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.
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.