76123 CASE STUDY 12: INDIA – SOLAR LOAN PROGRAMME Barriers Limited access to credit for rural households Instrument Soft loans Application Provision of subsidy to end-customers, used to pay down interest costs of commercial loan Amount US$1 million, US$ 900,000 subsidy amount PROJECT BACKGROUND AND OBJECTIVES INSTRUMENTS USED The rate of rural electrification in India was significantly The UNEO solar loan program includes a loan subsidy in low, with most households not connected to the grid. the form of an interest rate subsidy for borrowers, Where there is grid connection, it is unreliable and distributed through participating local banks and considered to be expensive. The Government of India transaction cost support in the form of fees paid to the has implemented several initiatives to promote the use participating local banks per closed loans. Simplified of solar power system in households. loan application and procedures where used to process the solar loans to make them more appealing to the The objective of the UNEP solar loan program is to targeted households. develop a sustainable commercial market for solar home systems (SHS), by engaging and supporting local In addition, part of the fund was used for training and banks to offer household consumers credit for financing other capacity building activities, including qualification SHS in the Southern Indian states of Karnataka and of SHS vendors. Kerala. The main target of this project are rural INSTITUTIONAL ARRANGEMENTS households who can afford service loans, however, the existing Self Help Group (SHG) initiative used by local The funding for the UNEP solar loan program comes banks can be used in conjunction with the solar loan from United Nation Foundation and Shell Foundation, system to reach poor households. and is provided to local participating banks to support transaction costs and to pay the subsidy amount for The local financial institutions, i.e. banking system, in borrowers. the region is well placed to deliver the UNEP solar loan program, as they have significant local knowledge and The UNEP subsidy does not cover the interest rate per are already have loan programs and policies for rural se, but is calculated as an amount equivalent to buy household customers. Several vendors of SHS already down the interest rate (for example from a 12% exists in the states of Karnataka and Kerala, however, commercial rate to only 6%) over the term of the loan. they have not managed to market and disseminate The amount calculated usually adds to 2-6 monthly loan information regarding the benefits of SHS. Another issue payments on a five year loan. This subsidy amount is is that service maintenance of the SHS after sale was not then passed on to the borrower on a back-end basis, at up to standard; hence consumer confidence in the the end of the loan term. The local banks still lend to system is not very high. borrowers on a commercial rate basis. The calculated subsidy amount is then placed on deposit with the bank and applied to offset the borrower’s last several 1 | R E F I N e www.worldbank.org/energy/refine payments. Hence, the customer would only get the regions or countries. Several important factors to note subsidy after successfully repaying the loan. Overtime that contributed to the success of this programme are: the subsidy will be decreased with a view of removing - The availability of good local financial institutions – in the subsidy all together once the system is in operation this case, there are local banks who has the experience and is sustainable. of lending to rural households under different schemes, The participating banks only provide loans for SHS and are motivated to provide socially inclined loans manufactured by qualified vendors. The loans must - The existence of local vendors – this shows that the adhere to normal lending policies and loan appraisal technology already exist and in use in the area, and criteria of the banks, subject to UNEP stipulated therefore it only requires strengthening and conditions in meeting the project’s objectives. The improvement in marketing and information to banks receive training and assistance in business customers. planning and marketing of the SHS loans. The partnership between the vendors and the banks also helps promote the sale of SHS using the subsidized loan. OUTCOMES Since its implementation in 2003, the programme has disbursed around 19,500 loans, with 2076 bank branches participating in the programme and 5 qualified vendors. Moreover, the loan arrangement and the partnership between vendors and banks can be replicated easily without intervention or subsidy. More banks and vendors are reported to be discussing similar partnerships to promote SHS. The programme originated in Karnataka, but has expanded to Kerala. New loan programme were discussed in 2007, with more banks and vendors registering interests in the programme. The success of this programme indicates that similar types of programme can be implemented in other Further reading UNEP Energy Branch website – click here 2 | R E F I N e www.worldbank.org/energy/refine