|Grant||UN & Shell Foundations (interest rate subsidies)||$1.5 million||20%||Renewable Energy|
|Equity||Canara & Syndicate Banks||$6.1 million||80%||Renewable Energy|
A four-year $7.6 million effort was launched in April 2003 to help accelerate the market for financing solar home systems in southern India. The project is a partnership between UNEP Energy Branch, UNEP Risoe Centre (URC), and two of India's major banking groups - Canara Bank and Syndicate Bank. The effort assisted Canara bank and Syndicate bank in developing lending portfolios specifically targeted at financing solar home systems (SHS).
With the support of the UN Foundation and Shell Foundation, the market catalyst model chosen was a finance subsidy (an interest rate buy-down) provided through the two banks and multiple established vendors. The customer therefore chose to purchase a SHS from one of a number of qualified vendors, and to finance the system from a branch of either Syndicate or Canara bank.
The project was financed through grants and subsidies targeted at making solar photovoltaic (PV) systems more affordable through interest rate buy-downs. Providing an interest rate buy-down allows partner banks to offer loans to customers at concessional rates of interest, initially 7% below their prime lending rate, which was hovering around 12%. A total of $900,000 funded interest subsidies for loans to buy approximately 18,000 SHS. These subsidies phased out over time.
The interest rate buy-down has been used previously in the Indian sustainable energy sector, particularly with solar water heating systems. Such an incentive can address a number of barriers without unduly distorting the market. It needs to be noted that the incentive is a small share of the total financing with the banks putting up most of the capital.
Product quality issues: UNEP set basic standards for the SHS systems, particularly on product guarantees, but the customers were left some latitude in deciding the most appropriate systems for their needs. Rather than over-regulating on equipment standards, UNEP instead applied a vendor qualification process, so that only the most experienced vendors have access to the programme.
High loan default rate: One benefit of providing an interest rate buy-down was that the entire risk of the loans remains with the banks, therefore they were responsible for minimising defaults. This they could do, for example, by increasing downpayment requirements.
Lack of consumer interest in securing solar system financing: The scheme built upon an existing cash-sales market, therefore there was little doubt that the market existed, even if it was still small. The level of financing incentive provided was reviewed annually and modified, as required.
The Indian SLP benefitted from the early interventions in India in the areas of micro-financing. Moreover, a creative approach to blending free market activities and government interventions led to lower costs and competition for customer service.
Experience with local vendors and banks: The 'two bank - multi vendor' approach is free-market oriented, making use of competitiion to ensure quality products, competitive pricing and reliable customer support. 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.
Stakeholder input: A survey of stakeholders revealed that there was a strong demand for Solar Home Systems (SHS) but that lack of availability of credit was a major barrier to meeting this demand. Banks do not yet have enough confidence in the technology to include SHSs in their standard lending portfolio. The survey indicated the need for a scheme to help banks begin providing consumer access to credit.