It is a well-known cliche that banks are most willing to lend to those who…don’t need their money.

It is somewhat true for solar as well. Or at least the corollary is true – Indian banks have not exactly been keen on lending to many aspiring solar developers who however neither have a balance sheet nor a high net worth.

Now, the sob story I recounted earlier is mainly the case with MW scale solar power plants where folks need a few crores to even put up a 1 MW solar power plant. The problem exists for the rooftop solar sector as well, though the pain point for this sector is much lower compared to that for large-scale MW solar power plants.

Rooftop Solar Loans

Getting loans for rooftop solar is not such a challenge as the amounts needed are much lower, but Indian residential and commercial rooftop solar prospects had been complaining for long that Indian banks are not giving them any preferential treatment when they are so keen to go solar and go green.

This might be about to change.

From what I read, India banks may soon chase you to fund installation of solar panels on your rooftop, and that too at concessional rates.

The finance ministry has advised banks to “encourage” home loan or home improvement loan applicants to install rooftop solar photovoltaic systems and include the equipment cost in the home loan.

The move is part of an overall push to renewable energy and banks have been “requested” to offer a 1% interest concession for renewable energy projects to propagate the use of green technology . This is in addition to suggestions of a new fund-raising and lending model, where state-run lenders such as SBI and PNB, through their overseas branches, are expected to borrow from multilateral agencies such as World Bank and provide rupee loans to borrowers through their branch network in the country.

An internal assessment by the finance ministry has shown that the mode would help banks lend below the base rate by avoiding hedging costs that add up to 6-8%. Lending below base rate is something that the Reserve Bank of India does not allow currently .

The RBI has already included financing of renewable energy projects under the priority sector lending limit, which includes loans up to Rs 10 lakhs to individuals but not much lending has taken place so far, prompting the government to step in and ask lenders to prepare a special scheme with specific targets.

Loans to MW Scale Solar Power Plants

Within the solar power sector, loans to MW solar power plants is a far bigger problem today, that it is for the rooftop solar sector, for which in some cases the residences or individuals are able to put in 100% as equity, and in other cases, getting a loan is not that difficult as the amount to be raised is not very high.

In another post at Solar Mango, I had put in recently where I discussed the challenging times Indian solar power developers – especially those constructing MW scale solar power plants – are facing in the context of financing. Here it is…

In the post to which I have linked, I have noted that the Indian banks are still concerned about three types of risks

  • Offtaker risk
  • Technology risk
  • Policy uncertainties

While the first and third indeed are justifiably areas of concerns, banks should not any longer be worried about technology risks, as solar PV is a mature technology. I am confident that it won’t be long before banks no longer consider the solar PV technology to have any significant risks.

From interactions I have had with Indian banks in the recent past, the following are the terms and construct under which they are willing to lend to the solar sector, especially to small and medium scale solar power plants without any significant corporate backing:

  • Debt: Equity = 70:30, increasingly this is becoming 75:25, and in very select cases, 80:20. Well, higher the debt, the better it is at least for those who are able to bring in that extra equity, but banks will also be vary of giving too much % of debt as that will lower the debt service coverage ratio (DSCR). Do push your bank for 75:25, though. This should be eminently possible in many cases today as mentioned earlier.
  • Tenure = Banks are happy to provide a tenure of up to 15 years for solar power plant loans, with a one year moratorium
  • Interest rate = Here, things get a bit iffy. From the interactions for various clients we have had in the last few months with a number of banks, the interest rate varies from 11.5-12.5%. In rare cases, for clients with solid rating and with reasonably large capacities (10 MW at least), the interest rate might go to 11% or slightly lower.
  • Collateral Security = This is where most banks are still super strict. For developers not belonging to established corporates and hence not having any much of a balance sheet, banks ask for 100% collateral, and in some cases up to 125% collateral! This has been a thorny issues with the banking sector. Essentially, they are NOT willing to offer what is called as pure project finance or what is called as Non-recourse Financing, in which the bank offers you a loan without any security or collateral as it considers the project returns themselves to be security enough that can pay off the loan. The Indian banks are today offering financing with recourse – that is, a financing avenue in which the bank has recourse to your assets outside of the project should you default in payments. And the banks ask you for a 100% collateral, which is the recourse they have in case of default.

Well, of the above, the two things that banks can try to work on and become more solar sector friendly are:

  • Much better interest rates – IREDA, gives loans in the range 10.8-11.4% with a 0.15% discount for prompt repayments. Banks can also follow the same system. With RBI recently cutting its policy interest rates to 6.75%, a more than expected number, it should be easier now for banks to offer a more competitive interest rate for solar loans.
  • Lower collateral – IREDA, once again, asks only for collateral up to 30%. Banks can reduce their collateral at least down to 50% if not 30%.  See more on IREDA’s financial terms here

A related question many developers ask Solar Mango is: Which is the best bank to go with for solar loans, especially for MW scale power plants? Or should I go to IREDA instead of to banks?

Based on our experience, we would put it this way:

  • It is always a good idea to check with IREDA to see the feasibility of their providing you with the lending. If they are willing, they are perhaps the best bet, as they offer lower rates of interest, at lower collaterals, and flexible tenures. But IREDA might have its own constraints on the minimum scale of of projects they can fund (they are more keen on funding 5+ MW scale), and they might also be inflexible on the total project cost they can consider (some banks can consider upto Rs 6.75-7 crores /MW as total capital cost without trackers, while IREDA might be willing to consider only a lot less). IREDA might also not give more than 75% as debt, but some banks might be willing to consider 80:20
  • If you have a long-standing existing relationship with a bank, it is a good idea to consider them. They might offer you hard and soft benefits because of your relationship with them, which might to a large extent make the deal as good as that from IREDA.

There are some who had asked us if indeed a small reduction in the interest rate could make a big difference to returns.

Let us take as an example, a 1 MW plant, without trackers.

For the above inputs, let us look at how the results could vary depending on the interest rate:

Interest Rate LCOE (Rs/kWh) Total cash flow  (Rs lacs) Equity IRR (%) DSCR
13 5.33 1504 17.2 1.2
12.5 5.28 1536 17.9 1.23
12 5.24 1567 18.7 1.26
11.5 5.19 1599 19.5 1.29
11 5.15 1630 20.4 1.32

You can see from the above table how, if you are able to get the lending rate from 13% to 11%, you

  • Lower the LCOE by 18 paise/kWh, from Rs 5.33 to Rs 5.15/kWh
  • Get an additional cash flow of Rs 1.3 crores
  • Increase the equity IRR by over 3%
  • And get the DSCR from a borderline 1.2 to a healthy 1.3

Not bad, eh?

Best practices for the developer to make access to bank loans easier

As a developer, you can undertake some acts that will make it relatively easier for a bank to lend you for your solar power project:

  • The first of course if to ensure that he has a good and bankable PPA. More than anything else, this is the most critical. Without a healthy PPA, you are just wasting your time, no bank (or for that matter no financial investor worth his salt), would be interested in financing you. So, if you are a prospective developer, spend time to investigate how to get a good, bankable PPA for 20 years or more. A good, bankable PPA comprises two aspects: a good tariff rate, and an established and financially sound offtaker who would be able to honour the goof tariff for 20-25 long years.
  • In most cases, for small developers without any corporate backing, collateral security will be required. If you are not in a position to provide that security, explore if you could get a business partner with a good net worth who could get that collateral security for you. Sure, you will be sharing the profits with him/her, but that is what partnership is all about!
  • Choose a good EPC. Most banks are recognizing the criticality of the EPC  for the success of the solar power plant; hence, having the right EPC as your implementation partner could infuse more confidence in the bank.

Which banks are the best for solar loans?

The other question that people have is about the list of banks that provide loans for solar power plants. While only a few banks in India were really providing solar loans earlier (though many more of them were just doing public posturing), by mid 2015, most banks in India, both private and nationalized banks, have become far more receptive to solar loans. This could be either because they probably feel that the solar power sector has come of age, or because the governments (both central and state) have started pushing this to them.

As a result, the developer who has a good PPA and also can bring in the equity and collateral today has a number of choices. However, what we have seen is that most developers tend to approach the bank they are already banking with. Now, this might not be a bad idea, as YOUR bank is likely to process everything faster for you. However, Solar Mango suggests that you check out at least a couple of other banks and their terms before finalizing with your bank.

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