Financing Support
| Interest Rate
Buy-Down
The interest rate buy-down has been used previously in
the Indian sustainable energy sector, particularly with solar
water heating systems, although has only just recently been
attempted for solar PV financing by one vendor on a small
scale. It is felt that such an incentive can address a number
of barriers without unduly distorting the market. It needs
to be noted that the incentive will be a small share of the
total financing with the banks putting up most of the capital.
In terms of risk sharing, the banks will carry 100% of the
exposure and therefore should be motivated to maintain quality
loan portfolios. Price distortion should also not be much
of an issue since the facility would be subsidizing financing
cost, not the capital cost. It is difficult to distort a market
- in this case SHS financing - that doesn't yet exist. |
Providing an interest rate buy-down will allow partner
banks to offer loans to customers at concessional rates of interest,
initially 7% below their prime lending rate currently hovering around
12%. A corpus of USD0.9 million will fund interest subsidies for
loans to buy approximately 18,000 SHS. These subsidies will phase
out over time.
Various market incentives were considered during project design.
Not being familiar with solar PV technologies, bankers aren't very
price sensitive to system costs (i.e., they don't have a good feel
for what a SHS should normally cost). UNEP providing a capital cost
subsidy for SHSs would therefore not have much impact on their motivation
to lend for the product. However they are enthusiastic about the
possibility of offering preferential banking terms to their customers
and therefore subsidizing the financing cost of a system is a more
effective inducement for bank participation than subsidizing the
capital cost of a system. A third possibility would be to subsidize
the risk of SHS credit portfolios through the provision of partial
loan guarantees. However Canara and Syndicate banks are already
willing to carry 100% of the risk exposure therefore in this case
the guarantee form of subsidy isn't needed.
One of the most attractive features of an interest rate subsidy
is that it doesn't distort the market, either in terms of the capital
cost (i.e., the ticket price) that the customer associates with
a solar PV system, or the risk that a banker associates with a solar
loan. Once SHS financing becomes a mainstream financial product,
an interest rate subsidy could cause some distortion, however this
will only happen once the intervention proposed in this project
is successful and no longer needed.
The interest rate buy-down approach is complimentary to other solar
PV programmes in India such as PVMTI and Government of India (GOI)
programmes. PVMTI financing has been targeting the supply side,
through vendor support to develop innovative new products and services.
The proposed UNEP approach seeks to strengthen the demand, or customer,
side by increasing access to credit for solar home system purchases.
By providing loans with an interest rate buy-down, the project will
address the 'high up-front cost' issue so typical of renewable energy
technologies. It is expected that the project will help increase
awareness and confidence in SHS technology, bring down the financing
costs of the technology in India, and widen the market. These features
coupled with advances as a result of the world-wide focus on PV
technology in general and the widening of the market in India in
particular, and learning experience of vendors are expected to bring
the costs down to levels where the market can be sustained without
further support.
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