Access to finance is vital for solar developers who fall under Micro, Small, and Medium Enterprises (MSME) to invest in infrastructure, technology, research, and development and expand their operations.

While the government has tried to support MSMEs operating in the solar industry with certain initiatives, small developers are still beset by the challenge of demanding collateral prerequisites and lengthy loan processing timelines.

Need for collateral-free loan

Like any other industry, the lending activities within the solar sector rely on public and private banks and non-banking financial companies (NBFCs).

“The MSMEs receive loans for 20% of the turnover. But turnover can increase only when the funding facility is available. It’s a catch-22 situation. Until the company has access to cash flow, it cannot churn that capital, build the turnover, and become eligible for Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE) loans,” Hitaksh Sachar, Director at Asun Solar said.

Primarily focused on the rooftop segment, MSMEs often face challenges securing collateral-free loans from lending institutions. These smaller projects are not perceived as highly profitable by lenders.

Rajeeb Das, Director of Greenfinity Powertech, feels that solar MSMEs are unlike big corporates and do not have sufficient capital. “Non-collateral-based financing is not readily available. The banks and NBFCs are financing projects based on the financial records of MSMEs. We’re not getting funding for bigger projects – for more than 1 MW or 2 MW capacity.”

Due to concerns about the financial stability of their businesses, many MSMEs hesitate to take on large-scale projects.

Raghunath T, Vice President and Head of Credit, Vivriti Asset Management, said, “This is a feature of the Indian bank loan market where banks have apprehensions on lending to any company (in other sectors as well) without collateral property such as the promoters’ residential property or land holdings.”

Way Out for MSMEs

The government has recently increased the cap for collateral-free loans to MSMEs from ₹10 million (~$120,852) to ₹50 million (~$604,260), providing flexibility to many small-scale developers.

Raveendiran Dhanasekaran, CEO of Viridis Engineering, stressed that non-collateral funding of ₹50 million (~$604,260) would benefit the MSMEs and improve their participation in the solar industry.

Sachar believes that even though banks are providing loans under the new cap, it is essential for them to consider expanding it further as the project costs continue to rise.

He said, “India can learn about lending to MSME manufacturers from China. They should further increase the working capital to ₹100 million (~$1.21 million).”

Anburaj C, Deputy General Manager at SIDBI, says that his organization has started lending based on project capacities.

He said, “We have a separate program for projects other than captive. We also have a green finance program, providing loans for third-party projects. But for this, we may require collateral. First, we examine the company’s financials. There are other factors also, like the location of the projects, the types of modules being used, and the capacity of the project. The bottom line is that if the balance sheet of the MSME is good, we provide loans,” he said.

For developers planning to install larger projects or even multiple projects of smaller capacities, it is challenging to procure loans due to the increased project costs.

For a 5 MW project, developers would need, on average, ₹200 million (~$2.43 million), which is not covered under the collateral-free loans cap.

According to Das, even with the extended cap, non-collateral funding is a must for the survival of MSMEs. The lending institutions can provide funding based on the company’s financials.

“The government can act as a guarantor to help MSMEs secure loans. For MSMEs, the project itself can act as collateral, and the lending institutions can provide loans based on the projects,” he adds.

Sandeep Upadhyay, Managing Director at Centrum Capital, said, “There has to be a pool of capital which should be made available to the small-scale developers, in line with Government of India’s initiative to support the MSMEs. Perhaps some of these developers will qualify to utilize those credit lines.

“Alternatively, a separate pool of capital could be explored for these small-scale developers from financial institutions and multilateral funding agencies. For example, a specific line of credit is available from World Bank to channel funding through public sector banks, including large banks like State Bank of India.”

Raghunath emphasized that MSMEs must build their financials over a long time by executing multiple small projects and establishing themselves as reliable borrowers that financing institutions can trust.

He said, “Investors like us place a higher emphasis on cash flows and finance based on the merits of the project. However, the past track record is an important consideration. Hence, the best approach for developers would be to establish execution capabilities by taking up projects on an engineering, procurement, and construction (EPC) basis, establishing client relationships, strengthening the company’s financials, and then approaching project lenders. Their past record in executing EPC projects can also play an important role in securing loans. ”

Stressing the need to improve the financial capabilities of MSMEs, Raghunath added that government-backed programs are available for MSMEs, but they will not help MSMEs in the long run. They can increase the cap to a certain limit but not beyond that. Beyond a point, relying on these measures is not a solution.

Government policies and support are crucial for the growth of MSMEs in the solar sector. The government can provide financial incentives, such as subsidies, low-interest loans, and tax benefits, to encourage MSMEs’ participation and investment in the solar industry.

“In foreign markets, there is a term called securitization. For example, five MSME developers join hands and seek loans. Then someone like the World Bank or any other such financial institution can give a credit enhancement and say that if someone defaults, it will bear the loss. There are a lot of multilateral institutions that provide credit enhancements. If they can provide a loss guarantee to lenders like us, then we can provide the loans. It’s not prevalent in the solar sector, but we can finance MSMEs with these types of credit enhancement structures in place,” Raghunath said.

MSMEs are a vital cog in the solar ecosystem and play an important role in India’s transition to clean energy. The government must strongly consider ways to provide these companies access to collateral-free loans and expand their access to finance through various channels.

Earlier, Mercom had written about MSMEs struggling to compete with the bigger entities in the solar manufacturing space.