When designed as long-term durable assets, the costs of decentralised renewable energy (DRE) products are higher than similar products with shorter lifetimes. Cheaper long-term financing makes these products more affordable for the poor, thus helping them to own long-term assets. So, financial products have to be designed to match the cash flows of the various target segments. Unfortunately, end-user financing for solar power-based DRE products is still not available in many parts of rural India, particularly in the tribal belts, as they are considered high-risk from a banker’s perspective.
Owing to marginal and unpredictable incomes, rural and tribal families cannot afford to pay the cost of basic systems upfront. Also, over the years, solar products, heavily subsidised by multiple donors, have been installed in villages without adequate servicing and maintenance, leading to a loss of faith in the sustainability of the technology itself.
Strong doorstep service, along with affordable local finance, can lead to the creation of sustainable long-term delivery models for energy access. This has been proven by a growing number of grassroots-based energy enterprises, partnering with local financial institutions, leading to reliable home-based solar systems being installed in remote/rural areas.
A good example to highlight how partnerships can render good results is that of SELCO Solar Private Limited, a social enterprise established in 1995, which provides sustainable energy solutions and services to underserved households and businesses in rural areas. The company strongly believes that linking individuals to the bank can not only help them access energy products, but also throw open opportunities for them to access better livelihood opportunities, education, health and sanitation facilities.
For banks to step in, a comprehensive support network is required on the ground. SELCO has been working towards building partnerships with local entrepreneurs, non-governmental organisations (NGOs) and policymakers to develop an ecosystem on the demand and supply side that can not only issue, but also absorb loans. This means helping banks build technical knowledge, outreach capacity to borrowers, and financial literacy amongst consumers and entrepreneurs, as well as provide guidance on proper due diligence of technology.
Moreover, this ecosystem is able to advise banks on creating savings schemes for villagers, and converting these savings into comprehensive, integrated loans that not only include electrification and lighting, but also livelihoods, housing and agricultural production. This allows banks to offer group lending, and reduces the transaction cost of supporting rural electrification.
Local financial institutions, by virtue of their proximity to customers, are a critical channel that can ensure financial inclusion via energy access. For those banks that do not have branches in rural areas, the appointment of banking correspondents was allowed by the Reserve Bank of India vide a circular dated January 25, 2006. These correspondents are individuals/entities engaged by a bank in India (commercial banks, regional rural banks [RRBs] and local area banks [LABs] for providing banking services in unbanked/under-banked geographical territories. A banking correspondent works as an agent of the bank and substitutes for the brick-and-mortar branch of the bank, and can engage in tasks ranging from the identification of borrowers to the recovery of the principal or collection of interest.
The Manipur story
Manipur, one of the seven sister states in northeast India, is significantly underserved in terms of basic services. The power supply scenario is dismal. For example, Churachandpur district in Manipur, with a population of over 270,000, is one of the most underserved districts in the country. It has close to 50,000 households, but only about 60 per cent of them have access to electricity, and 40 per cent avail of banking facilities. In addition, only 18 per cent of the villages have bus connectivity, while 48 per cent of the villages do not have even approach roads.
To meet the deficit in energy supply and cut down the high cost of electricity tariffs due to prepaid systems in parts of the state, many households opted for solar power systems to improve their livelihoods.
Access to finance in Manipur was also lacking. Banks in Manipur were comfortable extending loans to those employed in the government or reputed private companies with secure incomes, but they were hesitant to lend to individuals from the unorganised sector, including agriculture (the primary profile of the solar customer segment), where proof of income may not exist and the extent of bank interaction is lower (with no existing savings with the bank). In Bethel village, Churachandpur district, the community mainly comprises farmers with income levels ranging from Rs 10,000 to Rs 25,000 per month.
Developing a partnership-based ecosystem
While working towards setting up an ecosystem, SELCO also supports last-mile delivery start-up entrepreneurs with a mission to provide energy access to the rural population. Mangaal Sustainable Solutions Private Limited was one such social enterprise promoting sustainable energy solutions in Imphal. A renewable energy start-up, Mangaal was incorporated in 2013 by Devakishor Soraisam and his team to provide poor rural households with access to solar energy for household and livelihood needs. But one of the major challenges Mangaal faced was the inability of end-users to access finance. To address this issue, the Rural Women Upliftment Society (RWUS), a church-based, not-for-profit organisation founded in 1990, was roped in by Mangaal. A major part of RWUS’s activities was its work in microfinance, with it giving out livelihood loans for the past 10 years. RWUS knew most of the customers through its continued engagement with the community, awareness building and training initiatives, while its connection with the church helped ensure discipline in repayments. It carried out the first round of due diligence and then helped applicants fill out the loan paperwork to avail of finance. In 2015-16, RWUS had a total of 2,045 clients who availed of loans for income-generating activities. RWUS also had a negligible default record, owing to its strong scouting and collection mechanism. At the same time, beneficiaries had guarantors, who followed up with them regarding their loans. Most of the collections were in the form of cash and as RWUS’s office was in the market area, it was convenient for customers to drop off the money when they visited the market. The series of events unfolded as follows:
- In 2015, Mangaal partnered with Churachandpur-based RWUS, which agreed to take responsibility for collections and identification of future customers. The agreement was for RWUS to retain 7 per cent of the amount collected every month as commission, while Mangaal was the technology service provider and facilitator of the revolving fund pilot. A fund of Rs 180,000 was used to provide 10 lights of 40 W solar home systems (Rs 18,000 each). The systems were installed in March 2015. The customers were satisfied with the systems installed and paid the margin money and the first instalment on time.
- Following this, Mangaal introduced SELCO to RWUS. SELCO did a field assessment with RWUS in Churachandpur to understand its ability to play a key role in the implementation of sustainable energy projects, while RWUS visited the operational areas of SELCO in Karnataka. RWUS was chosen as an ecosystem builder in the Manipur area to identify needs among its members (for possible business associates for local enterprises); unlock assets by carrying out pilots and actively pursuing local financial institutions (with a potential to play the role of a banking correspondent or a peer-to-peer lending agent); and identify and bridge gaps in servicing, training and capacity building.
- In 2016, SELCO, Mangaal and RWUS initiated the revolving loan fund for installing solar home systems in 80 households. During the programme design, Mangaal was the critical technology provider, with SELCO ensuring quality, and regular servicing and maintenance of the systems. SELCO also supported RWUS with strategy, expertise and resources for implementation. The systems were installed in the RWUS members’ houses with a payment mechanism that extended from 12 months to 18 months. The money collected was ploughed back into the revolving fund. The pilot thus helped understand the overall acceptance of the local communities with respect to technology and its utilisation, and the need for customised financing at the local level. As loans were being recovered successfully, as of August 2017, 130 households had availed of financing for solar systems from the revolving fund, which continues to reach more households. The highest loan amount provided so far is Rs 58,000. Interest on all the loans is charged at a flat rate of 12 per cent, and the loan tenure now ranges from 8 months to 15 months, depending on the repayment choice of the beneficiaries identified by RWUS, comprising government workers, small businesses, masons, farmers, daily wage earners and private sector employees. So far, 12 micro, small and medium enterprises have been provided finance to power their appliances (sewing machines, handlooms, food and dairy processing, etc.) with solar energy, to develop their livelihoods further.
- In January 2017, piggybacking on the success of the pilot revolving fund, RWUS and SELCO approached Canara Bank, Churachandpur branch, to finance the next phase of 250 households. After numerous meetings, the bank agreed to start with 60 households. As one of the preconditions by the bank, SELCO provided a 30 per cent risk guarantee by opening a fixed deposit in the bank. RWUS helped catalyse joint liability groups (JLGs) (six in number with 9 to 10 persons each) and mobilise the savings accounts of the end-users who wanted to avail of bank loans. During this time, RWUS also set up a sewing machine training centre with three solar-powered machines as a demo for entrepreneurs from the region.
Impact and next steps
RWUS has set up a training and capacity building hub for micro clean energy technicians, business associates and other NGOs. In addition, it is expanding into other renewable energy sources such as hydro. RWUS has also volunteered to play the role of a nodal agent for all other NGOs and microfinance institutions in Manipur to learn and implement clean energy systems for households.
As of August 2017, meetings have been held with the community for awareness on the technology and financial linkages. The bank has sanctioned one loan to one JLG, with the rest expected soon. A member from RWUS has been identified and is soon to be appointed as a banking correspondent to enhance financial literacy among the community and facilitate loan repayment collection.