4.1 Consultation with Stakeholders: Consultations with a wide range of stakeholders in South India, which included SHS vendors, banks and other small scale financing institutions, governmental agencies, experts, NGOs etc., were carried out during the planning phase of the programme. The findings from stakeholder discussions indicated that there is a strongly felt need for SHS in areas with non-existent or erratic electricity grid. Strong motivators for the use of SHS were children’s education, other lighting needs, and TV. A lack of availability and the cost of credit emerged as two major barriers to the wide scale adoption of SHS by potential buyers. It was also observed that although banks had enough credit available and were seeking new loan products, they were not yet ready to treat SHS as a standard technology. Since it is not a standard product in banks’ lending portfolios, and the loan size is small, transaction costs for the bank are thus high, reducing its attractiveness further. But the banks were ready to experiment and explore the possibility of scaled up lending for SHS. It also became apparent from the consultations that the poor, who have least access to electricity, could benefit from a lending facility through SHGs.

Given that for renewable energy technologies access to finance has been widely considered a barrier, discussions with stakeholders also included feedback on a variety of finance support mechanisms including front-end / back­end interest rate subsidies, credit default guarantees, loan term extensions, beneficiary margin support, and subsidised transaction costs. According to both vendors and banks, an interest rate subsidy would help address many of these barriers and in so doing would accelerate SHS adoption by providing bank loan managers the incentive to promote the

product and by offering consumers more attractive terms to purchase the product.

The stakeholder consultations indicated the need to address risk perceptions in the financing community regarding SHS loans. The high up-front cost of SHS, the high cost of credit and a lack of awareness among potential users were other barriers identified during the consultations.

4.2 Selection of Programme Partners: The stakeholder consultations were carried out in three southern states of India but Karnataka was finally selected to implement the programme in the initial phase. Karnataka has a strong rural banking system with a ready­made platform for credit delivery. Several vendors are based, and have manufacturing facilities, in Karnataka, including three of the most reputed names in the renewable energy industry in India — Tata BP Solar, Shell Solar and Selco India. Vendors already have after­
sales service networks in Karnataka, an important requirement for market sustainability and growth.

Canara Bank and Syndicate Bank, two large Indian retail banks with networks of branches in most parts of South India, were chosen as the partner banks. The banks support Regional Rural Banks (RRBs or Grameen banks) and hence have considerable coverage in the more rural areas. They are at the forefront when it comes to launching innovative products. They provide credit to poor households through SHGs. Malaprabha Grameen Bank, one of the rural banks promoted by Syndicate Bank, has already been lending for the purchase of SHS in association with Selco, although this experience is still nascent. The banks also have the ability to replicate their success in other parts of India thanks to their national reach.

4.3 Financing Mechanism : Interest Rate Buy-Down: A number of market development models were considered during programme preparation, including providing capital cost subsidies to solar vendors, end-user subsidies directly to customers, or financing subsidies through one or two partner banks. It was determined that direct links with vendors or customers were not necessary, and that working through the banks would be the most effective approach. Experience from other programmes has shown that capital subsidies have a tendency to stick and distort the market. Bankers were also not very enthusiastic about capital subsidies and preferred interest rate subsidies, which enable them to offer preferential banking terms to their customers. Since banks were willing to take the full credit risk under the programme, the option of a guarantee facility was also ruled out. An interest rate subsidy also reduces the programme risk, whilst the possibility of a gradual reduction in subsidies ensures that it can be planned properly and withdrawn fully without significantly damaging the market.

One of the attractive features of an interest rate subsidy is that it does not 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. As against a new product, interest subsidies can distort the market if offered for a mainstream financial product. The provision for reviewing and revising the subsidy in the programme is to ensure that the interest rate subsidy is gradually eliminated.

The interest subsidy approach allows the partner banks to offer loans to customers at

concessional rates of interest, initially about 7% below their prime-lending rate of 12%. A corpus of USD 0.9 million can fund interest subsidies for loans to finance approximately

18,0 to 20,000 SHS. As these subsidies phase out over time, the actual number of SHS financed might in fact be larger, depending on the timing of the phase-out.

The programme, by providing loans with an interest rate buy-down, addresses the ‘high up-front cost’ and high credit cost, the barriers identified by stakeholders. The programme is expected to help increase awareness and confidence in SHS technology, bring down the financing costs of the technology in India, and widen the market. Worldwide advances in PV technology and decreasing costs are expected to usher the SHS market in India to levels where it can be sustained without further support.

4.4. A Multi-Vendor — Free Market Approach: Since a number of experienced solar rural electrification companies already existed in Karnataka, it could have distorted the market to choose, or tender for, one vendor over the others. Furthermore, working with a single vendor would require the use of narrowly defined and monitored system specifications to ensure that the ‘chosen’ vendor actually delivered a quality product. This heavily regulated approach could restrict the vendor/customer relationship, leaving little room for vendors to innovate in product/service offerings and for consumers to choose the system most appropriate for their needs and budgets. It was therefore decided to work with as many vendors as could meet the product quality and after-sales service criteria. The vendor panel has been kept open and new vendors will be included as and when they are able to meet the criteria. The partnership with only two banks was considered in view of the size of the subsidy corpus — a large number of banks would have left hardly any incentive for the banks due to the small amounts of business. Thus, the ‘two banks — multi vendor’ approach was deemed to be the best possible, free-market oriented approach for the programme, making use of competitive forces to ensure quality products, competitive pricing and reliable after-sales support.

4.5 Technical Support and Awareness Raising: An important component of the strategy was to provide support to the banks by providing standard specifications for SHS equipment and inputs for appraisal of the product at branch levels. Since the technology and the products were new to the banks, a further cushion was provided through the vendor qualification process so that banks can ensure quality products and reliable after­sales service. This addressed the problem of risk perception and also reduced transaction costs in processing the loans.

During the product launch, training programmes were organised by the banks for their branch managers, and some support and inputs to the training were provided. The window for training support has been kept open for banks, and they have already indicated the need for such support whilst they incorporate their Grameen banks into the
programme. In addition to training, support for village level meetings between banks, vendors and potential customers has also been provided. Both the banks have been organising village meetings regularly to increase awareness among potential customers. In addition to this, banks and vendors have been carrying out other promotional activities to raise awareness. Support has also been provided to banks to meet expenses related to programme promotion activities, which reduces the cost for promotion by the banks. However, these support activities are quite small, on average 300 rupees per loan approved (or roughly 2 per cent).

4.6 Reaching the Poor: The programme focuses mostly on rural and semi urban populations and also aims to reach the poorer households. To deepen the reach in rural areas, the extension of the programme through their RRBs (Grameen banks) is in progress. Efforts are also underway to reach the poor through the involvement of SHGs and NGOs working with the poor. One such initiative is in the pipeline to be supported by the Small-Scale Sustainable Infrastructure Development Fund (S3IDF).

4.7 Feedback: Periodic customer surveys are used to gain feedback from customers, and periodic audits for relevant checks are part of the programme design. These are used to take corrective actions. A recent audit indicated the need for some corrections, which have now been initiated.