. Subsidies in government tenders vary in ticket size depending on the amount of SWP needed, the technical specifications

of the SWP type requested (e.g., the HP and motor), and the number of SWPs needed for the project.

Equity: in the range of $80K to $300K has been accessed from domestic and international angel investors by half of the players interviewed. One such player has secured over $200K of Pre-Series A investments from international investors. All angel investors involved in the sector have a dual objective of financial returns and social impact – as such, they are willing to accept lower rates of return around 10-12%. Equity is used primarily to finance expansion of rural after-sales services for maintaining and servicing solar water pumps.

Debt: is a much needed source of finance for this segment but is not highly available at present. Players


Summary of findings: The majority of players in this segment depend heavily on government subsidies, covering as much as 85% of the pump cost in certain states. Additional sources of funding include informal capital (personal assets of founders), small uncollateralized loans, and angel investments. Players in this segment are typically looking for debt products to meet working capital needs necessitated in large part by delays in subsidy disbursement. The other key financing need includes expansion capital to finance distribution networks to reach the last mile customers. For this, they are primarily looking at equity investments, preferably from impact investors. Finally, market players are looking to maintain their level of subsidies in order to ensure continued growth in the current market.

Access to subsidies is not an issue, however delays and uncertainty in subsidy disbursement can have negative implications on the working capital constraints of these firms. Access to debt is most commonly limited by lack of assets that are considered collateral and by the fact that the cost of standard debt products may be too high for players. Access to equity is most often limited by a lack of capacity on the part of the equity investor on how to evaluate the investment, and by misalignment on the target ROI required.

To address these barriers, there are a number of solutions to consider. Developing a pledge guarantee fund to allow market players to access subsidies before actual disbursement by MNRE has high potential to unlock potential of the sector. In addition, scaling up access to working capital loans and soft loans through a credit line can help market players meet the working capital stress they currently face. Lease financing is also a new financial product for the sector and would allow end consumers to lease solar pumps instead of having to purchase them and could unlock new segments of customers who cannot afford these pumps. However, across the sector, a more streamlined process for subsidy disbursement would allow market players to better plan their finances around subsidies and avoid working capital constraints.

Annex 5A


who have been able to access it have used it to finance or offset working capital costs and secondly to finance expansion. The ticket size of working capital received by players ranges between $130K-160K. One player was able to secure a CGTMSE collateral free loan of $160K for use as working capital – however, no other players interviewed were able to avail of this option.

Personal capital was also used as a one-time infusion of informal capital – $8-80K was committed towards start-up costs and used within the first two years of operation.

Risk-reward profileMedium risk; medium reward. For solar water pump procurers, the perceived risk for investment can be classified as ‘medium’ because it is heavily supported by the government through the subsidy mechanism. However, investors do face risks because there are delays in subsidy disbursement, and the sensitivity of the market to policy shifts in the amount and type of subsidy offered. With respect to returns, there is a relatively “medium” expected short-term financial reward for FIs given that there is awareness among the consumer base, especially farmers in regions in which MNRE solar water pump programs are active and have been implemented. Moreover, given that farmers understand the financial returns that solar water pumps yield for the type and quality of crop they can grow, there is a high unmet demand for subsidized solar water pumps. If current market conditions and awareness initiatives continue, the market is expected to grow significantly. However, given its dependence on external factors for success, the potential rewards have been scaled back.


Patient equity or impact-oriented angel investors who would like to get involved in a growing market, but are not looking for extremely high returns. If they provided pure equity or hybrid products (i.e., convertible debt) there could be a strong market for this.

Public sector banks could be involved but would need to have some form of guarantee for their lending (as the risk may still be too high for them to be involved).

Need for finance: preferred sources and amount soughtThe majority of actors in this segment, like most RE consumer product actors, find working capital the most challenging form of finance to access, and it is likewise their biggest unmet need. This is further heightened due

to delays in subsidy disbursement by the government, which causes additional liquidity stress. As compared to other RE consumer product segments, a unique financing requirement for SWP players is their need for equity to expand their rural after-sales networks due to fact that all government contracts require long term after-sales service. Listed below (in order need) are forms of preferred sources of finance sought by SWP players:

Debt: players were open to securing debt in any form, but were particularly seeking debt in the form of soft loans, through a revolving fund with a credit line, or through the CGTMSE program to offset inventory cycle costs. The range of debt required varies from $300-800K, with an ideal interest rate of 8-12%. Currently, players find it hard to access debt because of the emphasis on collateral (which many players do not have), delays in subsidy disbursement, and irregularities in tender offerings (explored in further detail below). CGTMSE loans would be particularly well suited to the sector because they meet the working capital needs and have favorable interest rates without needing collateral – however, their provision in the market currently is very limited.

Equity: players want to access angel investment (in the form of patient capital) with a significant ticket size of $300K, target returns of 10-13% over an investment horizon of 5-7 years. Players seek to use their equity for three main purposes: the first and most prevalent need is to expand their operations across geographies and fund up-front costs (e.g., HR, new offices, increased inventory, etc.). Secondly, some players are seeking to de-risk their business by decreasing dependence on subsidies and product sales through the government. Therefore, enterprises are seeking equity to set up a new business model that would provide direct sales of SWPs to the end-consumer. Thirdly, equity is sought to fund the expansion of rural after-sales networks as warranties and after-sales services are required to be provided (>1 year) by SWP players for all government-led contracts and subsidies (regardless if the issue is due to manufacturing defects or consumer misuse of the product).

Subsidies: there is a high need, and reliance upon government tenders and subsidies. Over 90% of SWP players interviewed have accessed and use government subsidies. All players stated a continued need in accessing these given the ease of distribution of SWP (i.e., conducted through the government) despite challenges in delays in disbursement and tender processes (see ‘barriers’, below for details).


Debt

Equity/hybrid

Subsidies


Lack of assets that are considered collateral: Most companies cannot access debt products because they do not have fixed assets that are considered as collateral by financial institutions. Since SWP players do not manufacture their products but procure these from other entities, they do not own facilities to offer as collateral and currently are limited to provide their own property (e.g., personal real estate or offices) or storage warehouses as collateral. In addition, market players are unable to access, use, or incentivize banks to accept their existing inventory as collateral, making the supply of working capital even more restricted.

Cost of debt is too high for players: The cost debt is currently out of the needed range for SWP players. The cost of debt is too high for these actors (e.g., 13-17% instead of an ideal 8-10% interest rate for debt in the form of loans or working capital, preferred by market players). While players might be willing to pay slightly higher, rates above 14-15% prove very difficult for a MSME SWP player to honor in regular payment intervals.

Lack of access to CGTMSE collateral-free loans: Banks are unwilling to provide CGTMSE collateral-free loans due to a lengthy application processes and lack of incentives to do so (i.e., a portion of the risk of default and the burden of proof in the provision of the loan to the SME is borne by the bank manager). Due to these barriers few RE and SWP players are able to access collateral-free loans which are the most attractive and needed debt product for actors in this segment.

The tenor of debt products is too short. Most companies are looking for loans that are longer than 5 years in order to finance their expansion and operational needs, whereas most financial institutions only provide loans with a tenor of 2 to 3 years.

Target ROI of equity is too high: Target ROI for equity investors is out of the range that SWP players need or can currently meet. Target returns are expected to be around 17-20% by investors, whereas market players are seeking expected returns between 10-14%. This leads to a mismatch of expectations between players and investors. This mismatch can act as a disincentive for financiers to invest in the sector.

For additional barriers see ‘cross-cutting barriers’ (below)

Significant liquidity stress due to subsidy delays: Subsidies form an important part of the business model for the vast majority of SWP market players in this segment. Since subsidy disbursements from MNRE are often delayed (taking a few months instead of a week or two), the players end up with very high account receivables, resulting in high liquidity stress for this segment. This issue further adds to the need for working capital in the form of debt.

Inconsistent government tender process further generates liquidity stress: There is little consistency in government tenders for SWPs – there is often large variation in the types and amounts of pumps required. As such, enterprises are unable to predict sales cycles and either cannot meet the needs of the tender, or are left with large inventories to service which cannot be sold. This leads to significant working capital stress due to high inventory holding costs.

Fragmented policy environmentOutdated MNRE product guideline acts as disincentive for improvements in SWP technology: MNRE standards are misaligned with current SWP technologies and best practices in the sector. For example, guidelines recommend the provision of a 3000 Watt SWP, however wattage is dependent on the water table depth, and amount of water needed to be pumped per day for the end-user, rather than on an arbitrary fixed wattage amount. This leads to the market being flooded with one type of solar water pump, rather than a variety of choices matched to the needs and demands of the consumer. MNRE product guidelines result in a mismatch between supply and demand of solar water pumps given that the product does not cater to the particular demands (e.g., size of land, liters of water needed per day, etc.) of the consumer. Moreover, the mismatch complicates the evaluation of SWP companies and projects that have SWP outside the MNRE norms and potentially restrict these players from accessing loans from RRBs and public banks.

Lack of knowledge and awarenessLack of reliable sector data in public domain: FI’s are usually hampered by a lack of market data on SWP SMEs and benchmarks, in terms of player operations (e.g., business models and set-up costs, expected return on investment) and technology quality (i.e., how reliable and robust the player’s SWP technology can be, after-sales warranties, etc.). As commercial banks have a lower risk appetite than other investors, this lack of information restricts the flow of debt into the sector more than it does for any other source of finance. Nevertheless, this lack of knowledge and access to information also restricts equity investments.

Annex 5A


Debt

Equity/hybrid

Subsidies



Designing a lease finance model: Such a model could be designed on the lines of the model used for tractors in the agricultural sectors, with modifications to suit segment players. This would help end customers lease solar pumps instead of purchasing them by making the complete payment upfront. This would help address the affordability barrier for farmers and potentially unlock new customer segments in the sector. However, it would require to be implemented over a longer term as it needs the establishment of a secondary market, or a buyback facility.


See knowledge initiatives noted below

Developing a pledge guarantee facility: A pledge guarantee fund facility would serve as a “stopgap” funding facility to help speed up subsidy disbursements. Essentially, the fund would be developed by a donor agency or foreign aid agency specifically for SWP players that have pending subsidy disbursements from MNRE or NABARD. Market players would receive funds from commercial banks, which can in turn, could tap into the fund to recover the amount lent before actual disbursement by MNRE. This would address the barrier of subsidy delays by helping speed up disbursement and decrease liquidity stress and the heightened need for working capital. This would be a longer term solution for implementation.

Knowledge and awarenessHighlighting case studies of successful investments in SWP MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors.

Technical assistance for financial institutions and potential investors: A gap in sector knowledge continues to be a barrier to financing the SWP sector in India. Although the gap is not as severe as that for other RE segments, a lack of high technical expertise at financial institutions makes it difficult to assess potential investment opportunities in the sector. The challenge is compounded by a lack of reliable information in the public domain. Potential investors and banks would need technical assistance to help them evaluate investments in the sector through a better understanding of potential risks, growth prospects, business model, etc.

Policy solutionsRevision of MNRE guidelines on technical specifications of SWPs: MNRE could consider updating their guidelines on SWP to create barriers to entry for sub-standard products and ensure the inclusion of other forms of SWPs that are the highest performing and whose wattage and type is catered to demand/the end-consumers’ needs. This would also encourage higher penetration of latest technologies, setting a high benchmark for product quality in the SWP market.



Current sources of financePlayers in this space have historically relied on two main sources of finance for their scale up and operational expenses: debt and grants. Subsidies are a secondary form finance, used primarily for SHS products. Although these RE MSME distributors wish to access equity for further expansion of their enterprises, they have thus far been unable to do so.

Grants: Grants have been accessed and provided to distributors from various sources. Distributors have received grants directly from international NGOs, through competitions and award money, high net worth individuals, foundations, and foreign agencies. These were used towards testing out alternative distribution networks, after-sales servicing models, and new RE products in the market. They were also used for training purposes for their VLE salesforce as well as training for RRB managers on MNRE policies, applicable RE consumer finance options, and RE products. One player stated that the ticket size of one of their grants ranged between $6K and $10K. Debt: Debt in the form of loans have been accessed in this sector in various forms in the form of an overdraft facility53, a working capital loan, and a general low interest loan for the enterprise. However, debt in the form of working capital remains a constraint for distributors. Players have been able to only access small ticket size loans of between $3K-7K at slightly

below market rates (6-8%). These were used for various activities: the expansion of distribution networks and the provision of working capital loans to the player’s distributors to help launch their VLE salesforce businesses.

Subsidies: Government subsidies disbursed through the MNRE and NABARD are accessed by a few distributors. These distributors likewise assist their consumers in accessing subsidies. Distributors state that they only access subsidies for their SHS products.

Risk-reward profileMedium risk; low reward. The relative risk profile of this segment is medium because it is largely made up of mature medium-sized distribution enterprises that have been in operation for over ten years, as such they are fairly well known and mature players in the sector. However, given that they operate in a relatively new sector of RE consumer products, there is always a certain level of risk premium attached to any activities in this sector. In terms of rewards, while there is a steady and growing market for RE products, the profitability of this business is based on low-margins and high volume. As such, in the short-term, investors are likely to perceive that given the slower rate at which the market is growing, the rewards are not expected to be very high. In addition, many of these enterprises also carry out market creation activities. These more mission-drive activities do not yield the highest return on investment (e.g., increasing living


Summary of findings: On the whole, distributors have had difficulties in accessing finance. To date, the primary source of financing has been in the form of grants. However a few select distributors have also been able to access debt in various forms, including as an overdraft facility, a working capital loan, and a low-interest loan). Going forward, the primary need for distributors is in accessing debt to address working capital constraints, develop marketing campaigns and support their ability to scale. Actors also mentioned that equity and hybrid sources would be welcome to support their expansion plans.

However, access to financing is limited primarily because the sector is perceived to have low rewards, even it is not considered to be a very risky sector. This is because the profitability of these enterprises is based on low margins and high volumes – this is challenging given that the market for RE consumer products overall is not growing very quickly. In addition, access to debt is limited because many firms do not have assets that are considered collateral and access to equity is also limited because many financial institutions do not have the ability or capacity to effectively evaluate these firms.

In order to address these barriers, there are three solutions that have high potential to unlock value in this sector. The first is developing a line of credit to direct more working capital towards these enterprises. A second is scaling up convertible debt and mezzanine financing – a particularly attractive type of hybrid finance – for the sector. In addition, developing a series of capacity building workshops for FIs and potential investors would help to build up the interest of financial institutions in this sector.

The details of the overdraft facility (ticket size, interest rate and source) were not provided by the player. This is the same case for grants from high net worth individuals as well as foundations described in this section.

53

Annex 5A


conditions or income for the rural BoP through their VLE training and salesforce structure).

Based on this risk-reward profile, there are three primary actors who could be interested in this segment:

Patient equity or impact-oriented investors who would like to get involved in market, but are not looking for high returns. If they provided pure equity or hybrid products (i.e., convertible debt) there could be a strong market for this.

Public sector banks who are providing debt given the lower risk of the sector, however, this is dependent on them understanding RE products and the sector.

Donors would be interested in providing funds in the form of grants, especially towards specific activities like VLE training, pilot projects, or expansion needs.

Need for finance: preferred sources and amount sought There are three primary financing needs for distributors. First, debt in the form working capital and unsecured loans is the most pressing need for funding inventory sales costs and supporting product market outreach, respectively. Second, is the need for equity in the form of patient capital to fund geographic expansion. Third, is the need for large ticket-sized grants to offset various costs such as training, marketing and R&D of products,

Debt: Distributors are open to securing debt in any form, but are particularly seeking debt in the form of a revolving overdraft, structured guarantees, and soft loans. The primary need for debt is to finance working capital, as many distributors are unable to balance the demands of geographic expansion and the inventory sales cycle costs (which ranges in length between 4 and 6 months). For distributor’s working capital would be used to increase sales by providing working capital to village level entrepreneurs (VLEs) as well as the extension of credit (~1 month) to retailers/MFI distributors. In addition, working capital is also needed for HR, warehouse infrastructure, vehicles. Ideal forms of working capital sought by distributors had low collateral requirements and included revolving overdraft facilities and structured guarantees, with a ticket size between $200K-800K.

Debt in the form of unsecured loans would also be prioritized to support RE product marketing and awareness. A priority for this segment is to grow consumer awareness of the RE products it carries and

Barriers to accessing financesells (i.e., cookstoves, SPLs and SHS) through marketing and outreach. In addition these loans would offset costs to undertake and expand distributors’ rural marketing campaigns and demonstrations to educate potential consumers on the cost-savings proposition and potential health benefits of the product.

Equity: To fund geographic expansion of the enterprise and increase their distribution presence market players primarily look for equity, ideally in the form of patient capital. However, debt is also needed to fund expansion when it involves the generation of new assets such as warehouses and distribution centers, but is a secondary preference to equity for expansion purposes. Distributors would use patient capital to grow their distribution network and expand their consumer reach and scale. The ideal form of patient equity for distributors in this segment has an average ticket size of $1-2 million with a 5-10% rate of return, and a investment horizon spanning five to ten years. However distributors state that they face significant challenges accessing equity, especially within India.

Grants: Grants with significant ticket sizes (between $1m to $3m) are needed by distributors. Distributors need grants to offset a variety of expenses. These needs and expenses include geographic expansion, R&D on various RE consumer products, training of VLEs to sell their products as well as extending marketing efforts for their rural consumer base.

Subsidies: There is a continued need for government subsidies, specifically for SHS products. However the demand for subsidies by RE distributors is not very high given the existing barriers to accessing subsidies, and the delays in their disbursement (see ‘Barriers’ below). If these issues were addressed, and the process streamlined, there would likely be an overall higher demand for accessing SHS subsidies both for enterprise finance, and for addressing consumer finance needs by RE distributors.

Debt

Equity/hybrid

Grants

Subsidies


Debt

Distributors do not have enough assets that are considered collateral. Most distributors cannot access debt products because they do not have enough assets that are considered to be collateral by the financial institutions. Players use personal real estate (or those of staff/board members) as collateral but don’t have enough additional collateral to access loans or working capital needed

Cost of debt is misaligned: In cases players are able to access debt, the cost of debt is very high for many SPL MSMEs. For example, the cost of debt is around 13-18% instead of a 7-8% interest rate preferred by market players. This affects both their ability to repay the loan, as well as their profitability. While distributors might be willing to pay slightly higher, rates above 14-15% prove very difficult for an MSME distributor to honor in regular payment intervals.

Ticket size misalignment: RE-specific distributors want to scale their enterprise but are limited by the lack of access and provision of large ($1m-3m) equity investments in the form of patient capital. Due to the misalignment between demand and supply of equity with significant ticket sizes, distributors have limited ability to scale up their operations.

Ticket size misalignment: RE-specific distributors want to scale their enterprise but are limited by the lack of access and provision of large ($1m-3m) ticket-sized grants. Due to the misalignment between demand and supply of grants with significant ticket sizes, distributors have limited ability to scale up their operations. In addition, the misalignment between supply and demand limits the amount of training players provide their sales representatives (or VLEs) and the marketing efforts in rural areas these players undertake for selling their RE products.

Uncertainty, delay, and shortfall in subsidy disbursement: Delays in disbursement means companies often do not receive it within expected timelines. This is especially common for SHS products. This uncertainty makes lenders or investors unwilling to consider subsidies as mechanisms to make a project or business model viable, limiting investments in distributors who help consumers access these subsidies through RRBs despite the existence of the JNNSM government program.

Knowledge and awarenessLack of reliable sector data in the public domain, and a lack of understanding of the RE sector by FI’s: Primarily banks have a limited understanding of the growth potential of RE products and distributors. Our research indicates that FIs base their assessment of the MSME largely on past profitability rather than future growth projections, limiting access to formal debt for distributors who wish to scale but have yet to undergo significant growth and high past profitability. Similarly there is limited information available to investors. For all RE consumer product segments (and therefore for distributors of these products) investors -- angel, patient capital, or VC-- have limited access to information. This lack of information makes it challenging for distributors to attract new investors in the provision of equity.

There is a lack of consumer knowledge and general understanding of RE products: Despite a general uptake in demand once consumers are aware of the advantages of acquiring improved cookstoves, SPLs or SHS, general consumer awareness and knowledge these products in rural India remains low. This general low awareness of RE consumer products stifles the scale-up and expansion of RE dedicated distributors.

Fragmented policy environmentLack of regulation on RE product quality and suitable information for FIs: Due to the absence of product standards and quality guarantees for cookstoves, SPLs and SHS, FIs are further hindered in their analysis and ability to evaluate the products they would potentially invest in. FIs therefore lack the technical expertise and knowledge to be able to evaluate RE products or distributors who carry these products, which is further compounded by the lack of relevant standards for products.

Designing new financial productsDeveloping new credit lines to meet specific financial needs: Longer-term debt products could allow firms to grow and reach scale. However, players find it difficult to access to these types of products (namely working capital loans) in the present scenario. Access could be catalyzed using a credit line with a specific mandate to increase the flow of these products to the sector. This process would involve selecting an aligned banking institution, providing them with the technical assistance on how to evaluate the RE sector, and provide



Annex 5A


Equity/hybrid


incentives (i.e., charging a fee upfront for banks who intend to access the mechanism) so that the credit lines are actually used. A multilateral agency could also provide technical assistance and support the financial institution. For example, the donor agency would be available to provide guidance on the types of RE segments to focus on, while the due diligence would be conducted by the bank itself (e.g., what ticket size the player needs, and the potential risk/reward profiles for each enterprise).



For both products, it could be possible to scale up access and supply by engaging with these investors by providing them with technical assistance to evaluate these enterprises. This would involve helping them think through the various business models, quality of products, and growth prospects of different enterprises.

Knowledge and awarenessHighlighting case studies of successful investments in RE distributor MSMEs: Disseminating information about successful case studies of RE investments in the segment, emphasizing firms’ ability to generate returns as well as social and economic impact, would spur FI interest in the sector, especially in the case of equity and hybrid investors.

Capacity building workshops for FIs and potential investors: These workshops would highlight case studies of successful investments in RE MSMEs, and provide information regarding consumer products, business models, expected returns and past investments in the sector. This would generate more interest in RE MSMEs and also place investors in a much better position to evaluate potential investment opportunities in the sector.

Policy solutionsDevelopment of national quality standards for RE consumer products: A significant barrier preventing access to finance and increased uptake of RE consumer products (through distributors) is the lack of quality standards available in the market. In the absence of quality benchmarks for all RE consumer products, investors are unable to ascertain the potential of investment opportunities in the sector. It is therefore necessary to have national standards for RE consumer products to lend more credibility to the sector and thereby increase the ease of investment by FIs and donors.

CP-1: Cross market players in cookstoves for less than $120

Current types of consumer finance accessedThe most common consumer finance product utilized by this segment is subsidies. Enterprises seek subsidies through a combination of CSR funds, and philanthropic donations and use these funds to extend discounts to the end-consumers. A few actors in this segment also state that customers sometimes avail of microloans, either through MFIs or through group-based institutions such as Self-Employed Women’s Association (SEWA).

Philanthropic or CSR grants: RE firms use donations from foundations as well as targeted CSR programs to provide subsidized cookstoves to consumers in specific regions (e.g., where the particular company is located). Large corporations also bulk purchase cookstoves from these companies and directly sell them to NGOs or targeted communities at a discounted cost, usually as part of their CSR programs. Given the recent CSR mandate from the government, there could be an increase inflow of corporate donations to the sector – this could be a stop-gap solution for the short-term. However, the scalability of this model faces two important challenges. The model depends heavily on the availability of finance from donors or corporate

programs – this is not self-sustaining and is not a long-term solution in itself. Secondly, subsidies tend to introduce varying price-points for end-consumers, limiting their willingness to pay for high-quality products – this does not help create a sustainable market for cookstoves.

Targeted micro-loans: While the majority of the players have difficulty in accessing loans specifically for cookstoves, members of the SEWA can access and avail of a low-interest loan from the association. This loan provides a 100% loan for the price of the product, with a nominal upfront deposit made by the consumer/SEWA member. After the completion of the loan, the SEWA bank returns the original upfront deposit to the consumer. This program also includes demonstrations, presentations, and marketing outreach to consumers about the product in their villages.

Group or individual top-up loans through MFIs: A few cookstove companies state that consumers use standard MFIs to access loans against the purchase of their product. However, these MFIs mostly provide top-up loans to their existing customers rather than new loans

Annex 5BDetailed profiles of market segments – consumer financing

Summary of findings: Enterprises in this segment have traditionally relied on two sources of consumer finance – top-up micro-loans from MFIs (although these are limited in supply), and philanthropic or CSR subsidies to offset the price for the end-consumer.

However, discussions with cookstove enterprises indicate that consumer finance is not the most significant challenge for this segment – rather, the primary challenge is around scaling up knowledge and awareness as many consumers are unaware of clean cookstoves. As such, consumer financing options are limited: products are not matched to the needs of the consumer (i.e., there are limited targeted loans for cookstoves), and FIs have limited incentives to lend to the sector given high transaction costs and unclear potential returns. In addition, due to a lack of product standardization and abundance of sub-par products, FIs are generally unwilling to engage.

These barriers can be addressed in several ways. First, by investing in consumer awareness campaigns as well as capacity building for FIs. These could be supported by establishing national quality standards for cookstoves. Second, incentivizing FIs to participate in the sector by piloting new financial products such as a product-linked savings account, scaling-up group lending to SHGs through RRBs, and piloting a mobile-based credit pay-as-you go system. Finally, existing solutions such as facilitating partnerships between RE MSMEs and MFIs to increase provision of consumer loans for cookstoves can also be expanded.

Annex 5B


to different borrowers. MFIs prefer to do top-up loans because loans for cookstoves are typically small-ticket items and the loan economics are not viable for the MFI.

Need for consumer finance: preferred typesThere are three main types of consumer finance products that cookstove players typically seek: micro-loans and savings, pay-as-you go options, and grants from CSR or philanthropic sources.

Micro-loans and savings: The biggest need for consumer finance is to increase the availability and accessibility of micro-loans and micro-savings options. This includes increased access to MFI and SHG loans, as well as additional sources of individual or group loans (e.g., SEWA bank). There is also potential to develop a RE product-linked savings account, which would allow consumers to formalize their savings for the purchase of the cookstove.

Pay-as-you go: Pay-as-you-go options are an attractive option as they increase the availability and ease of accessing consumer finance at the point of sale. Pay-as-you go models include establishing equated monthly

Potential solutions Based on the needs, barriers and eligibility of this segment, the following consumer finance solutions have high

installments and potentially generating new options such as a mobile-pay-as- you-go model.

Grants: Grants in the form of philanthropic and CSR donations, although widely used at present, are not a high preference for cookstove firms going forward. These players are looking to move to a commercial model of consumer finance and develop business models that are not dependent on grants/ subsidies at all. However, select entities that currently rely on grants to subsidize their cookstoves for the consumer are looking to continue securing this funding.

Barriers to accessing consumer financeFor those players or entities that provide consumer finance to customers, (e.g., MFIs, SEWA bank, or large corporations), the most significant barrier is a lack of awareness of improved cookstoves and its benefits both for consumers and for FIs. Other barriers to accessing finance include a lack of incentives for RRBs and MFIs to lend to cookstove consumers, the inability of distributors to extend credit to consumers, and the absence of product regulations or standards to ensure product quality across cookstoves types.

potential to unlock value for consumers being able to access cookstoves in the sector.


Micro-loans and savings

Pay-as-you go



Pay-as-you go

Lack of knowledge Low awareness of improved cookstoves and their benefits among end-users: The most significant barrier preventing growth of the sector is a lack of knowledge of improved cookstoves among end-users – this includes an inability to tell quality products from sub-standard ones, and an overall lack of understanding of its value proposition. This lack of knowledge prevents creation of a sufficient “pull” for cookstoves in the target market. This disincentivizes FIs, which typically seek to target product sectors with high demand from potential consumers.

Lack of knowledge and access to market information for FIs: FIs often do not have the technical expertise to evaluate investments in the cookstoves sector. This lack of expertise is further intensified by the lack of quality market information available in the public domain. This information gap includes the absence of relevant standards for products, a lack of market data on cookstove projects, or market benchmarks to assess firms - this further limits interest among FIs.

Fragmented policy environmentLack of regulation on product quality: Interviews with enterprises indicate that this is one of the biggest barriers in the cookstove sector. Due to the absence of product standards and quality guarantees, MFIs are unwilling to provide loans to end consumers. Further, the availability of sub-par cookstoves in the market tends to ruin the sector perception – for both potential users and FIs.

Lack of incentives for RRBs and MFIs to engage in lending: Low ticket sizes and high transaction costs associated with consumer loans for cookstoves limit the margin for FIs, deterring them from engaging in the sector. Further, the lack of “pull” from potential users does not encourage RRBs or MFIs to engage in the sector.

Lack of distributor finance and capacity to provide consumer finance: Distributors, who are often the primary point of contact for the consumer are squeezed on WC constraints themselves and are therefore unable to extend credit to consumers. This lack of credit earlier in the value chain has a knock-on effect in the availability of pay-as-you go (e.g., equated monthly installment) consumer financing.

Cross-cutting solutions in policy and knowledge and awarenessEstablish national standards for cookstoves to allow MFIs and RRBs to benchmark product quality: The development of national quality standards would help increase an understanding of quality and sub-par cookstoves. These standards would help both lenders and consumers filter out non-quality products, allowing them to focus their lending and purchasing on quality products, leading to an increase in the flow of loans towards this sector.

Conduct knowledge workshops for investor forums and FIs: To address current misperceptions about the cookstoves segment, a bilateral agency or a government body could increase the understanding of technologies for FIs and investors through targeted capacity building workshops. The workshops would focus on sharing successful cookstove business models, expected risk and returns from investing in the sector, and case studies for impact investors on the impact and social return on investing in cookstove players.

Marketing drives for end-customers: To increase awareness of improved cookstoves, a national marketing campaign would be undertaken by a bilateral aid agency, a foundation, or a government body. This intervention would help increase consumer interest and help spur the growth of the sector. The marketing drive would consist of state-based mass media campaigns which would highlight the value proposition of improved cookstoves, discuss high quality products available in the market, and their long-term cost-saving and benefits.

Pilot launch of a micro-savings account model through bank-linked SHGs. In this solution, a bilateral aid agency would be involved in two main activities: first, highlighting successful examples of product-linked savings accounts to bank-linked SHGs and RRBs (e.g. through case studies from Africa). Second, working with an RRB to help launch this solution at a smaller scale with a small number of consumers (e.g. 100) in one state (e.g. Bihar). This solution would address the need for formalizing savings through a bank-linked product, and assisting the process of saving towards a specific product like cookstoves. The solution has significant potential for impact due to the extensive network of bank-linked SHGs in India (estimated at ~7 million54).

Scale-up lending to SHGs through RRBs: This solution would provide consumer loans under a partnership between an RRB and a cookstove MSME. Under the partnership, the RRB would define the eligibility criteria for a partner MSME - these would include parameters such as the company’s track record, the quality of its products, availability and quality of its after sales service network, etc. As part of the partnership, the market player would be required to offer a partial guarantee to cover part of the loan (e.g. 60 – 70%) made by the RRB. However, in the short-term, NABARD/ a bilateral aid agency may provide the guarantee, considering the financing barriers faced by cookstove MSMEs themselves. In the longer term, as the cookstove player gains financial strength, the partial guarantee offered by NABARD/ a bilateral agency can be rolled back and replaced with the guarantee provided by the MSME.

Facilitate and scale up partnerships between MFIs and MSMEs: Facilitating partnerships and establishing MoUs between high-quality cookstove enterprises and local MFIs would help to promote lending towards cookstoves through MFIs. This solution would enable the MSME to offer end-user finance without dipping into their own finances and gain access to MFI’s clients. However, MFIs might not be as willing to partner with cookstove players that do not provide high quality after-sales service - this is a key need indicated by MFIs.

Pilot a mobile-based credit pay-as-you go model: In partnership with a selected foundation (e.g., Shell Foundation), and a telecom company (e.g., Vodafone), a bilateral aid agency would launch a pilot program on mobile based payments – this would allow consumers to pay for their cookstoves using m-based payment platforms. This pilot would apply a model similar to M-KOPA (from Kenya), which would offer consumers the chance to purchase equipment on a pay-as-you-go basis. It would offer consumers flexibility in terms of the amount and time-frame in which they pay for the technology. The pilot would be an immediate or short-term solution to implement, while the model would be a longer term solution for implementation.

Each SHG is made up on average of 13-14 members. Therefore ~100 million members are connected to banks through SHGs in India. If even 2% of these 100 million members were converted to this solution, over 1 million individuals could have access to this solution

54

Annex 5B



Current types of consumer finance accessedThe most common consumer finance product used in this segment is in the form of micro-loans to groups and individuals through MFIs; a few players directly partner with MFIs to ease access to loans for their consumers – these are typically top-up loans to existing customers. Although present in the SPL sector, trade credit is limited to few consumers as indicated in field surveys conducted by Dalberg.

The few SPL market players who do not provide consumer finance state that they market their higher-end SPL products ($20USD and above) to more affluent rural or peri-urban consumers. Nevertheless, players state that their consumers rely most on personal savings (or informal borrowing from friends and relatives) rather than availing of consumer finance options such as MFI loans.

Group or individual top-up loans through MFIs: Most SPL players indicate that consumers use local MFIs or the enterprise’s partner MFI to access top-up individual or group loans to purchase the SPL. The ticket size of group or individual micro-loans accessed through MFI or SHGs varies. One player stated that consumers readily access group loans between $20-50 from their partner MFI, while another player stated that their customers only avail loans either from SHGs or MFIs when the product is priced above $100 (e.g., for their SHS’s).

Trade Credit: Although this consumer finance option is present, very few distributors/suppliers of SPLs extend credit to end-consumers due to WC constraints for most enterprises in this space.

Potential solutions Based on the needs, barriers and eligibility of this segment,

Need for consumer finance: preferred typesThere are two main types of consumer finance that SPL players seek: micro-loans and savings, and pay-as-you go models.

Micro-loans and savings: This includes increased access to MFI and SHG loans, as well as additional sources of individual or group loans (e.g., SEWA bank). There is also potential to develop a RE product-linked savings account, which would allow consumers to formalize their savings for the purchase of SPLs.

Pay-as-you go: Pay-as-you-go options are an attractive option as they increase the availability and ease of accessing consumer finance at the point of sale. Pay-as-you go models include establishing equated monthly installments and potentially generating new options such as a mobile-pay-as- you-go model.

the following consumer finance solutions would have a high potential to unlock value for consumers in the SPL sector.

Barriers to accessing consumer finance

Summary of findings: The most commonly used type of consumer finance for purchasing SPLs are individual and group top-up loans provided by MFIs. In addition, there is initial evidence that suggests limited availability of credit for consumers from the point of sale (distributor/ end-retailer).

Barriers to accessing consumer finance in the SPL sector span issues around knowledge and awareness - for both consumers and FIs. Consumers are typically unaware of the value proposition of SPLs and are unable to distinguish quality SPLs from sub-standard ones. Similarly, FIs are generally unaware of prevalent technologies, quality levels, or track record of companies. Challenges around policy include the absence of product quality and prevalence of sub-par SPLs in the market. Finally, issues around the mismatch of financial products include the high cost of consumer loans, the lack of incentives for MFIs and RRBs to lend to the sector, as well as a low MFI presence in areas of high financial need. Solutions to address these barriers are threefold. First, through cross-cutting solutions such as the establishment of national standards and regulations to ensure quality oversight of SPLs, conducting marketing drives to increase consumer awareness of SPLs, and undertaking workshops for FIs to enhance their knowledge and understanding of the sector. Second, scale-up existing solutions such as facilitating and increasing partnerships between MFIs and SPL enterprises improve access to microloans. Third, new financial solutions including the creation of a micro-savings account administered through bank-linked SHGs, the scale-up of lending to SHGs through RRBs and commercial banks, as well as piloting a mobile-based credit pay-as-you go model could mitigate the barrier to consumer finance in this segment .



Pay-as-you go

Trade credit


Low awareness among end-users of SPLs and their benefits: The most significant barrier preventing growth of the sector is a lack of knowledge of SPLs among end-users – this includes an inability to tell quality products from sub-standard ones, and an overall lack of understanding of its value proposition. This lack of knowledge prevents creation of a sufficient “pull” for SPLs in the target market. This disincentivizes FIs, which typically seek to target product sectors with high demand from potential consumers.

Lack of knowledge and access to information among FIs: FIs often do not have the technical expertise to evaluate investments in the SPL sector. This lack of expertise is further intensified by the lack of quality market information available in the public domain. This information gap includes the absence of relevant standards for products, a lack of market data on SPL projects, or market benchmarks to assess firms - this further limits interest among FIs.

Lack of regulation on product quality: Interviews with enterprises indicate that this is one of the biggest barriers in the SPL sector. Due to the absence of product standards and quality guarantees, MFIs are unwilling to provide loans to end consumers. Further, the availability of sub-par SPL in the market tends to ruin the sector perception – for both potential users and FIs.

Lack of incentives for MFIs or formal banks to engage in lending: Low ticket sizes and high transaction costs associated with consumer loans for SPLs limit the margin for FIs, deterring them from engaging in the sector. Further, the lack of “pull” from potential users does not encourage RRBs or MFIs to engage in the sector.

High cost of consumer loans: Preferable interest rates for consumer loans are between 8-10%, whereas the provision of consumer loans are typically priced between 13-20% from RRBs and MFIs, making consumer loans too costly for consumers to access.

Low penetration of MFIs in areas of high need: Most MFIs tend to have a strong footprint in the southern states and have a limited presence in key states such as Uttar Pradesh, Bihar, Jharkhand, and Chhattisgarh. These states are important for two reasons: first, they represent a large number of under/ unelectrified households in India, and therefore, a large potential market for RE products. Secondly, households in these states typically have lower incomes than those in the southern states and are more in need of financial assistance. However, due to the limited footprint of MFIs in these states, microloans continue to be unavailable for a large part of their population.


Barriers are the same as ‘pay-as-you go’ and ‘ cross-cutting barriers’ (above)

Policy Establish national standards or certifications for SPL players to allow MFIs to benchmark product quality: The development of national quality standards would help increase an understanding of quality and sub-par SPLs. These standards would help both lenders and consumers filter out non-quality products, allowing them to focus their lending and purchasing on quality products, leading to an increase in the flow of loans towards this sector.

Knowledge and awarenessMarketing drives for end-customers: To increase awareness of SPLs, a national marketing campaign would be undertaken by a bilateral aid agency, a foundation, or a government body. This intervention would help increase consumer interest and help spur the growth of the sector. The marketing drive would consist of state-based mass media campaigns which would highlight the value proposition of SPLs, discuss high quality products available in the market, and their long-term cost-saving and benefits.

Conduct knowledge workshops for investor forums and RRB bank managers: To address current misperceptions about the SPL segment, a bilateral agency or a government body could increase the understanding of

Annex 5B



Pay-as-you go

technologies for FIs and investors through targeted capacity building workshops. The workshops would focus on sharing provisions of the JNNSM, successful SPL business models, expected risk and returns from investing in the sector, and case studies for impact investors on the impact and social return on investing in SPL players.

Facilitate MFI partnerships with RE MSMEs: Facilitating partnerships and establishing MoUs between high-quality SPL enterprises and local MFIs would help to promote lending towards SPLs through MFIs. This solution would enable the MSME to offer end-user finance without dipping into their own finances and gain access to MFI’s clients. However, MFIs might not be as willing to partner with SPL players that do not provide high quality after-sales service - this is a key need indicated by MFIs.

Pilot launch of a micro-savings account model through bank-linked SHGs. In this solution, a bilateral aid agency would be involved in two main activities: first, highlighting successful examples of product-linked savings accounts to bank-linked SHGs and RRBs (e.g. through case studies from Africa). Second, working with an RRB to help launch this solution at a smaller scale with a small number of consumers (e.g. 100) in one state (e.g. Bihar). This solution would address the need for formalizing savings through a bank-linked product, and assisting the process of saving towards a specific product like SPLs. The solution has significant potential for impact due to the extensive network of bank-linked SHGs in India (estimated at ~7 million55).

Scale-up lending to SHGs through RRBs: This solution would provide consumer loans under a partnership between an RRB and an SPL MSME. Under the partnership, the RRB would define the eligibility criteria for a partner MSME - these would include parameters such as the company’s track record, the quality of its products, availability and quality of its after sales service network, etc. As part of the partnership, the market player would be required to offer a partial guarantee to cover part of the loan (e.g. 60 – 70%) made by the RRB. However, in the short-term, NABARD/ a bilateral aid agency may provide the guarantee, considering the financing barriers faced by SPL MSMEs themselves. In the longer term, as the enterprise gains financial strength, the partial guarantee offered by NABARD/ a bilateral agency can be rolled back and replaced with the guarantee provided by the MSME.

Pilot a mobile-based credit pay-as-you go model: In partnership with a selected foundation (e.g., Shell Foundation), and a telecom company (e.g., Vodafone), a bilateral aid agency would launch a pilot program on mobile based payments – this would allow consumers to pay for SPLs using m-based payment platforms. This pilot would apply a model similar to M-KOPA (from Kenya), which would offer consumers the chance to purchase equipment on a pay-as-you-go basis. It would offer consumers flexibility in terms of the amount and time-frame in which they pay for the technology. The pilot would be an immediate or short-term solution to implement, while the model would be a longer term solution for implementation.


One player is currently piloting a ‘pay-as-you-go’ model for their SHS’ (e.g., via mobile payments, etc.) to facilitate access to and the selection of consumer finance choices for their Indian consumers.

55 56

CP-3: Cross-market players in solar home systems from $120 – $600

Summary of findings: Players in this segment have primarily relied on two products for consumer finance: microloans from MFIs, and subsidies from MNRE (under the JNNSM). In addition, there are two more financing products that are used, although their usage remains limited – the pay-as-you-go model, and credit for the consumer from the distributor or retailer, depending on the point of sale.

Interviews with RE MSMEs indicate that several barriers have limited the availability of consumer finance for SHSs. Challenges due to mismatch of financial products to consumer needs include the lack of incentives for RRBs to lend, the difficulty of accessing RRB loans due to a lack of credit history of individual borrowers, the high cost of consumer loans, and low MFI penetration in areas of high need. In addition, there are multiple barriers related to knowledge and awareness – these include low awareness of the value proposition of SHSs among target consumers, and limited technical expertise of FIs to evaluate SHS related investment opportunities. Finally, policy challenges include delays in disbursement of subsidies, possible gaps between the policy and available infrastructure to implement it across geographies, as well as misinterpretation of MNRE guidelines by RRBs.

Addressing these barriers can be done in three ways. First, by creating and launching new financial products that encourage and de-risk the process of extending consumer loans for SHSs - this type includes three potential solutions. First is the creation of a product-linked savings account, allowing consumers to save in a targeted manner for purchasing SHSs. Second, is to encourage and facilitate partnerships between RRBs and RE MSMEs for the provision of microloans for SHSs. Third, a pledge guarantee fund could help decrease delays in disbursement of subsidies. The second way to address the barriers discussed above is to enhance or scale-up existing consumer finance solutions – there are three potential solutions for this as well. These include encouraging more partnerships between RE MSMEs and MFIs to increase microloans for potential consumers, scaling up group loans to bank-linked SHGs through RRBs, and piloting a mobile-based credit pay-as-you go model. Finally, there are certain cross-cutting solutions that would help create an enabling environment for these financial solutions – these include capacity building workshops for FIs and awareness drives for end consumers.

Current types of consumer finance accessedThere are four types of consumer finance products that are presently used in this segment56: the first is in the form of NABARD solar loans to consumers (facilitated by SHS market players) provided through RRBs or Gramin banks. Another commonly used source of consumer finance includes group or individual loans from MFIs and is used most frequently for basic SHS with a retail price between $80 and $120.In addition, trade credit from distributors/ retailers and the pay-as-you-go model are also used, although both of these products have limited prevalence in the Indian SHS market.

Subsidies under the JNNSM: A few RE MSMEs assist their consumers in accessing capital subsidy under the JNNSM - these are typically routed through RRB and Gramin banks and are most commonly used in Karnataka. On average, customers need pay a 20% down-payment for the SHS and receive a 5 year-loan with an interest rate of about 12%. The average ticket size of the loan ranges between $300-350. Interviews with SHS enterprises indicate, that typically, rural middle or upper class individuals (owners of land or cattle) are most commonly able to access these subsidies and loans through RRBs.

Players face numerous challenges (see section below) when helping consumers access subsidies and loans from RRBs. Despite these challenges, enterprises assist their SHS consumers to access subsidies and loans through an involved and lengthy relationship building process with the RRB management and staff. For example, the RE MSME often undertakes awareness campaigns geared to the RRB and its management. The player educates and publicizes solar technology to the bank managers, and invests time to build long-term relationships by meeting bank representatives and managers on a weekly, and sometimes on a daily basis. On average, a relationship is established between this particular enterprise and a bank manager over a period of 6 to 8 months. Group or individual micro-loans through MFIs: A few SHS players state that consumers use local MFIs or their partner MFIs to access individual or group loans to purchase an SHS. In most of these cases, the enterprise provides after-sales services to its consumers, which incentives MFIs to lend for the SHS. The ticket size of group or individual micro-loans accessed through the MFI varies but interviews indicate that consumers most often avail of MFI loans for the entry-level/basic SHS priced between $80 and $120.

Annex 5B


Trade Credit: Consumer also avail of credit provided directly by the distributor/ retailer to the lowest tier of its BoP consumers. The player partners with MFIs and RRBs to provide credit lines to distributors. The distributors are then able to provide micro-loans to the consumer for the purchase of the SHS. However, this form of consumer finance is not very common in the sector, and has been undertaken by one larger, established MSME which has more access to WC finance as compared to other players in the sector. Therefore, this solution is likely not scalable across the sector at this stage.

Pay-as-you go: This model is not very prevalent among SHS players. One player has launched a pay-as-you go model, which involves an upfront payment amount to 10-30% of the price of the SHS. The consumer then pays the RE MSME daily usage charges for the SHS. The consumer finally gains ownership of the SHS after a period of 1-3 years (depending on the amount they pay back over the given time period).

Need for consumer finance: preferred typesThere are four main types of consumer finance that SHS players seek: micro-loans and savings, government subsidies, pay-as-you go models, and trade credit.

Micro-loans and savings: The biggest need for consumer finance is the expansion of the availability and accessibility of micro-loans and micro-savings options.

Potential solutions Based on the needs, barriers and eligibility of this segment, the following consumer finance solutions would

This includes increased access to MFI and SHG loans, as well as additional sources of individual or group loans. There is also potential to develop a RE product-linked savings account, which would allow consumers to formalize their savings for the purchase of SHSs.

Subsidies: A majority of players are seeking subsidies through the JNNSM scheme to off-set the consumers’ up-front expense. However, due to significant challenges associated with accessing subsidies, enterprises typically did not rank subsidies as their highest need.

Pay-as-you go: Pay-as-you-go options are an attractive option as they increase the availability and ease of accessing consumer finance at the point of sale. Pay-as-you go models include establishing equated monthly installments and potentially generating new options such as a mobile-pay-as- you-go model. However, considering the WC constraints faced by most RE MSMEs, this payment system is not high priority among them.

Trade Credit: This solution involves extending credit to the end-consumer, either through the supplier or distributor or the RE MSME. This solution could be high potential for the SHS space, however, there is limited interest in it because players (MSMEs, and suppliers/distributors) already face WC constraints and therefore, are unable to further extend credit to their end-consumers.

have a high potential to unlock value for consumers in the SHS sector.

Micro- savings and loans

Subsidies

Pay-as-you go

Trade credit


Micro- savings and loans

Lack of incentives for RRBs to engage in lending: Low ticket sizes and high transaction costs associated with consumer loans for certain SHSs limit the margin for FIs, deterring them from engaging in the sector. Further, the lack of “pull” from potential users does not encourage RRBs or MFIs to engage in the sector.

Emphasis on credit history: RRBs typically require individual borrowers to have a credit history – this limits the ability of most rural households to access consumer loans because they have not had any prior interaction with a banking institution, and therefore, do not have a credit history.

High cost of consumer loans: Preferable interest rates for consumer loans are between 8-10%, whereas the provision of consumer loans from RRBs and MFIs are typically priced between 13-20%, making consumer loans too costly for consumers to access. This cost of consumer loans is especially perceived to be too high due to low consumer understanding of the value proposition of SHSs.

Low penetration of MFIs in areas of high need: Most MFIs tend to have a strong footprint in the southern states and have a limited presence in key states such as Uttar Pradesh, Bihar, Jharkhand, and Chhattisgarh. These states are important for two reasons: first, they represent a large number of under/ unelectrified households in India, and therefore, a large potential market for RE products. Second, households in these states typically have lower incomes than those in the southern states and are more in need of financial assistance. However, due to the limited footprint of MFIs in these states, microloans continue to be unavailable for a large part of their population.

Difficulty in accessing consumer subsidies: Consumers face significant challenges in accessing NABARD subsidies - RRBs and public banks are reluctant to provide or disburse them due to several issues including a

lack of knowledge of the program, limited resources dedicated to the process, and a lack of incentives to lend to consumers due to low ticket sizes. The average delay in disbursement of subsidies is 6-12 months (instead of 1 or 2 weeks) – this causes many potential consumers to back out of the loan repayment process.

Misalignment of policies with ground realities: The existing policy under the JNNSM assumes that all states have a presence of vendors with adequate know-how and well-developed networks. However, vendors are often unaware of JNNSM loans to consumers and this restricts the ability of consumers to access finance under the scheme. This misalignment also limits the uptake of government subsidies by RE vendors and MSMEs.

Lack of clear communication and misinterpretation of MNRE guidelines by banks: Due to a lack of clear communication and understanding of MNRE lending guidelines, branch managers tend to misinterpret them and are only willing to provide loans up to the benchmark cost of the RE product (even though the total cost of a system lies above the benchmark). This causes further stress for consumers to find adequate end-user finance.


Barriers faced are the same as those captured under ‘pay-as-you go’ barriers (above) and ‘cross-cutting barriers’ (below)

Low awareness among end-users of SHSs and their benefits: An important barrier preventing growth of the sector is a lack of knowledge of SHSs among end-users – this includes an inability to distinguish quality products from sub-standard ones, and an overall lack of understanding of its value proposition. This lack of knowledge prevents creation of a sufficient “pull” for SHSs in the target market, disincentivizing FIs, which typically seek to target product sectors with high demand from potential consumers.

Lack of knowledge and access to information among FIs: FIs often do not have the technical expertise to evaluate investments in the SHS sector. This lack of expertise is further intensified by the lack of quality market information available in the public domain. This information gap includes the absence of relevant standards for products, a lack of market data on SHS projects, or market benchmarks to assess firms - this further limits interest among FIs.

Pilot launch of a micro-savings account model through bank-linked SHGs. In this solution, a bilateral aid agency would be involved in two main activities: first, highlighting successful examples of product-linked savings accounts to bank-linked SHGs and RRBs (e.g. through case studies from Africa). Second, working with an RRB to help launch this solution at a smaller scale with a small number of consumers (e.g. 100) in one state (e.g. Bihar). This solution would address the need for formalizing savings through a bank-linked product, and assisting the process of saving towards a specific product like SHSs. The solution has significant potential for impact due to the extensive network of bank-linked SHGs in India (estimated at ~7 million57).

Scale-up lending to SHGs through RRBs: This solution would provide consumer loans under a partnership between an RRB and an SHS MSME. Under the partnership, the RRB would define the eligibility criteria for a partner MSME - these would include parameters such as the company’s track record, the quality of its products, availability and quality of its after sales service network, etc. As part of the partnership, the market player would be required to offer a partial guarantee to cover part of the loan (e.g. 60 – 70%) made by the RRB. However, in the short-term, NABARD/ a bilateral aid agency may provide the guarantee, considering the financing barriers faced by SHS MSMEs themselves. In the longer term, as the enterprise gains financial strength, the partial guarantee offered by NABARD/ a bilateral agency can be rolled back and replaced with the guarantee provided by the MSME.

Facilitate consumer loans by developing partnerships between RRBs and RE MSMEs. This solution entails increasing the provision of consumer loans for SHSs by facilitating partnerships between RE enterprises and RRBs. A bilateral aid agency could facilitate this partnership and the process by highlighting best practices


57

Annex 5B



Subsidies

Pay-as-you go



Subsidies

of existing RE MSMEs using this model to RRBs or public banks. The aid agency would then assist the bank in identifying high quality RE MSMEs to partner with and support the development of an agreement (and partnership) between them.

Facilitate partnerships between MFIs and RE MSMEs: Facilitating partnerships and establishing MoUs between high-quality SHS enterprises and local MFIs would help to promote lending towards SHSs through MFIs. This solution would enable the MSME to offer end-user finance without dipping into their own finances and gain access to MFI’s clients. However, MFIs might not be as willing to partner with SHS players that do not provide high quality after-sales service - this is a key need indicated by MFIs.

Establish a pledge guarantee fund. A bilateral aid agency could establish a pledge guarantee fund for SHS MSMEs that have pending subsidy/ grant disbursements for consumer finance. Delays in subsidy disbursement could be reduced significantly (e.g. to 2 months instead of 6-12 months) through early disbursement by commercial banks. The bank would recover the amount lent to the player from the pledge fund after a fixed period of time (e.g. 6 months). Timely access to subsidies would help increase both their utilization as well as their impact.

Pilot a mobile-based credit pay-as-you go model: In partnership with a selected foundation (e.g., Shell Foundation), and a telecom company (e.g., Vodafone), a bilateral aid agency would launch a pilot program on mobile based payments – this would allow consumers to pay for SHSs using m-based payment platforms. This pilot would apply a model similar to M-KOPA (from Kenya), which would offer consumers the chance to purchase equipment on a pay-as-you-go basis. It would offer consumers flexibility in terms of the amount and time-frame in which they pay for the technology.

Conduct knowledge workshops for investor forums and RRB bank managers: To address current misperceptions about the SHS segment, a bilateral agency or a government body could increase the understanding of technologies for FIs and investors through targeted capacity building workshops. The workshops would focus on sharing provisions of the JNNSM, successful SHS business models, expected risk and returns from investing in the sector, and case studies for impact investors on the impact and social return on investing in SHS players.

Marketing drives for end-customers: To increase awareness of SHSs, a national marketing campaign would be undertaken by a bilateral aid agency, a foundation, or a government body. This intervention would help increase consumer interest and help spur the growth of the sector. The marketing drive would consist of state-based mass media campaigns which would highlight the value proposition of SHSs, discuss high quality products available in the market, and their long-term cost-saving and benefits.

Lack of incentives for RRBs to engage in lending: Due to low individual ticket sizes for SWP loans and high transaction costs, RRBs have a low margin on these and as such, do not have an incentive to get involved. However, this barrier is less severe for higher cost/higher wattage SWPs as compared to low cost RE consumer products (e.g., cookstoves or SPLs). Further, the lack of “pull” from potential users does not encourage RRBs or MFIs to engage in the sector.


High cost of consumer loans: Preferable interest rates for consumer loans are between 8-10%, whereas the provision of consumer loans from RRBs and MFIs are typically priced between 13-20%, making consumer loans too costly for consumers to access. This cost of consumer loans is especially perceived to be too high due to low consumer understanding of the value proposition of SWPs.

Misalignment of policies with ground realities: The existing policy under the JNNSM assumes that all states have a presence of vendors with adequate know-how and well-developed networks. However, vendors are often unaware of JNNSM loans to consumers and this restricts the ability of consumers to access finance under the scheme. This misalignment also limits the uptake of government subsidies by RE vendors and MSMEs

Difficulty in accessing consumer subsidies: Consumers face significant challenges in accessing NABARD subsidies - RRBs and public banks are reluctant to provide or disburse them due to several issues including a lack of knowledge of the program, limited resources dedicated to the process, and a lack of incentives to lend to consumers due to low ticket sizes. The average delay in disbursement of subsidies is 6-12 months (instead of 1 or 2 weeks) – this constricts the flow of finance to the sector in general considering its high dependence on government subsidies.


Summary of findings: Over 90% of all SWP enterprises utilize and rely heavily on the JNNSM’s subsidy program as well as on the MNRE tenders to sell their product. As such, the most dominant form of consumer finance accessed in this segment is subsidies. In addition, initial evidence suggests that microloans from RRBs, and personal savings are used by potential consumers to pay the balance price of the SWP.

Financing barriers related to mismatch of financial products include a lack of borrowers’ credit history limiting their eligibility for RRB loans, a lack of incentives for RRBs to provide loans due to low ticket sizes, and the perceived high cost of consumer loans limiting repayment ability of potential consumers. Policy related challenges include a lack of regulations on product quality, delays in disbursement of subsides by the MNRE, and potential gaps between the policy design and ground realities. With respect to knowledge and awareness, there is a general lack of understanding of the value proposition of SWPs among consumers, and low understanding of the product space and of MNRE’s policies among FIs.

Addressing these barriers can be done in three ways. First, by creating and launching new financial products that encourage and de-risk the process of extending consumer loans for SWPs - this type includes four potential solutions. First is the creation of a product-linked savings account, allowing consumers to save in a targeted manner for purchasing SWPs. Second, is to encourage and facilitate partnerships between RRBs and MFIs for the provision of microloans for SWPs. Third, a pledge guarantee fund could help decrease delays in disbursement of subsidies. Fourth, piloting a mobile-based credit pay-as-you go model, to help reduce the upfront expense for the consumer. The second way to address the barriers discussed above is to enhance or scale-up existing consumer finance solutions – there are two potential solutions for this. These include scaling up group loans to bank-linked SHGs through RRBs, and scaling up a VLE rental model for SWPs. Finally, there are certain cross-cutting solutions that would help create an enabling environment for these financial solutions – these include improving the quality of SWPs entering the market through the MNRE tender process, updating MNRE technical specifications to encourage small-scale technology adaptation, and developing capacity building sessions for RRB branch managers.

Current types of consumer finance accessedSWPs are the most expensive RE consumer product analyzed in this report, with price ranging from $2,200 to over $12,000. Although SWP prices vary by company and also depend on the pump head, motor type (AC or DC), and on whether it is a surface or submersible pump, SWPs cost $2,440 per HP, on average. Therefore, SWPs are extremely expensive products for the BoP, and even middle income individuals and farmers – this necessitates financing assistance for potential consumers. In India, consumer finance for SWPs has been availed of in two primary ways: through subsidies under the JNNSM and consumer loans from RRBs.

Subsidies: Under the JNNSM, farmers receive an 80-90% capital subsidy58 on the cost of the pump, and they source the remaining 10-20% as up-front payment. In regions where there is knowledge of SWPs (i.e., in states with high prevalence of government tenders, or those with active state-backed SWP programs or installation pilots), there is a high demand for the SWP subsidy, and as such, a shortfall in their availability. For example, one player stated that the government wanted to select

farmers for 10,000 pumps but that there were over 30,000 enquiries from farmers wanting to avail of the subsidy.

RRB loans: Only a few players help their consumers in availing of this option in which the end-beneficiary either takes out a loan against their up-front payment (for the subsidy), or in fewer cases, takes out a loan to purchase a non-subsidized SWP.

Players face numerous challenges (see section below on ‘Barriers’) when helping consumers access finance for SWPs. Despite these challenges, SWP enterprises assist their consumers in accessing subsidies and loans through an involved and lengthy relationship building process with the RRB management and staff. For example, the RE MSME undertakes awareness campaigns geared to the RRB and its management – this involves educating and publicizing SWP technology to the bank managers, and investing time in building long-term relationships by meeting bank representatives and managers on a weekly, and sometimes daily basis. On average, this type of relationship takes between 6-8 months to develop.

Subsidies vary depending on the state’s subsidy provision. For example, in special category or high priority states capital subsidies account for 90% of the benchmark cost (e.g., in the North East, Sikkim, Jammu and Kashmir, Himachal Pradesh and Uttarakhand).

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Annex 5B



Pay-as-you go



Subsidies

Pay-as-you go


Lack of clear communication and misinterpretation of MNRE guidelines by banks: Due to a lack of clear communication and understanding of MNRE lending guidelines, branch managers tend to misinterpret them and are only willing to provide loans up to the benchmark cost of the RE product (even though the total cost of a system lies above the benchmark). This causes further stress for consumers to find adequate end-user finance.

Barriers faced are the same as those listed in ‘cross-cutting barriers’ (see below)

Lack of regulation on product quality: Due to the absence of product standards and quality guarantees, FIs are generally unwilling to provide loans for SWPs. Further, several SWP enterprises suggested that the MNRE tender process for SWPs are typically driven by minimum technical specifications and price - not by the quality of these appliances. Players also stated that there is no in-field testing or quality assurances to become empaneled with the MNRE, or more importantly, to win a tender. Also, the influx of sub-par SWPs ruins product perception for the end-consumer and for FIs, liming the availability of finance in the sector.

Low awareness among end-users of SWPs and their benefits: An important barrier preventing growth of the sector is a lack of knowledge of SWPs among end-users – this includes an inability to distinguish quality products from sub-standard ones, and an overall lack of understanding of its value proposition. This lack of knowledge prevents creation of a sufficient “pull” for SWPs in the target market, disincentivizing FIs, which typically seek to target product sectors with high demand from potential consumers.

Lack of knowledge and access to information among FIs: FIs often do not have the technical expertise to evaluate investments in the SWP sector. This lack of expertise is further intensified by the lack of quality market information available in the public domain. This information gap includes the absence of relevant standards for products, a lack of market data on SWP projects, or market benchmarks to assess firms - this further limits interest among FIs.

Pilot launch of a micro-savings account model through bank-linked SHGs. In this solution, a bilateral aid agency would be involved in two main activities: first, highlighting successful examples of product-linked savings accounts to bank-linked SHGs and RRBs (e.g. through case studies from Africa). Second, working with an RRB to help launch this solution at a smaller scale with a small number of consumers (e.g. 100) in one state (e.g. Bihar). This solution would address the need for formalizing savings through a bank-linked product, and assisting the process of saving towards a specific product like SWPs. The solution has significant potential for impact due to the extensive network of bank-linked SHGs in India (estimated at ~7 million59).

Facilitate partnerships between MFIs and RE MSMEs: Facilitating partnerships and establishing MoUs between high-quality SWP enterprises and local MFIs would help to promote lending towards SWPs through MFIs. This solution would enable the MSME to offer end-user finance without dipping into their own finances and gain access to MFI’s clients. However, MFIs might not be as willing to partner with SWP players that do not provide high quality after-sales service - this is a key need indicated by MFIs

Scale-up lending to SHGs through RRBs: This solution would provide consumer loans under a partnership between an RRB and an SWP MSME. Under the partnership, the RRB would define the eligibility criteria for a partner MSME - these would include parameters such as the company’s track record, the quality of its products, availability and quality of its after sales service network, etc. As part of the partnership, the MSME would be required to offer a partial guarantee to cover part of the loan (e.g. 60 – 70%) made by the RRB. However, in the short-term, NABARD/ a bilateral aid agency may provide the guarantee, considering the financing barriers faced by the SWP MSMEs themselves. In the longer term, as the enterprise gains financial strength, the guarantee offered by NABARD/ a bilateral agency can be rolled back and replaced with the guarantee provided by the MSME.

Establish a pledge guarantee fund. A bilateral aid agency could establish a pledge guarantee fund for SWP MSMEs that have pending subsidy/ grant disbursements for consumer finance. Delays in subsidy disbursement could be reduced significantly (e.g. to 2 months instead of 6-12 months) through early disbursement by commercial banks. The bank would recover the amount lent to the player from the pledge fund after a fixed period of time (e.g. 6 months). Timely access to subsidies would help increase both their utilization as well as their impact.

Establish a SWP rental model through VLEs: A multi-lateral organization or donor agency could provide a grant to RE-specific distributors (or the SWP MSME directly) to expand and establish a VLE rental model for their SWPs. Currently, one player is piloting this model by working with VLEs that currently lease out diesel pumps, by trying to have them transition from diesel into SWP entrepreneurs. They are trying to access loans for the entrepreneur through public banks and RRBs (or through a donor agency). However, their ability to provide loans to the VLEs directly remains restricted given their WC constraints, and also limits the scalability of this model across multiple regions.

Pilot a mobile-based credit pay-as-you go model: In partnership with a selected foundation (e.g., Shell Foundation), and a telecom company (e.g., Vodafone), a bilateral aid agency would launch a pilot program on mobile based payments – this would allow consumers to pay for SWPs using m-based payment platforms. This pilot would apply a model similar to M-KOPA (from Kenya), which would offer consumers the chance to purchase equipment on a pay-as-you-go basis. It would offer consumers flexibility in terms of the amount and time-frame in which they pay for the technology. The pilot would be an immediate or short-term solution to implement, while the model would be a longer term solution for implementation.

Improve product quality regulations through updated MNRE tender process: MNRE tender guidelines should set aside funds for adequate field-testing of products to address the challenge of low-quality SWP products entering the market through the MNRE tender process. This would allow the focus to be on the quality, longevity, and durability of the component parts prior to the allocation of the tender (e.g., the selection of solar panels in the SWP should be made not solely on price but on panels with a high extended life and performance in-field).

Updating MNRE technical specifications to incentivize the development of small scale technology adaptation: There remains potential to modify the technical specifications to become an empanelled/approved MNRE enterprise. Specifically, updating the SWP wattage amount to include pumps below 1HP60 could be an area to explore further. Moreover, R&D testing could be conducted by MNRE in partnership with a multilateral organization or a multilateral development bank to. This R&D effort would inform the MNRE as to whether and how to include small scale water pumps under the JNNSM scheme.61

Developing communication outreach and training for RRB branch managers: To address current misperceptions about the SWP segment, a bilateral agency or a government body could increase the understanding of technologies for FIs and investors through targeted capacity building workshops. The workshops would focus on sharing provisions of the JNNSM, successful SWP business models, expected risk and returns from investing in the sector, and case studies for impact investors on the impact and social return on investing in SWP players.

Potential solutions Based on the needs, barriers and eligibility of this segment, the following consumer finance solutions would

have a high potential to unlock value for consumers in the SWP sector.


For example, a 3000 Watt pump is recommended and established as best practice according to MNRE SWP guidelines, however the wattage/HP of the pump is very dependent on the requirement and need of the farmer (e.g., the amount of water needed to be pumped per day, the depth of the water source, and the size of the agricultural plot).One company is currently undertaking the R&D and sale of ½ HP SWPs as a pilot to benefit individual or marginal farmers for plots that are on average ½ an acre to an acre. Instead of costing thousands of dollars these smaller SWPs cost around $400; a much more attainable loan amount that can be accessed via MFIs or RRBs.

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60

61

Annex 5B



Summary of findings: Due to the range of RE products that distributors typically offer, distributors likewise offer a variety of consumer finance options to the end-beneficiary. These include two variants of pay-as-you-go models (EMI and rental models), group loans and individual micro-loans from SHGs and MFIs, access to subsidies under MNRE’s program, and loans from RRBs (typically for higher ticket size products such as SHSs and SWPs).

Interviews with RE-distributors indicate that there are several barriers to consumer finance. First and most significantly is a lack of willingness and incentives for RRBs and MFIs to provide loans against RE products – in the specific case of RRBs, the lack of credit history for individual borrowers is a particular issue. Second, is the absence of regulations and quality control of RE consumer products, ruining market perception. Moreover, unexpected delays in disbursement of subsidies add uncertainty in the RE products space. Finally, a general lack of awareness of products and consumer finance options among consumers, and a limited knowledge of the RE sector among FIs further restrict the availability of finance.

Addressing these barriers can be done in three ways. First, by creating and launching new financial products that encourage and de-risk the process of extending consumer loans for RE appliances - this type includes three potential solutions. First is the creation of a product-linked savings account, allowing consumers to save in a targeted manner for purchasing RE devices. Second, is to create a partial credit guarantee to encourage RRBs and MFIs to extend consumer loans for RE products. Third, is to pilot a mobile-based credit pay-as-you go model, to help reduce the upfront expense for the consumer. The second way to address the barriers discussed above is to enhance or scale-up existing consumer finance solutions – there are three potential solutions for this. These include scaling up group loans to bank-linked SHGs through RRBs, encouraging more partnerships between MFIs and RE MSMEs, and sharing best practices in pay-as-you-go models (including both rental and EMI models). Finally, there are certain cross-cutting solutions that would help create an enabling environment for these financial solutions – these include establishing quality standards for RE products, and developing capacity building sessions for RRB branch managers.

Current types of consumer finance accessedDistributors provide and help connect the end-beneficiary with a variety of consumer finance options given that they carry and sell a range of RE consumer products (and therefore, carry products with varying ticket sizes). Moreover, given that most RE-focused distributors are mission-driven enterprises serving the rural BoP, they prioritize the ability of their consumers to access and afford RE products as well as their role in facilitating it. There are three major types of consumer finance offered by distributors. The first is a pay-as you go model (e.g., rental of the product and equated monthly installments), the second type is top-up or group loans accessed through MFIs or SHGs, and the third type are loans provided by RRBs. In addition to these product types, distributors also help consumers in accessing subsidies (although this remains limited to specific product categories).

Pay-as you go - equated monthly installments (EMIs): Some distributors provide EMIs to their consumers wherein the consumer makes regular monthly cash installments for the RE product. This is more common for lower-cost RE products (under $100) and is targeted for the lowest BoP (with an income of around $1-2/day). Installments are used to pay off the interest and principal each month until the price of the product has been paid in full. Under EMI plans, borrowers are usually allowed one fixed payment amount each

RRB loans: RRB loans are most commonly used to purchase SHSs. The majority of loans provided are around $400, but can go up to as high as $6,500. On average, the tenor of the loan is under 5 years with an interest rate between 10-13%, depending on the bank. The most active RRBs who are willing to lend against RE products are located in South India (e.g., Karnataka, Kerala, Tamil Nadu) - there is initial evidence of RRB loans being used in Uttar Pradesh as well. However, RRB loans continue to be highly dependent on the willingness of the bank manager to engage.

Subsides: Select distributors interviewed for this study indicated that they assist RE consumers in accessing subsides under MNRE’s JNNSM scheme. However, these are mostly used for SHSs and various barrier limit the involvement of RE distributors (as discussed below).

Players face numerous challenges (see section below on ‘Barriers’) when helping consumers access these financial products. Despite these challenges, distributors assist their consumers in accessing loans through an involved and lengthy relationship building process with the RRB management and staff. Need for consumer finance: preferred typesThere are three main types of consumer finance that RE

month (as opposed to variable payment plans in which the borrower is able to pay higher amounts at their discretion). The advantage of an EMI for borrowers/customers is that they know the exact amount they need to pay towards the product each month, making personal budgeting easier.

Pay-as-you go - rental model: A few RE distributors directly rent out a range of the products they carry (from SPLs to SWPs) to rural consumers on a day-to-day basis - consumers pay a small daily fee to rent and use the product. The most common product this is used for are SPLs, likely due to their portability and low daily rental cost. Individual or group micro-loans through MFIs and SHGs: Distributors help their consumer’s access local or partner MFIs for individual top-up loans, and SHGs for group loans. MFI and SHG loans are most commonly used to purchase cookstoves and solar lighting products. In some cases, the SHG identifies potential consumers for the given RE product, and then decides whether to sanction the loan or not; once sanctioned the SHG can provide the loan and also avail loans from RRB and public sector banks. However, some distributors find the SHG model hard to scale because it involves a group loan and it may be difficult for the SHG to reach a consensus on the RE appliance to be purchased.

distributors seek: micro-loans and savings, pay-as-you go consumer finance models, and government subsidies.

Micro-loans and savings: All distributors interviewed sought to expand the ease and availability of microloans from MFIs and SHGs and to establish micro-savings accounts for lower priced RE products like cookstoves and SPLs. Specifically, loans from RRBs and public banks were seen as a good match for higher cost RE products like SHS and SWPs.

Pay-as-you-go: Distributors are interested in expanding (or launching) daily rental and EMI programs for all their RE products. Distributors also wanted to diversify the type of pay-as-you-go models for their consumers; the mobile-based credit model would be applicable to all products, if launched successfully (see ‘Solutions’ for more detail).

Subsidies: Government subsidies were an expressed need by distributors but not ranked as highly as micro loans and savings or the pay-as-you-go model. Subsidies are important for distributors who already assist their consumers in availing (specifically for SHS). However, the barriers and time commitment needed to access subsidies needs to be reduced to make this option more applicable to all players (see ‘Barriers’ for more detail).


Pay-as-you go

Subsidies


Lack of incentives for MFIs or RRBs to engage in lending: Due to high transaction costs and low margins associated with low-medium ticket loans, consumer finance loans are not currently attractive to many public banks, RRBs, or MFIs. This issue is exacerbated by the fact that the majority of distributors do not provide an additional commission for the sale of particular RE products to incentivize loan officers, as distributors feel that this is a conflict of interest for other products/ brands that they carry.


Barriers are the same as those in ‘cross-cutting barriers’ (see below)

Loss of customers due to subsidy process and delays: Delays in subsidy approval and disbursement by MNRE cause distributors to lose consumers during the subsidy application process. On average, it takes 6-12 months for the disbursement of subsidies across all consumer products to take place (instead of taking 1 to 2 weeks to process). In addition, MNRE guidelines do not allow consumers to access subsidies through co-operative banks/societies which are an important source of credit for rural end-users, making the process and ability of availing subsidies more of a challenge. This barrier is most applicable for products such as SHSs and SWPs.

Lack of regulation on product quality: Due to the absence of product standards and quality guarantees, FIs are generally unwilling to provide loans for RE products. Further, several RE MSMEs suggested that the MNRE tender process for RE appliances are typically driven by minimum technical specifications and price - not by the quality of these appliances. Also, the influx of sub-par RE devices ruins product perception for the end-consumer and for FIs, liming the availability of finance in the sector.

Annex 5B




Pay-as-you go

Subsidies


End-users are largely unaware of consumer finance options: Potential RE consumers are generally unaware of the ability to access credit from banks in the form of solar loans and of the availability of government subsidies. Further, distributors state that even when consumers are aware of subsidies, they do not know where or how to access it. This general lack of knowledge of consumer finance options can limit the uptake of RE products, as well as the demand for these consumer finance options to begin with.

Low awareness among end-users of RE products and their benefits: An important barrier preventing growth of the sector is a lack of knowledge of RE products among end-users – this includes an inability to distinguish quality products from sub-standard ones, and an overall lack of understanding of its value proposition. This lack of knowledge prevents creation of a sufficient “pull” for RE appliances in the target market, disincentivizing FIs, which typically seek to target product sectors with high demand from potential consumers.

Lack of knowledge and access to information among FIs: FIs often do not have the technical expertise to evaluate investments in the RE products sector. This lack of expertise is further intensified by the lack of quality market information available in the public domain. This information gap includes the absence of relevant standards for products, a lack of market data on RE consumer products, or market benchmarks to assess firms - this further limits interest among FIs.

Provide a partial-credit guarantee for MFI and RRB consumer loans: A partial-credit guarantee for MFIs and RRBs could be created by a bilateral aid agency to de-risk the process of providing consumer finance loans. In case of default, the guarantee would help the MFI/ RRB in recovering part of the loan. A bilateral aid agency would work with an RRB and MFI to help launch this solution, first as a pilot at a smaller scale (e.g., with 100 consumers in a targeted region) and consider scaling up after incorporating key learnings from the pilot.

Pilot launch of a micro-savings account model through bank-linked SHGs. In this solution, a bilateral aid agency would be involved in two main activities: first, highlighting successful examples of product-linked savings accounts to bank-linked SHGs and RRBs (e.g. through case studies from Africa). Second, working with an RRB to help launch this solution at a smaller scale with a small number of consumers (e.g. 100) in one state (e.g. Bihar). This solution would address the need for formalizing savings through a bank-linked product, and assisting the process of saving towards RE products. The solution has significant potential for impact due to the extensive network of bank-linked SHGs in India (estimated at ~7 million62).

Scale-up lending to SHGs through RRBs: This solution would provide consumer loans under a partnership between an RRB and an RE MSME. Under the partnership, the RRB would define the eligibility criteria for a partner MSME - these would include parameters such as the company’s track record, the quality of its products, availability and quality of its after sales service network, etc. As part of the partnership, the MSME would be required to offer a partial guarantee to cover part of the loan (e.g. 60 – 70%) made by the RRB. However, in the short-term, NABARD/ a bilateral aid agency may provide the guarantee, considering the financing barriers faced by the MSMEs themselves. In the longer term, as the enterprise gains financial strength, the guarantee offered by NABARD/ a bilateral agency can be rolled back and replaced with the guarantee provided by the MSME.

Facilitate partnerships between MFIs and RE MSMEs: Facilitating partnerships and establishing MoUs between high-quality RE MSMEs and local MFIs would help to promote lending towards RE appliances through MFIs. This solution would enable the MSME to offer end-user finance without dipping into their own finances and gain access to MFI’s clients. However, MFIs might not be as willing to partner with RE MSMEs that do not provide high quality after-sales service - this is a key need indicated by MFIs.

Best practice sharing among distributors on existing ‘pay-as-you-go’ models: Currently, one RE distributor has adopted a rental model for their RE products to allow more flexibility in accessing the product when needed, and to make the product more accessible and affordable for their BoP consumer base. This model should be analyzed to examine how to scale it up among different distributors across all consumer product segments. Likewise, the EMI model should be examined for its scalability among both the lowest BoP consumer base (i.e., daily wage earners, those that earn $1-2/per day) and middle-income rural consumers to analyze its scalability across regions and socio-economic strata.

Pilot a mobile-based credit pay-as-you go model: In partnership with a selected foundation (e.g., Shell Foundation), and a telecom company (e.g., Vodafone), a bilateral aid agency would launch a pilot program on mobile based payments – this would allow consumers to pay for RE products using m-based payment platforms. This pilot would apply a model similar to M-KOPA (from Kenya), which would offer consumers the chance to purchase equipment on a pay-as-you-go basis. It would offer consumers flexibility in terms of the amount and time-frame in which they pay for the technology.

Solutions to address barriers in subsidy challenges are the same as those in ‘cross-cutting solutions’ (below)

Establish national standards for RE products to allow MFIs and RRBs to benchmark product quality: The development of national quality standards would help increase an understanding of quality and sub-par RE appliances. These standards would help both lenders and consumers filter out non-quality products, allowing them to focus their lending and purchasing on quality products, leading to an increase in the flow of loans towards this sector.

Developing communication outreach and training for RRB branch managers: To address current misperceptions about the SWP segment, a bilateral agency or a government body could increase the understanding of technologies for FIs and investors through targeted capacity building workshops. The workshops would focus on sharing provisions of the JNNSM, successful SWP business models, expected risk and returns from investing in the sector, and case studies for impact investors on the impact and social return on investing in SWP players. Potential solutions

Based on the needs, barriers and eligibility of this segment, the following consumer finance solutions would

have a high potential to unlock value for consumers finance in the RE distributor sector.


62

Annex 5B


Annex 6List of interviews

Name

Name

Mini-grid players

Consumer product players (contd.)

(contd.)

Mr. Nikhil Jaisinghani

Mr.Vipin Surana

Mr. Jorge Ayarza

Mr. Raghuram

Mr. Rajnish Jain

Mr. Nair

Mr. Kulkarni

Dr. Sajidas

Mr. Eklavya Sharan

Mr. Manoj Sinha

Mr. Vijay Bhaskar

Mr. Shyam Patra

Mr. S K Sharma

Dr. Anil Joshi

Mr. Vikram Dileepan

Mr. Benudhar Sutar

Mr. Sampath

Mr. Jan Imhoff

Mr. Kunjan Gandhi

Mr. Pravin Bhasin

Mr. Pradeep Podal

Ms. Neha Juneja

Mr. Jon Salle

Dr. Mouhsine Serrar

Ms. Sujatha Srinivasan

Mr. Ramesh Kumar Nibhoria

Mr. Vidyasagar

Dr.Karve

Mr. Punwani

Mr. Raja

Mr. Viney Sharma

Mr. Vinay Jaju

Mr. Broja Gopal Paul

Mr. Anish Thakkar

Mr. Amit Chugh

Mr. R.B. Jain

Mr. Kartik Wahi

Mr. Swaraj Khare

Mr. Rick Hooper

Mr. Sengupta

Mr. Damian Miller

Mr. Ranga

Mr. Patil

Mr. Harish Hande

Ms. Sarah Alexander

Mr. Ramnath N Dixit

Mr. Gaurav Mehta

Mr. Biswa Nanda

Mr. Wadhia

Mr. Harish Kaushik

Mr. Ravi Tyagi

Mr. Deshpande

Dr. Venkatesh Tagat

Mr. Rajesh Sehgal

Mr. Karan Gupta

Mr. Rajat Arora

Mr. Rajesh Cherayil

Mr. Jonathan Mazumdar

Ms. Eleanor Horowitz

Mr. Venky Natarajan

Ms. Anu Valli

Ms. Aditi Shrivastava

Mr. Karthik Chandrasekar

Mr. Mohsin Bin Latheef

Mr. Anurag Misra

Mr. Hari Natarajan

Mr. Santosh Kumar Singh

Ms. Tej Dhami

Mr. Kalkundri

Mr. Hemant Lamba

Ms. Pinal Shah

Mr. Aron Betru

Mr. Akole

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

Title

Title

Founder

CFO

Founder

Founder

Founder

Founder

Finance officer

Managing Director

Founder

CEO

Country Director

Founder

Founder

Founder

Founder

Founder

Founder

Founder

Head of Business Development

Former CEO

Founder

Founder

Sales manager

Founder

Managing Director

CMD

President

Managing Director

COO (India)

Director

Vice President (sales)

COO & Founder

Manager, Finance

Founder

Co-Founder & CEO

-

Founder

-

Founder (Head – Africa)

Founder

CEO

CEO

CEO

Managing Director

Innovation Manager

SELCO Consultant in charge of JNNSM implementation with banks in Karnataka

Founder & CEO

Vice President, Head (SEG Business)

DGM (Project Finance Group)

Head, Senior Vice President (Infrastructure Underwriting)

General Manager

General Manager

Chief General Manager

Senior Executive Director - Emerging Market Group (Franklin Templeton)

India Investments Manager

India Investment Manager

Managing Director

Portfolio Associate

Analyst

Managing Partner

Investment Associate

Head

CEO

Manager (Infuse Ventures)

Senior Clean Energy Specialist

Senior Technical Advisor

Technical Expert

Director (Incubation Support)

Retired

Director

-

Director

Director

Organization

Organization

Mera Gao Power

Ankur Scientific Technologies

MinVayu

E-Hands Energy

Avani Bio Energy

Gram Oorja

OMC Power

Biotech India

DESI Power

Husk Power Systems

Mlinda Foundation

Naturetech Infrastructure

SBA Hydro

Himalayan Environmental Studies & Conservation Organization (HESCO)

Solar Town

Desi Technology Solutions

Prakruti Hydro Labs

Auroville Wind Systems

Gram Power

Minda NexGen

Urjas Energy Solutions

Grameen Greenway

Prakti Design Lab

Prakti Design Lab

Servals

Nishant Bioenergy

SKG Sangha

Samuchit Envirotech

Nuru Energy

Avni Energy

D Light

ONergy

ONergy

Greenlight Planet

Cosmos Ignite

Jain Irrigation Systems

Claro Energy

Beejlee

Barefoot Power

Boond

Orb Energy

Thrive Energy

Sakhi Retail

SELCO

SELCO

SELCO

Project Dharma

Axis Bank

ICICI Bank

Reliance Capital Limited

SIDBI

NABARD

NABARD

Franklin Templeton/ Mumbai Angels

Insitor Management

LGT Venture Philanthropy

Nereus Capital

Acumen Fund

Unitus Capital

Lok Capital

Bamboo Finance

Intellecap Impact Investor Network

First Light Accelerator

Centre for Innovation Incubation and Entrepreneurship, IIM Ahmedabad

USAID

GIZ

GIZ

UnLtd.

Karnataka Gramin Vikas Bank

Auroville Policy Advocacy

SEWA

Pledge Guarantee for Health

Akson Solar

Consumer product players

Financial institutions

Sector experts and others

Annex 6


Company Name Company SizeFor/non-profit?

Abellon Clean Energy

Access Solar

Adharam Energy

Aditya Solar

Advait energy

Agni Solar

Alien Energy Private Limited

Avni energy

Ammini

Andromeda solar

Beejlee

Bhambri enterprises

Avee Energy

Avitech Enterprises

BioLite

Barefoot Power

Boond

Belifal Innovations & Technologies Pvt. Ltd

Chakraa Bio Energy

Bharat Solar Industry

Bhargava Energy

Claro Ventures

Cosmos Ignite

D Light

Dawner energy

DG Energytech

Dreamway Solar Project Limited

Easy Solar Industries

Ecco Electronics

Enviro Energy Enterprises

Envirofit

Eternal Renewable Energy Solutions

Consumer products -- any company involved with SPLs, SHSs, solar water pumps and cookstoves. Does not include organizations whose sole focus is on industrial applications of solar (i.e., solar heating, street lighting, etc.)

The focus of this database is on identifying smaller companies with limited fixed assets who are playing in this sector. As such, we have prioritzied identifying companies which focus on assembly and distribution and not manufacturing since their financing needs will not be as dire.

Decentralized utilities -- any company involved in providing electric power at less <100kW through solar, wind, biomass, hydro or biomass. Biogas is not included as it provides thermal energy.

The list of smaller players is fairly comprehensive. The list of larger players is indiciative only -- there will be gaps in players who are active but are not included here.

Micro-small enterprise

Medium-large company































1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

31

32

Sector Year of founding/ starting India operations

Segment (if applicable) Interviewed?

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

2010

2000

2007

2009

1994

2009

1999

2010

1991

2006

2012

2010

2012

2010

2011

2004

2007

2009

1987

2011

1999

2009

2005

2003

2011

CP-1

CP-1

CP-1

CP-3

CP-4

CP-2

CP-2

CP-3

CP-4

CP-2

CP-1

CP-3

CP-4

CP-2

CP-1

CP-3

CP-4

CP-2

CP-2

CP-3

CP-2

CP-2

CP-2

CP-1

CP-1

CP-2

CP-3

N

N

N

N

N

N

Y

N

N

Y

N

N

N

N

Y

Y

N

N

N

N

Y

Y

Y

N

N

N

N

N

N

Y

N

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Technology

Cookstoves

SPL, SHS

Cookstoves

SPL, cookstoves

SHS

All

SPL

SPL

SPL, SHS

SPL & SHS

SWP

SPL & SHS

SPL, SHS

SPL, SHS

Cookstoves

SPL & SHS

SWP

SPL

Cookstoves

SPL & SHS

SPL, SHS

SWP

SPL

SPL

SPL & SHS

SPL

SPL & SHS

SPL

SPL

Cookstoves

Cookstoves

SPL

What does it include?

What is the focus?

List of players in the consumer product and decentralized utility (<100kW) space



Divyam Solar Development Agency

Freeplay energy (Euro Suisse Group)

Greenlight Planet

Greenway Grameen Infra

Edge Technologies

Headway Solar

Enfinity Solar Solutions Pvt. Ltd

Intelizon

Jawallaa Sustainable Bio Energy

Kumar Enterprises

Flareum Technologies

Mayur Rastogi

Geeta Electronics Solar

Global Telelinks/Prakruthi Power

Nessa Illumination Technologies

NEXTECH Control

Green Energy Solutions

Nishant Bioenergy

Nuru Energy

Onergy

Orb Energy

ICOMM Tele

Indosol Energy Pvt Ltd

Instapower

Parikrama Energy Services

iSquareD

Jain Irrigation Systems

Janani Enterprises

Prakti Design

KC Powertracks

Pravin Solar System

Luminous Power Technologies

Maharishi Solar Technology

Project Dharma

Radhe Krishna Solar Products

MIC electronics

Microsun Solar Tech Private Limited

Mitva

Molasolar

Moserbaer

NanoBright Solar Technologies Pvt. Ltd









































33

34

35

36

37

38

39

40

41

42

43

44

45

46

47

48

49

50

51

52

53

54

55

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

2004

1994

2008

2010

2011

2005

2007

2011

2005

2011

N/A

1996

2008

2004

1999

2010

2009

2007

2009

1989

2008

2000

1999

2009

2004

2008

2008

CP-2

CP-2

CP-1

CP-2

CP-2

CP-1

CP-2

CP-1

CP-2

CP-2

CP-3

CP-1

CP-2

CP-2

CP-3

CP-1

CP-4

CP-1

CP-4

CP-2

CP-5

CP-3

N

N

Y

Y

N

N

N

N

N

N

N

N

N

N

N

N

N

Y

Y

Y

Y

N

N

N

N

N

Y

N

Y

N

N

N

N

Y

N

N

N

N

N

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

SPL & SHS

SPL

SPL

Cookstoves

SPL, SHS

SPL

Solar

SPL

Cookstoves

SPL

SPL, SHS

Cookstoves

All

SPL & SHS

SPL

SPL & SHS

SPL, SHS

Cookstoves

SPL

SPL & SHS

SHS

SPL, SHS

SPL, SHS

SPL, SHS

Cookstoves

Cookstoves

SWP

SPL, SHS

Cookstoves

SPL, SHS

SPL, SHS and SWP

SPL, SHS

SPL & SHS

Distributor

SPL, SHS and SWP

SPL, SHS

SPL & SHS

SPL, SHS

SPL, SHS

SPL, SHS

SPL and SHS

List of players in the consumer product and decentralized utility (<100kW) space (contd.)


Company Name Company SizeFor/non-profit?Sector Technology Segment (if applicable) Interviewed?Year of founding/ starting India operations


Rudra Solar Energy

Sakhi Retail

Samuchit Enviro Tech Pvt. Ltd.

Nidhi Corporation

ServalS automation private Ltd.

Simpa Networks

Sneha Bio Energy

Solex Power Systems

Stove Tec

SunLite Solar

Photon Energy Systems Ltd

Sustaintech India Pvt. Ltd (SIPL)

Vikram Stoves and Fabricators

Promptec Renewable energy

Radha Energy Cell

Radiant Energy Technologies

Rajasthan Electronics and Instruments ltd.

Ramtara Engineering Company

Renewgreen

Renewgreen Energy Private Limited

Ronds Solar

S.R. Solar Systems

Saur Oorja Solutions Pvt Ltd

SELCO Labs

Sirius Solar Energy Systems Pvt Ltd

Solar Energbie Technologies

Sparktron Systems

Sun Shine Solar Systems Ltd.

Sun Technics

Sunlumens Solar Systems

Sunlumens Solar Systems

Suntek energy

Surana ventures

Tanu Solutions Private Ltd.

TAO Global

Tapan Solar Energy Pvt Ltd (product brand ELECSSOL)

Tata BP Solar Systems Limited

Thrive Energy

Tilak International

Topspun energy Limited

Trony

Udhaya semiconductors










































74

75

76

77

78

79

80

81

82

83

84

85

86

87

88

89

90

91

92

93

94

95

96

97

98

99

100

101

102

103

104

105

106

107

108

109

110

111

112

113

114

115

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

CP

2009

2009

2005

2010

2011

2002

2010

2008

2009

1995

2009

1992

1997

2004

2007

1996

2011

2009

2010

1989

2001

NA

1972

1984

CP-1

CP-5

CP-1

CP-1

CP-3

CP-1

CP-2

CP-1

CP-2

CP-4

CP-1

CP-1

CP-1to4

CP-4

CP-3

CP-5

CP-2

CP-4

CP-3

CP-3

CP-2

CP-2

CP-3

CP-4

N

Y

Y

N

Y

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

N

Y

N

N

N

N

N

N

N

N

N

N

N

Y

N

N

N

N

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Cookstoves

Distributor

Cookstoves

SPL, SHS

Cookstoves

SHS

Cookstoves

SPL

Cookstoves

SPL

SWP

Cookstoves

Cookstoves

SPL, SHS

SWP, Cookstoves

SPL, SHS

SWP

Cookstoves, SWP, SPL

SPL, SHS

SPL, SHS

SPL, SHS

SPL, SHS

SHS, Cookstoves & SPLs

Distributor

SPL, SHS

SPL, SHS

SPL, SHS

SPL

SPL

All

SPL, SHS

SPL, SHS

SPL, SHS

Cookstoves, SWP, SPL

Cookstoves

SPL & SHS

Solar

SPL & SHS

SPL

SHS

SPL, SHS

SWP





Unique Solar Power Systems

United Solar Engineering and Technologies

Urjaa Pratisthan

Utkarshaa Energy Services Pvt Ltd

Waree Energies

Akson’s Solar Equipments Pvt Ltd

ARTI (Appropriate Rural Tech Institute) - connected to SET

Jay Solar (Jay industries)

Kotak Urja

Noble Energy Solar Technologies (NEST)

Sunlit future

Premier Solar Systems Pvt Ltd

SKG Sangha

Solaris Innovations and Systems

Solkar Solar

Suryodoya Energies

Acme Solar

Alpha Renewables

Applied Solar Technologies

Avi Solar Energy

Azure Power

BHEL

Delta Solar

Gautam Polymers

HIM Urja

Himalayan Environmental Studies & Conservation Organization (HESCO)

Jisnu Solar Private Limited

JJ PV Solar Private Limited

Kuvam Energy

Mantri Solar

Minda NexGen

MinVayu

Mlinda Foundation

Moser Baer Solar Ltd

OMC

Alpha windmills

Auroville Wind Systems

Avani Bio Energy
































116

117

118

119

120

121

122

123

124

125

126

127

128

129

130

131

132

133

134

135

136

137

138

139

140

141

142

143

144

145

146

147

148

149

150

151

152

153

CP

CP

CP

CP

CP

CP/DRE

CP/DRE

CP/DRE

CP/DRE

CP/DRE

CP/DRE

CP/DRE

CP/DRE

CP/DRE

CP/DRE

CP/DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

2008

2007

1999

1997

1996

1985

1997

2001

2001

1993

1984

2010

2003

2000

2008

2010

2007

1962

1994

2002

1986

2010

2010

2011

2011

2012

2005

2011

2005

1999

2011

CP-3

CP-2

CP-3

CP-1 & DRE - Biogas

CP-2

CP-2

CP-4

CP-1

CP-2

DRE-3

N

N

N

N

N

N

Y

N

N

N

N

Y

N

N

N

N

N

N

N

N

N

N

N

Y

N

N

N

Y

Y

Y

N

Y

N

Y

Y

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Non-profit

Non-profit

For-profit

For-profit

For-profit

For-profit

For-profit

SPL & SHS

SPL, Cookstoves

Cookstoves

SPL & SHS

SPL & SHS

SPL/SHS/Solar/wind-solar

Cookstoves

SPL, Cookstoves, Wind-solar

SPL & SHS and Solar

SPL & SHS and Solar

SWP

SPL, SHS and SWP; Solar-wind

Cookstoves

SPL, SHS, SWP, Solar

SPL & SHS and Solar

All

Solar

Wind, Solar

Solar

Solar

Solar

Solar

Solar

Solar

Hydro

Hydro

Solar

Solar

Solar

Solar & wind-solar

Solar

Wind, Wind-solar

Solar

Solar

Solar

Wind-solar, Wind

Wind, Wind-diesel

Biomass (pine needle gasifier)





Biotech India

Desi Hydro

DESI Power

E-Hands Energy

Scatec Solar

Gram Oorja

Gram Power

Green Wind Energy Systems

Husk Power Systems

Mera Gao Power (MGP)

SunEdison (MEMC Electronic Materials)

Naturetech Infrastructure

Prakruthi Hydro

Saran Renewable Energy

Technology Informatics Design Endeavours (TIDE)

SBA Hydro

Unitron Energy

Urjas Energy Solutions

Vivekananda Kendra - Natural Resources Development Project (VK–NARDEP), India

Zenith solar

Frontier Markets

NDMI





















154

155

156

157

158

159

160

161

162

163

164

165

166

167

168

169

170

171

172

173

174

175

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

DRE

CP

CP

1994

2011

1996

2009

2009

2008

2012

2007

2007

2010

2010

2011

2009

2006

1993

2001

1987

2011

1986

2002

2010

2009

DRE-4

DRE-5

DRE-4

DRE-3

DRE-2

DRE-2

DRE-4 (could also go in DRE-1 given recent develop-ments)

DRE-1

DRE-1

DRE-5

DRE-4

DRE-3

DRE-3

CP-5

CP-1

Y

Y

Y

Y

N

Y

Y

N

Y

Y

Y

Y

Y

N

N

Y

Y

Y

N

N

Y

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

Non-profit

For-profit

For-profit

For-profit

Biogas

Hydro

Biomass / Biomass-solar

Wind-solar

Solar

Solar

Solar

Wind

Biomass / Solar

Solar

Solar

Solar

Hydro

Biomass

Hydro

Hydro

Wind-solar, Wind

Solar, Biomass (R&D)

Biogas

Wind-solar

All

Cookstoves




192

Published by: Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbHIndo-German Energy Programme - Access to Energy in Rural Areas1st Floor, B-5/2 Safdarjung Enclave, New Delhi 110 029, IndiaT +91 11 49495353, Ext no. 2152F +91 11 49495391E [email protected] www.igen-access.in

Responsible: Dr. rer. nat. Harald RichterProgramme HeadIndo-German Energy Programme – Access to Energy in Rural Areas

AuthorsMr.Gaurav Gupta, Mr.Shyam Sundarams, Mr.Vibhor Goyal, Ms.Kira IntratorDalberg Global Development Advisors

EditorsDr.Harald Richter, Mr.Santosh K.Singh

Design and layoutInfonautswww.infonauts.in

Partner:Dalberg Global Development Advisorswww.dalberg.com

Acknowledgment:GIZ and Dalberg Global Development Advisors are extremely grateful to different entrepreneurs, financial institutions, sector experts and other stakeholders whose inputs and feedbacks helped immensely in this study. We are also very grateful to the Ministry of New and Renewable Energy (MNRE) for their continuous direction, support and key inputs.

Disclaimer:The opinions, findings, interpretations, and conclusions expressed in this report are entirely those of the authors and should not be attributed in any manner to Deutsche Gesellschaft fuer Internationale Zusammenarbeit (GIZ) GmbH or any of its projects or its affiliated organizations. Deutsche Gesellschaft fuer Internationale Zusammenarbeit (GIZ) GmbH does not guarantee the accuracy of the data/facts included in this publication and accept no responsibility whatsoever for any consequence of their use.

Place and Date of Publication:New Delhi, December, 2016

For Further information, contact:

Dr. rer. nat. Harald RichterProgramme HeadIndo-German Energy Programme – Access to Energy in Rural Areas

Deutsche Gesellschaft für Internationale Zusammenarbeit (GIZ) GmbHIndo-German Energy Programme - Access to Energy in Rural Areas1st Floor, B5/2 Safdarjung Enclave New Delhi 110 029, India

T +91 11 49495353F +91 11 49495391E [email protected] W www.igen-access.in

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