Indian Solar Loan Programme: Programme Overview and ...

Photo: Selco

INDIAN SOLAR LOANPROGRAMME

Programme Overview andPerformance ReportFebruary 2005

February 2005

CRESTAR CAPITAL

UNE P

Table of Contents

PageCurrent Status and Performance 3Solar Loan Portfolio 4Background 5Project Strategy & Structure 6

Karnataka State...............................................………....................................... 6Credit Access Impacts PV Market……………………........................................ 7Why Banks?………………........…..................................................................... 7Loan Product Structure.............……………….................................................. 9Commercialisation and Subsidies...............…………....................................... 11Vendors and After-Sales Service……………………….………………………… 11Commercialisation Strategy ………………………………………………………. 12Replication...................……………................................................................... 13Self Help Groups (SHGs)………………….………………………………………. 14Business Planning, Review & Feedback…………………………………………. 15

Significant Future Initiatives 17

CURRENT STATUS AND PERFORMANCE

In April 2003, the United Nations EnvironmentProgramme (“UNEP”) initiated a credit facility inSouthern India to help rural households financethe purchase of Solar Home Systems (“SHS”).Two of India’s largest banks, Canara Bank andSyndicate Bank, along with their eight associateRegional Rural Banks (or Grameen Banks),partnered with UNEP to establish and run a LoanProgramme through their branch offices acrossKarnataka State and part of the neighbouringKerala State.

In addition to providing financial support in theform of interest rate subsidies for borrowers,UNEP provides assistance with technical issues,vendor qualification and other activities to developthe institutional capacity for this type of finance.

As of January 2005, the Programme has financed10,370 loans, through 1800 participating bankbranches. The fastest growth in loans is currentlyin rural areas, thanks in part to the increasingparticipation of the nine Grameen banks. OtherIndian banks have recently launched competingSHS loan products. UNEP is helping these bankswith technical support to establish their loanprogrammes (such as developing a vendorqualification process).

The three-year Programme is on target to financebetween 20,000-25,000 solar home systems,making it one of the largest SHS loanprogrammes.

Programme highlights include:

From Cash to CreditThe Programme has created a vibrant creditmarket for solar home systems. Loan approvalscontinue to grow, even with the recent decreasein the interest rate subsidy, indicating that asustainable credit market is taking hold.

Sales DriversThe Programme is contributing to a large shareof retail sales; now accounting for more than50% of the SHS market in the two states.

Loan AvailabilityThe availability of loans across 1,800 bankbranches - 80% located in rural areas – is nowthe key growth driver for this loan sector.

Success in KarnatakaKarnataka State has performed well as theprimary focus state for the Loan Programme,and is ahead of most other Indian States incommercial sales of SHS.

New Market DevelopmentVendors have expanded into new marketingterritories in Karnataka and Kerala.

Good PracticesThe Programme approach of qualifying SHSvendors rather than specifying systemconfigurations has proven effective.

Market PrinciplesA vibrant SHS market is emerging driven bycommercial market dynamics – no marketdistortion has been observed to date.

ReplicationThe loan product is becoming popular as morebanks launch competing solar loan programmesand new applications are financed, makingreplication likely across India.

Village ElectrificationDue to the wider availability of loans, particu-larly in poorer areas, village electrificationprojects based on stand-alone SHS areincreasing.

Shifts in Government PolicyThe need to shift approaches from capital tointerest subsidies is now recognized by theMinistry for Non-Conventional Energy Sources.

SOLAR LOAN PORTFOLIOUNEP LOAN PROGRAMME FOR SOLARHOME SYSTEMS - Karnataka/Kerala

SALES WITH HELP OF LOANSApril-January 2005

KarnatakaState

Canara BankSyndicate

BankGrameen

Banks Total

Apr-Nov

20042003-04Apr-Nov

2004 2003-04Apr-Nov

20042003-04Apr-Aug

2004Apr-Nov

20042003-04GrandTotal

Shell Solar IndiaPrivate Limited 571 1071 780 1063 564 73 1372 1915 2207 4122Selco Solar LightPrivate Limited 172 366 587 754 815 432 1103 1574 1552 3126Tata BP Solar IndiaLimited 481 377 597 358 487 111 423 1565 846 2411Kotak Urja PrivateLimited *

notreceived 104

notreceived 38

notreceived 166 166 142 308

Total 1224 1918 1964 2213 1866 616 3064 5220 4747 9967

Kerala State

Canara BankSyndicate

BankGrameen

Banks Total

Apr-Nov

20042003-04Apr-Nov

2004 2003-04Apr-Nov

20042003-04 Apr-Nov

20042003-04GrandTotal

Shell Solar IndiaPrivate Limited 69 19 65 88 0 88Selco Solar LightPrivate Limited 0 0 0 0Tata BP Solar IndiaLimited 126 126 140 252 0 252Kotak Urja PrivateLimited

notreceived

notreceived

notreceived 0

notreceived

Total 195 0 0 0 145 0 205 340 0 340GRANDTOTAL 1419 1918 1964 2213 2011 616 3269 5560 4747 10307

* data for Kotak Urja is incomplete, hence only sales upto end-Sep 2004 have been considered

Solar Loan Programme Fulfills a Need• Facilitates access to credit

Stimulate the market for rural credit finance,specifically for the purchase of SHS

• Funds the cost of financial incentivesHelp provide concessional finance that will nolonger be required once barriers to mainstreamfinancing – such as technology perceptions –have been overcome

• Encourages banks to lendCounterbalance the distortions inherent in asubsidy-led product programme by drawingmore banks into launching commercial loanproducts and creating a stronger customer baseamong rural households

• Pursues a commercial solutionCreates a sustainable and replicableprogramme for lending to buy SHS; increaseretail and commercial lending to the this sector

BACKGROUND

Villages Without Power

Although India has pursued an aggressive ruralelectrification strategy over the past decade,many households are still continuing to rely oninefficient and polluting energy sources. At thesame time, the Government was aggressivelypromoting renewable energy. In 2001, India hadone of the largest and most active renewableenergy programmes in the world, with a signifi-cant part of that directed towards meeting ruralenergy requirements. This is still the case.

The contribution of renewable energy hadreached 3000 MW in20011, or 3% of totalgrid capacity. Indiahas one of the largestsolar energy pro-grammes in the worldand an estimatedrenewable energy

potential of 100,000 MW.

However, the overall impact of the renewableenergy programmes was limited compared to themagnitude of the energy problems faced byIndian villages. In 2001, commercial sales ofSolar Home Systems were minimal although 60vendors of PV products were establishedthroughout India, mostly supplying products andservices under various government-sponsoredprograms.

Solar lighting preferred

With no electricity grid or erratic grid power, ruralhouseholds are mostly without reliable lighting.But even if a solar home system is the bestoption, little or no access to credit means it issimply unaffordable, and without credit, thegrowth of the SHS market is also impeded.

Indian Banks have ample financial resources andnearly 67,000 bank branches, of which over 70%are in rural areas. They are also required to lend40% of their loans for priority purposes (such ascauses with strong social objectives), includingagriculture.

However, this system was not being usedeffectively to increase credit access for SHS cus-tomers in rural areas - due largely to a lack ofwhat SHS could technically achieve. Conditionsprevailing in the year 2001 have hardly improved,despite substantial efforts by government andprivate agencies.

Power Stats• Over 85% of India is electrified but more than

80,000 villages and 70% of rural houseswere not connected to the power grid.

• Contribution of renewable energy reached3000 MW in 20011, or 3% of total gridcapacity. Estimated potential for RenewableEnergy technologies is 100,000 MW

• India has one of the largest solar energyprogrammes in the world.

In 2001, India hadnearly 67,000 bankbranches, of which

over 70% were in ruralareas.

Solving Several Challenges

Most rural Indian households are not connectedto a power grid. Even if the grid is available, it isoften unreliable. These households depend onkerosene for their lighting needs, which is costly,frequently unavailable, hazardous, and producesunhealthy fumes and smoke. Depending on theirincomes, these households can consider a rangeof alternatives, including SHS, Inverters, andgenerators.

One technology that is not favoured, however, isthe solar lantern. Although they are the focus ofmost Government-sponsored programmes, solarlanterns are not widely sold outside these pro-grammes because they are perceived to beunreliable, due primarily to poor quality after-sales service.

Despite high capitalcosts, Solar HomeSystems have emergedas an attractive long-term option. Suchsystems guaranteegood quality power ando f f e r t o t a lindependence from thegrid, unlike other alter-

native power systems. SHS are relatively simple,reliable and quickly constructed.

Rising tariffs for conventional grid power areincreasing the financial attractiveness of SHS.UNEP is facilitating commercial sales of SolarHome Systems by using the existing vast Indianrural banking infrastructure

Reaching Poor Customers

Government-sponsored efforts reach out to un-electrified villages and rely on heavy subsidies toprovide lighting solutions to the very poor. Thefinancial contribution of most households is smalland there is often limited motivation for them towant to pay for lighting needs.

Banks often find that lending to the very poor isnot commercially viable. Although they are keento lend for SHS, they must also be commercially

prudent. Since the overriding objective of theLoan Programme is to develop a sustainablecommercial market for SHS, it is targeted atthose who can afford to service loans out of theirown earnings.

The Indian Banking system can help the poorthrough other mechanisms. Group lendingthrough Self-Help Groups (“SHGs”), for example,can reach “Below Poverty Line” (BPL)households. Lending to SHGs has been a goodexperience for banks and UNEP support is alsoavailable for loans provided by the banks toSHGs. In this way, poorer households canbenefit from the UNEP Loan Programme.

Vendors need to do more

More than 50 Indian vendors of photovoltaicproducts supply the complete range of solarlighting products, mostly for government-spon-sored programs. Vendors have limited geo-graphical focus with most sales concentrated in afew states, and further limited to specific regionsof the state. Their business focus is concentratedon selling their products to the relatively affluentsections of the population in semi-urban andrural areas. Vendors have not been able tomarket effectivelyacross diverse terri-t o r i e s , m o s t l ybecause of their ownl im i ted se rv i ceinfrastructure.

KARNATAKASTATE

The choice of theSouthern India stateof Karnataka wasmade for severalreasons. The regionis more developed in areas of literacy,industrialisation, agricultural prosperity, economiclevels and other indicators of progress. Banks inSouthern India have larger branch networks,higher volumes of business, a wider customerbase and report better quality of assets. The

A recent CustomerSatisfaction Survey for the

Indian Solar LoanProgramme showed thatcustomers bought SHS

because of powershortages in their area.

Apart from stimulating ahigher level of

commercial activity in thestates of Karnataka andKerala, the UNEP Loan

Programme canencourage replication in

other parts of thecountry.

PROJECT STRATEGY & STRUCTURE

UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

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region also has the highest number of vendors ofPV products.

Further, Southern India is homogenous in manyways, making replication more easily possible inall five States.

The failure of the local grid also presents a goodincentive. Although Karnataka State claims to befully electrified (26,702 out of 27,066 villageselectrified2), only 31% of rural households haveelectricity compared to 76% of urban house-holds. Chronic power shortages are endemicand individual households face power shutdownsfor several hours during the day and night atirregular times. Peak hour shortages were 16%3.Power tariffs of grid power have gone up drasti-cally in recent times and further increases areexpected.

Good business for Vendors

India’s largest vendors operate out of Karnatakaand have a strong marketing base there, as wellas neighbouring States. In Karnataka, they preferto sell their SHS directly to individual householdsindependent of the Government-sponsored pro-grams. Karnataka has one of the largest after-sales networks of any State in India.

The customer base is maturing with customerswilling to pay for SHS from their own funds andnot expecting support under the Government-sponsored programmes as in several otherStates. They also realize that the quality of gridpower is unlikely to improve in the short-term andtariffs likely to increase.

Good banking infrastructure

Karnataka State has a very large banking net-work with nearly 5,000 bank branches or 7% oftotal Indian bank branches. Most of these (67%)are in rural areas and provide ready-made plat-forms to deliver credit. The culture of banking isstrong and credit history good.

UNEP’s partner banks, Canara Bank andSyndicate Bank, are among the biggest in India,with headquarters in Karnataka and an extensiveState network of more than 1,000 branches.India’s largest Grameen banks, eight of whichare owned by Canara and Syndicate Banks, arealso from Karnataka and maintain 800 branches.

CREDIT ACCESS IMPACTS PVMARKET

Access to credit is improving sales of SHSbecause the initial cost of buying a SHS is highand only a small percentage of rural householdscan afford to pay up-front to acquire a system.Loans provided at concessional interest rateshave made it affordable for households.

Credit access has improved due to both theincreased number of Bank branches providingfinance – now greater than 1800 – and thereduced financial burden that the interest ratesubsidy provides.

Improving credit access

Banks only provide loans for SHS manufacturedand supplied by the Qualified Vendors whoseproducts meet set Technical Specifications4.They adhere to their normal lending policies andloan appraisal criteria, subject to UNEP-stipu-lated conditions in line with objectives of theLoan Programme. Market principles are followed– product configurations, choice of vendors,pricing, etc – and the banks administer loansusing a decentralized approach.

“The banking system touches the lives ofmillions and has to be inspired by a larger

social purpose and has to subservenational priorities and objectives such as

rapid growth of agriculture, small industriesand exports, raising of employment levels,encouragement of new entrepreneurs and

development of backward areas.”

Government’s banking policy since 1969


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WHY BANKS?India has a vast rural banking system withnational presence, comprising the commercialbanks, co-operative banks, Grameen banks andtheir allied concerns. They have an extensiverural network and a wide range of banking prod-ucts for the poorest segments of the population.Besides being driven by credit-linked povertyalleviation government lending initiatives, Indianbanks apply corporate social responsibility prin-ciples strongly in theirbusinesses. Their credibility,institutionalized managementand cont ro l sys tems,understanding of local socio-economic realities and stand-ing amongst the communitiesthat they serve make them thebest dispensers of rural credit.

Indian banks have over 47,000branches in rural areas, con-stituting over 70% of the totalnumber of bank branches inthe country. Loans to agricul-turists, small industries andthe poor represent 34% of total lending.

Canara Bank and Syndicate Bank

UNEP’s partner banks, Canara Bank andSyndicate Bank, have a significant physicalpresence and strong brand equity in Karnataka,particularly in rural areas. They also sponsoreight Grameen Banks in Karnataka, which allowsthem to reach remote corners of the State.

The Banks have considerable experiencedesigning, customising, launching and imple-menting special loan programmes in rural areaswhere they operate. Some of their productshave been accepted nationally and adopted bythe rest of the banking industry. They alsomaintain systems for handling special loanprogrammes.

The Banks have a strong stake in developingtheir own capacity for newloan products with in-housetraining facilities and theresources to reach potentialcustomers. They have theability to significantly impactthe local communities theyserve, and their efforts haveult imately gained themi m p o r t a n t c u s t o m e rrelationships in those areas.They also have the necessaryskills to interact with andinfluence their customers –such competencies areextremely useful for UNEP

and helping Vendors expand the market.

UNEP/Bank Partnerships

UNEP has formal “Fund Support” Agreementswith Canara Bank and Syndicate Bank to imple-ment the Loan Programme through theirbranches and those of their Grameen Banks inKarnataka. The Banks provide consumer loansto buyers of SHS, stipulating that UNEP-qualified

Credit Access is Improving• Increased number of Banks

providing finance for SHS;• Reduced financial burden for

borrowers;• Enabling continuity of bank loan

schemes beyond the tenure of theUNEP Programme;

• Number of Bank branches lendingfor SHS is now around 1,800; and

• Effective interest rate for SHSloans started at 5% p.a. and isnow 7%, compared to acommercial rate of 11%.

Financial Support to Banks

Interest Subsidy USD 900,000Awareness Programme Costs Grant

Promotional Costs USD 90,000 Other Awareness Costs USD 10,000

Total USD 1,000,000

Interest Subsidy is the difference in interest rates that helps borrowers pay a lower effectiveinterest cost while the Bank earns the Prime Lending Rate (PLR). Currently, the interest subsidy isthe difference between the PLR and 7%, or approximately 11%. The entire interest subsidy ispassed on to the borrower.

Marketing Costs Grant helps the Banks market the SHS loan product and partly compensatesthem for the high transaction costs involved with disbursing small loans.


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Vendors adhere to strict technical specifications,after-sales service and good practices. TheBanks have created tailored lending policies forSHS buyers, such as subsidized interest ratesand simplified lending procedures and practices.However, the credit decision is at the discretionof a Bank that normally follows their standardloan appraisal and management practices.

Banks are interested

The banking system has ample capital and iskeen to enlarge its portfolio of rural bankingproducts. Perceptions are positive about themarket potential for solar loans. Helping poorrural households buy SHS makes a powerfulsocial slogan in banking. Although vendors arethe main drivers for marketing SHS, in severalplaces dynamic bank personnel have contributedsignificantly to increased sales. Most brancheshave internal business targets for sanctioningSHS loans. Following the Programme’s launch,SHS has proved popular in several new areas ofthe two States.

More than a third of the total number of bankbranches5 in Karnataka State are involved in theLoan Programme.

LOAN PRODUCT STRUCTURE

Demystifying a new technologyBankers seldom lend for an unfamiliar productand SHS is no exception. The UNEP LoanProgramme helps them understand thetechnological issues while creating safeguardssuch as good practices formanufacturing, sales andservice. Branch personnel atgrassroots level are educatedabout the key concernspertaining to photovoltaictechnologies and the importanceof after-sales service infrastruc-ture. UNEP has: Set technical specifications

benchmarked against bestinternational product stan-dards;

Created a set of good prac-tices;

Qualified the vendors andm o n i t o r e d t h e i r

performance; and Assisted banks in training their personnel.

Both Canara Bank and Syndicate Bank havebeen sanctioning loans under the Government-sponsored Solar Water Heater Loan Programme.UNEP’s intervention has further helped them toenter the SHS market. To date, the five QualifiedVendors have maintained good standards ofproduct quality, information disclosure and after-sales service.

Building relationships

To maintain a strong after-sales infrastructure,relationships between the Banks and Vendorshave been forged to safeguard against prema-ture failure of the product. In these relationships: Banks have the comfort of a 5-year mainte-

nance contract to cover the full period of theloan;

Vendors provide long-term product warran-ties;

Vendor sales and service offices are situatedin close proximity to the bank branch;

Banks work closely with Vendors to assesscredit risk and process loan applications;

They jointly market the technology throughvillage meetings and other publicity plat-forms; and

Vendors help Banks recondition failed SHSin the event of loan defaults.

Encouraging good sales and servicepractices

SHS specifications have been standardized, and

Banks participating in the Loan Programme

Bank Number of Branchesin Karnataka

1 Canara Bank 5421

2 Tungabhadra Grameen 1693 Chitradurga Grameen 944 Sahyadri Grameen 305 Kolar Grameen 656 Syndicate Bank 5061

7 Bijapur Grameen 938 Malaprabha Grameen 2489 Varada Grameen 3110 Netravathi Grameen 23

Total 1,801


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common good practices for sales, warranties andservice have been implemented. Pricing is trans-parent and determined by the market, promotingcompetition and preventing price fixing. Althoughprice lists must be published in advance, pricesare not fixed by either UNEP or the Banks. Theyare merely indicative and meant to serve asbenchmarks for Bank appraisal.

Limited risk of loan defaultRural lending is an attractive proposition forbanks since repayment records are generallygood. Banks did not see the need for a UNEP-backed default risk guarantee.The experience in the first 18months of operations hasbeen good with no defaultsreported to date.

The role of financialincentivesBorrowers are offered loans ata reduced interest rate, whichis about 4% below Bank PrimeLending Rates. Even assubsidies decrease, Loanvolumes continue to rise,which clearly shows that it is the availability ofthe loan and not the interest subsidy that isdriving demand. At the same time, an interestsubsidy presents a strong incentive forcustomers to purchase a system. The interestsubsidy is: Back-ended: Banks charge customers at the

commercial rates of interest and use theinterest subsidy to make the final payments.

Phased: The amount of interest subsidy issubject to change and will progressively bereduced to zero when the UNEP interventionends and loan interest then linked to prevailingcommercial rates.

The effective rate of interest over the lifetime ofthe loan was 5% for loans approved beforeSeptember 2004, and is 7% for currentapprovals.

Financial incentives for the Bank

High transaction costs are one of the main deter-rents to extending low-value loans for SHS.Banks are paid a promotion fee of Rs 300 perloan account to help them meet the costs of

special promotions in the form of publicity andinformation activities and to partly defray thetransaction costs of processing loans.

The participating banks draw support funds inadvance based on a 6 monthly Business Plan,and branches can follow simplified proceduresfor calculating subsidies and reporting on theirloan dispersements. Vendors are also permittedto assist Banks in the processing of loanapplications.

A wide spectrum of buyers

Loans are available forhouseho lds and smal lbusinesses. The pooresthouseholds can access bankloans through Self-Help Groupsof which they are members. TheProgramme is structured sothat: Buyers have to pay only

15% up front, as opposed tothe conventional 25%deposit normally required;

Loans can be repaid over 5years against the normal 3

years for other non-home banking loanproducts; and

Loan security and documentation require-ments are simplified, making it easier forborrowers to access the loans.

The Loan Programme is principally directed athelping rural households finance the purchase ofa Solar Home System. Most of the demand isindeed in rural areas where the grid power isunreliable or unavailable. Bank lending to non-rural SHS customers is restricted to 30% of theirtotal loan portfolio and the Rs 25,000 ceiling onloan size makes it less interesting for urbanhouseholds to take loans, as their fundingrequirements are normally higher.

Building markets

The market for SHS loans is being built throughvillage meetings to demonstrate products andeducate potential customers under the auspicesof the Bank branch. UNEP helps to cover thecost of publicity materials used by the Banks forsuch events. Vendors help Bank personnel to

Loan PopularityLoans are becoming popular dueto:• Reducing Down Payment on

loans: from 25% to 15%, makingloans accessible to poorerhouseholds;

• Reduced Lending Rates whencompared to equiva lentconsumer loans at about 13%;

• Simplified lending requirements.


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deal with customers effectively while UNEP helpsto train bankers.

COMMERCIALISATION ANDSUBSIDIES

Subsidies and markets

In the initial stages of market development, front-end capital subsidies were needed, but continu-ing them has created expectations and a ‘sub-sidy mind-set’ in buyers, which has stifled com-mercial SHS sales. Thus, despite the fact thatcapital subsidies have been instrumental inaccelerating sales of SHS in the initial stages,they are now hampering growth of a healthy SHSmarket.

A subsidy should not be seen as the leadingfactor to buy SHS; it has to be suitably packagedto ensure that customers buy SHS because it isa preferred option to supply energy. The UNEPLoan Programme is devised with this in mind,helping the borrower with a ‘back-end’ interestsubsidy conditional on prompt repayment of theentire loan. Further, the interest subsidy isprogressively reduced over the Programme’s 3-year life.

Improving access to credit is a higher prioritythan reducing interest costs. The pressing needis to increase the number of Banks and branchnetworks offering loans to buy SHS. Providingfinancial incentives supplements the financialability of the borrower, creates market awarenessamong customers and bank managers, andprovides a moderate incentive to buy theproduct.

Interest subsidies encourage lending

The back-end subsidy ensures that loans are nottainted by the stigma of front-end subsidies, andthe levying of commercial rates on the loanensures borrowers absorb the amortisation coststhemselves. This approach also recognises thereality that SHS buyers are more concerned withobtaining access to financing than specificallyreducing the cost of systems.

The back-end subsidy is a quasi-GuaranteeFund for the Banks, providing them collateral inthe event of default by the borrower and elimi-

nating the need for UNEP to establish a creditrisk default Guarantee Fund. Banks favour back-end subsidies, primarily because they carry abuilt-in incentive for prompt repayment by theborrower, partially defray the cost of bad loansand drive demand.

Phasing out interest subsidies

UNEP will gradually phase out interest subsidiesby increasing interest rates up to the commercial

levels prevailing at the time when the LoanProgramme ends. The first mark-up in interestrates to 7% took place in September 2004 with asecond increase to 9-10% (close to current PLRrate of 10.75%) scheduled for 2005.

This gradual removal of subsidies will enable theUNEP Loan Programme to reach approximately23,000 households by the time the Programmeends.

VENDORS & AFTER-SALESSERVICE

Building market infrastructure

The key issues in building market infrastructureare: Technical standards, allowing flexibility in

system types and configuration; Good practices for sales, service and dis-

closing information; and

Has the Government reoriented itsown approach to its large SPV

programme?

“The [new MNES] interest subsidyscheme is aimed at expanding the

commercial market for SPVproducts in the country so that thecapital subsidies can be gradually

phased out.” – MNES policystatement in December 2003”.


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Qualified vendors capable of providing qualityproducts and reliable after-sales service.

The Programme has benchmarked technicalspecifications to international standards, butaligned to Indian operating conditions. Thesestandards mandate product testing and certifica-tion by independent bodies, and defines restric-tions on warranty support and after-sales service.Banks and buyers have access to information tomake informed decisions and to be aware ofincidences of sales malpractices.

Unlike other programmes, UNEP sets standardsfor disclosure of pricing information. Actual pric-ing of SHS, however, is a decision between thevendor and buyer.

Qualification of Vendors

The Programme maintains an on-going qualifica-tion process for Vendors, who will be added anddeleted from the Programme from time to timedepending on an assessment of their perform-ance and compliance with the criteria. The initialqualification was based on an open biddingprocess - A Request for Proposals was publishedin October 2002, and Vendor ParticipationAgreements signed with 4 selected Vendors inDecember 2002. The process is still open; anyVendor can obtain the qualification package andapply for qualification. One further vendor wasqualified in 2004, bringing the total to five.

Qualified Vendors are reputed leaders in theKarnataka commercial SHS market with salesand service networks across the State. Theyparticipate in advertising and publicity initiativesassociated PV technologies, SHS and the LoanProgramme; demonstrating their products,attending village meetings and helping to trainbank personnel.

Qualified Vendors offer standard product warran-ties and have firm service contracts for the fullfive-year term of the loan. Besides routine serv-icing, they are responsible to the Bank forrepairs/ replacements/ resale of Solar HomeSystems that are repossessed from defaultingcustomers.

COMMERCIALISATIONSTRATEGY

The UNEP Loan Programme operates on marketprinciples. Vendors are qualified through anongoing transparent selection process with norestrictions on the number of qualified vendors.Vendors are free to decide their product configu-rations6 and prices, and customers are free tochoose a vendor.

Banks are also free to package their loanproducts as they wish. The only stipulations arethat the borrowers get the full benefit of theinterest subsidy while the Banks adhere to theprinciples of simplicity and ease of offering loans.More banks beyond the ten7 who are partneredby UNEP are free to participate in the LoanProgramme, although the present budgetaryconstraints only allow UNEP to provide technicalsupport and not financial assistance.

The subsidy will be phased out and interest rateswill be progressively moved up to commercialrates of interest by the end of 2005.

Subsidies promote commercializa-tion

The Loan Programme demonstrates an alterna-tive to the capital subsidy-approach. Bankscharge their borrowers at commercial rates ofinterest, although the effective interest cost to the

Qualified VendorsVendor Number of Sales/ Service Offices in Karnataka1

In 2002 Today1 Kotak Urja Private Limited 5 52 Selco Solar Light Private Limited 17 233 Shell Solar India Private Limited 10 164 Tata BP Solar India Limited 8 14

Total 40 58


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borrower is reduced through the mechanism of aninterest subsidy. This is similar to MNES interestrate subsidy programme for promotion of solarwater heaters. However, the UNEP approachdiffers as interest rates are scheduled to go upover a period of time and reach market rateswithin 3 years from Programme launch. TheProgramme will be considered successful if itconcludes with loan figures continuing to grow asthe subsidy is removed.

Marketing emphasis is on the easier access tobank loans, not the subsidies that go with it.Subsidies are being reduced in 2 stages with aninitial interest rate increase in 2004 andsubsequent increases in 2005 that will end withloans charged at commercial interest rates.

High standards

The Loan Programme has set high standards forsales and service that empower both the bankerand the SHS buyer. Thanks to the availability ofloans, Qualified Vendors have a dominant role inthe industry and setting benchmarks for the othervendors to follow. Safeguards built into the LoanProgramme ensure free market dynamics andensure sustainability of the lending products. Thepartner-Banks adopt appraisal and lending prac-tices that serve as a model for other banks tofollow.

REPLICATION

Conditions in the rest of South India are similar toconditions prevailing in Karnataka State. The fourother South Indian states suffer the same elec-tricity shortages and offer the same infrastructurein terms of banking. Some similar lending initia-tives have been launched in the neighbouringstate of Andhra Pradesh8 along the lines of theUNEP model. Both Canara Bank and SyndicateBank have launched similar Loan Programmes(with limited funding support from UNEP) in theneighbouring State of Kerala.

Currently, the Loan Programme works with 2tiers of Banks: The Government-owned nationalized Canara

Bank and Syndicate Banks that have anational presence, cosmopolitan bankingculture, reach and business focus: and

The Grameen Banks with region-specificoperations and dedication to rural banking.

The Loan Programme sets standards for othersimilar banking entities to follow. Independently,some vendors are already discussing with otherbanks ways to replicate the same lending model.

The role of Banks

Banks customarily lend to their existing custom-ers and Canara, Syndicate and the GrameenBanks are no exception to this banking practice.Even under the UNEP Loan Programme, it islargely the existing customers of the participatingBanks who have sought loans to buy SHS. Thishas stifled the buying ambitions of otherhouseholds, which applies peer pressure onother Banks to follow the lending model andlaunch their own LoanProgrammes so cus-tomers are not left out.

Other banks operatingin Karnataka, includingVijaya, Corporation,Karnataka Bank andKrishna GrameenB a n k , h a v eapproached UNEP tocreate partnerships tolaunch their own Loan Programmes. Withbudgetary constraints, UNEP has offered non-financial assistance in guiding similar LoanProgrammes at these Banks. The interestdisplayed by the Banks demonstrates that thereplication strategy is working.

Both Canara Bank and Syndicate Bank haveproposed to extend the Loan Programme toother districts in the neighbouring states ofKerala and Andhra Pradesh. In early 2004 theloan Pßrogramme was extended to some regionsin Kerala, and 340 loans were processedbetween April and November. UNEP is indiscussion with the Rayalseema Grameen Bankin Andhra Pradesh to adopt the same lendingmodel with limited UNEP support.

When the Programmewas launched, theQualified Vendorsoperated out of 40

offices. They have nowexpanded to 58 outlets.


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Built-in replication

The Loan Programme is structured to operate ina decentralized fashion, which relies on grass-roots marketing and loan sanctions. Other thanbasic guidance and control systems, individualoffices of Vendors and Banks transact loan busi-ness independently and follow simple proceduresfor funding, capacity building, loan processingand reporting. There are no special banking pro-cedures to be followed, and the Loan Pro-gramme conforms to the normal standards ofbank policy and practice. Any bank at any loca-tion in India can replicate these procedures with-out any special intervention.

By its design and structure, the Loan Programmewill hopefully encourage commercial loan repli-cation through: Larger loans: Banks now finance at commer-

cial interest rates larger SHS where the loansize exceeds Rs 25,000, the loan ceiling of theUNEP Loan Programme9.

Alternating Current SHS: Currently, the tech-nical specifications only permit funding to buyDC Solar Home Systems. The increasingpopularity of higher-end AC systems is puttingpressure on banks to extend loans atcommercial rates of interest for AC systems.

Government-sponsored programmes: Bankshave been granting loans for SHS that usecapital subsidies provided by theGovernment10.

Simplicity of lending model: With its Vendorqualification process, the UNEP LoanProgramme can serve as a model for otherbanks to follow regardless of whether financialassistance is available or not.

Vendors and Dealers

Prior to the launch of the UNEP LoanProgramme, SHS were popular in only someregions of the State. But the marketing strategiesemployed, strengthened by the easy availabilityof loans, have encouraged Vendors to ventureinto new regions in the State and to build newmarkets.

Up until April 2004, only the Qualified Vendorswere eligible for funding under the UNEP LoanProgramme. Recognizing that Qualified Vendorsoften have dealers who are active and dynamicmarketers of their suppliers’ products, these

dealers will be permitted to seek loans for theircustomers. This moderation in the entry criteria isexpected to aggressively drive dealership salesand stimulate loans in certain areas.

Government

In December 2003, the Government announcedits intention to launch a loan programme tofinance photovoltaic (PV) systems using thesubsidized-interest model. When launched, it islikely to complement the existing UNEP LoanProgramme and result in a larger coverage ofbank branches for solar lending.

Village Projects

Qualified Vendors have reported successful mar-keting to household clusters in some villages,which has resulted in SHS sales for 50-150houses at a time. This mass conversion has thepotential to motivate other villages to follow suitand signals a significant shift in the customermindsets and Vendor marketing strategies.

The Shree Kshetra Dharmastala RuralDevelopment Project (“SKDRDP”) has beenworking in several dozen villages to helpdisadvantaged households in 2 districts inKarnataka to buy Solar Home Systems entirelyon commercial terms. Of late, SKDRP-sponsoredhouseholds have also started seeking loansunder the UNEP Loan Programme.

SELF HELP GROUPS (SHGs)

Reaching poor households

In a customer survey, 7.5% of households in aportfolio of around 850 loan accounts11 in severalbranches of Canara and Syndicate Banksrevealed that most borrowers earn upwards ofRs 50,000 per annum. This is primarily because(a) these customers have the capacity to repaythe loans, and (b) Banks view them as anacceptable credit risk. In view of their highersocial standing, it is also expected that theyserve as demonstration models for poorerhouseholds to follow. Vendors appear to skewtheir SHS marketing to the more affluent ruralhouseholds.


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Vendors have no marketing strategies for thevery poor despite the fact that each bank branchhas several credit-linked Self-Help Groups12

(“SHG”)13. For the most part, the Banks’ enthusi-asm to lend more money to SHGs is not matchedby marketing efforts on the part of the Vendors.Vendors need to be better informed about thepotential to sell SHS to SHG member-house-holds and intensively market SHSs in collabora-tion with bank branches.

Consequently, SHGs are the best route to extendSHS to poor rural households and obtain loansfrom the banking system.

BUSINESS PLANNING, REVIEWAND FEEDBACK

Bank Planning

Banks file a Business Plan every 6 months esti-mating the volumes of loans that they expect todisburse, which UNEP then uses to estimate

financial and technical assistance. The financialsupport sanctioned for the ensuing half-year isthen paid to the Banks in advance. The BusinessPlan also defines the plan of action for increasingaccessibility of the loans to the target customersand reviews the process of commercialization.

Vendor Review

Meetings are convened every quarter withVendors to review progress, discuss new busi-ness strategies and troubleshoot problems. Thefour most important issues discussed to datehave been how to: Effectively market the Loan Programme to

SHGs; Ensure adherence to good practices of sales

and service; Prepare for the withdrawal of subsidies and

transit to commercial interest rates within 18months; and

Introduce PV-GAP technical norms for theirSHS products.

Field Visits

Field visits are conducted by UNEP representa-tives to various districts in Karnataka State tomonitor activity at the grassroots level.Discussions are held with bankers, vendors andcustomers to address issues relating to satisfac-tion with the product/ service, capacity building,specific projects, etc. The field visits are heldmeet with officials at local offices of Vendors andBanks at least once every 2 months with mostdistricts of the State visited in the past 12months. Every one of the eight participatingGrameen Banks (except one) has been visited inaddition to Canara and Syndicate Banks.

Bank Branch Audits

Participating Bank branches must be auditedduring the tenure of the Loan Programme. DuringJanuary-February 2003, 26 branches of Canaraand Syndicate Banks were audited, and certaindepartures from the stipulations for sales andservice were found, mostly involving price trans-parency and consolidating 5-year service con-tracts.

Suitable remedial action has been initiated torectify these variances, including:

SHG Plan of Action• Help Vendor sales personnel discover

marketing opportunities in SHS member-households and address banking issuesrelating to credit off take by SHGs.

• Village meetings are to be organised to helpVendors interact with SHGs that are credit-linked to the various bank branches.

• Large capacity building platforms forinteracting with SHGs will be exploited suchas training institutes run for SHGs by theBanks.

• With the best rural banking networks and themaximum number of SHGs, Grameen Bankswill be motivated to carry out special SHSmarketing campaigns and encouraged toincrease the loan exposure to SHGs that buySHSs.

• The present ceiling on loan size will bespecially increased for lending to SHGs

• A different interest rate scheme will betailored for SHGs which will protect them fromthe progressive increase in interest rate – i.e.SHGs may continue to take advantage of theloans at the subsidized interest rate of 5%while the rate for other categories ofborrowers will be 7.5% or higher.


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• Stricter vigilance over the sales/ servicepractices of dealers/ agents of QualifiedVendors;

• Higher standards of price transparency andinformation disclosures for the customer; and

• Firming long-term service contracts.

The next round of audits is scheduled for all 10participating banks in Nov-Dec 2004.

Feedback from Customers

A Customer Satisfaction Survey was conductedin January 2004 where 7.5% of the borrowersspread across 6 districts in the State were visitedand polled on various issues. According to theresults:• The predominant reason for buying SHS was

the acute power shortage in their village;• Nearly 75% of the customers polled have

opted for SHS with 4 lights or more;• Over 90% of the customers are happy with

their Vendors; and• Customers are happy with the level of the

Banks’ service and loan processing proto-cols.

Based on the findings from the Audit andCustomer Satisfaction Survey, procedure manu-als have been further standardized and are beingimplemented at various sales offices QualifiedVendors, their dealers and Bank branches.

0%

20%

40%

60%

80%

100%

Reasons to Purchase SHS

Percent of Respondants 100% 10% 6%

Lack of grid Save on Power Costs

Children's Education

Customer Satisfaction

Good92%

Very Good5%

Unhappy3%

Type of System Purchased

Less than 4 lights13%

Four lights39%

More than four lights48%

FUTURE INITIATIVES

Phasing out Interest SubsidiesInterest Subsidies are being phased outprogressively with the first interest rate increasein September 2004. The Solar Loan rate willeventually align with commercial rates.

Reaching poorer householdsMarketing efforts of vendors and banks are to beintensified to sell more Solar Home Systems tomembers of Self-Help Groups, which represent

the poorest households in villages. To facilitatelending to Self-Help Groups, the ceiling on loan

size will be increased.

Replicating in other areasDiscussions are being held with more banks inKarnataka and neighbouring States tocommence loan programmes without anyfinancial support from UNEP.

NOTES 1 Report of the Ministry for Non-Conventional Energy Sources, Government of India2 May 20013 Year 20014 Stipulated by UNEP5 Based on 2003 figures6 Within the parameters of the Technical Specifications stipulated by UNEP7 Canara, Syndicate and their 8 Grameen Banks8 In areas contiguous to districts in Karnataka State where the UNEP Programme is being run9 Under the UNEP Loan Programme10 UNEP Loan Programme does not permit a borrower to take the benefit of multiple subsidies – hence, thebuyer who obtains the capital subsidy from Government is not entitled to interest subsidy under the UNEPLoan Programme11 Customers surveyed during the course of the Customer Satisfaction Survey conducted in Jan-Feb 200412 Representing the poorest households in the village13 denotes that the SHG is entitled to credit facilities at that bank branch

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