INDIAN SOLAR LOAN
         Programme Overview and
         Performance Report
         February 2005


                                         Photo: Selco

                         February 2005
                                          Table of Contents
Current Status and Performance                                                                                   3
Solar Loan Portfolio                                                                                             4
Background                                                                                                       5
Project Strategy & Structure                                                                                     6
     Karnataka State...............................................……….......................................    6
     Credit Access Impacts PV Market……………………........................................                             7
     Why Banks?………………........….....................................................................              7
     Loan Product Structure.............………………..................................................                 9
     Commercialisation and Subsidies...............………….......................................                  11
     Vendors and After-Sales Service……………………….…………………………                                                        11
     Commercialisation Strategy ……………………………………………………….                                                          12
     Replication...................……………...................................................................     13
     Self Help Groups (SHGs)………………….……………………………………….                                                            14
     Business Planning, Review & Feedback………………………………………….                                                      15
Significant Future Initiatives                                                                                  17
In April 2003, the United Nations Environment          Programme highlights include:
Programme (“UNEP”) initiated a credit facility in
Southern India to help rural households finance         From Cash to Credit
the purchase of Solar Home Systems (“SHS”).              The Programme has created a vibrant credit
Two of India’s largest banks, Canara Bank and            market for solar home systems. Loan approvals
Syndicate Bank, along with their eight associate         continue to grow, even with the recent decrease
Regional Rural Banks (or Grameen Banks),                 in the interest rate subsidy, indicating that a
partnered with UNEP to establish and run a Loan          sustainable credit market is taking hold.
Programme through their branch offices across           Sales Drivers
Karnataka State and part of the neighbouring             The Programme is contributing to a large share
Kerala State.                                            of retail sales; now accounting for more than
                                                         50% of the SHS market in the two states.
In addition to providing financial support in the       Loan Availability
form of interest rate subsidies for borrowers,           The availability of loans across 1,800 bank
UNEP provides assistance with technical issues,          branches - 80% located in rural areas – is now
vendor qualification and other activities to develop     the key growth driver for this loan sector.
the institutional capacity for this type of finance.    Success in Karnataka
                                                         Karnataka State has performed well as the
As of January 2005, the Programme has financed           primary focus state for the Loan Programme,
10,370 loans, through 1800 participating bank            and is ahead of most other Indian States in
branches. The fastest growth in loans is currently       commercial sales of SHS.
in rural areas, thanks in part to the increasing        New Market Development
participation of the nine Grameen banks. Other           Vendors have expanded into new marketing
Indian banks have recently launched competing            territories in Karnataka and Kerala.
SHS loan products. UNEP is helping these banks          Good Practices
with technical support to establish their loan           The Programme approach of qualifying SHS
programmes (such as developing a vendor                  vendors rather than specifying system
qualification process).                                  configurations has proven effective.
                                                        Market Principles
The three-year Programme is on target to finance         A vibrant SHS market is emerging driven by
between 20,000-25,000 solar home systems,                commercial market dynamics – no market
making it one of the largest SHS loan                    distortion has been observed to date.
programmes.                                             Replication
                                                         The loan product is becoming popular as more
                                                         banks launch competing solar loan programmes
                                                         and new applications are financed, making
                                                         replication likely across India.
                                                        Village Electrification
                                                         Due to the wider availability of loans, particu-
                                                         larly in poorer areas, village electrification
                                                         projects based on stand-alone SHS are
                                                        Shifts in Government Policy
                                                         The need to shift approaches from capital to
                                                         interest subsidies is now recognized by the
                                                         Ministry for Non-Conventional Energy Sources.
                        SOLAR LOAN PORTFOLIO
HOME SYSTEMS - Karnataka/Kerala

April-January 2005

                                    Syndicate       Grameen
                   Canara Bank         Bank           Banks                    Total
                   Apr-Nov         Apr-Nov         Apr-Nov         Apr-Aug Apr-Nov         Grand
                      2004 2003-04    2004 2003-04    2004 2003-04    2004    2004 2003-04 Total
Shell Solar India
Private Limited          571 1071      780 1063      564       73    1372      1915 2207 4122
Selco Solar Light
Private Limited          172 366       587  754      815       432   1103      1574 1552 3126
Tata BP Solar India
Limited                  481 377       597  358      487       111   423       1565    846 2411
Kotak Urja Private not            not           not
Limited *           received  104 received   38 received             166        166    142   308

Total                 1224 1918      1964 2213         1866    616   3064      5220 4747 9967
Kerala State
                                    Syndicate       Grameen
                   Canara Bank         Bank           Banks                   Total
                   Apr-Nov         Apr-Nov         Apr-Nov                Apr-Nov         Grand
                      2004 2003-04    2004 2003-04    2004 2003-04           2004 2003-04 Total
Shell Solar India
Private Limited           69                             19           65         88     0    88
Selco Solar Light
Private Limited                                                        0          0     0    0
Tata BP Solar India
Limited                  126                             126         140         252    0   252
Kotak Urja Private not                              not                     not           not
Limited             received                        received                received    0 received

Total                  195      0        0      0       145     0    205        340     0    340
TOTAL                 1419 1918      1964 2213         2011    616   3269      5560 4747 10307

* data for Kotak Urja is incomplete, hence only sales up
to end-Sep 2004 have been considered

   Villages Without Power                                  However, this system was not being used
   Although India has pursued an aggressive rural          effectively to increase credit access for SHS cus-
   electrification strategy over the past decade,          tomers in rural areas - due largely to a lack of
   many households are still continuing to rely on         what SHS could technically achieve. Conditions
   inefficient and polluting energy sources. At the        prevailing in the year 2001 have hardly improved,
   same time, the Government was aggressively              despite substantial efforts by government and
   promoting renewable energy. In 2001, India had          private agencies.
   one of the largest and most active renewable             Power Stats
   energy programmes in the world, with a signifi-          • Over 85% of India is electrified but more than
   cant part of that directed towards meeting rural           80,000 villages and 70% of rural houses
   energy requirements. This is still the case.               were not connected to the power grid.
                                                            • Contribution of renewable energy reached
   The contribution of renewable energy had                   3000 MW in 20011, or 3% of total grid
                            reached 3000 MW in                capacity. Estimated potential for Renewable
  In 2001, India had        20011, or 3% of total             Energy technologies is 100,000 MW
                            grid capacity. India            • India has one of the largest solar energy
 nearly 67,000 bank         has one of the largest
  branches, of which                                          programmes in the world.
                            solar energy pro-
over 70% were in rural grammes in the world
        areas.              and an estimated                Solar Loan Programme Fulfills a Need
                            renewable energy                • Facilitates access to credit
   potential of 100,000 MW.                                   Stimulate the market for rural credit finance,
                                                              specifically for the purchase of SHS
   However, the overall impact of the renewable             • Funds the cost of financial incentives
   energy programmes was limited compared to the              Help provide concessional finance that will no
   magnitude of the energy problems faced by                  longer be required once barriers to mainstream
   Indian villages. In 2001, commercial sales of              financing – such as technology perceptions –
   Solar Home Systems were minimal although 60                have been overcome
   vendors of PV products were established                  • Encourages banks to lend
   throughout India, mostly supplying products and            Counterbalance the distortions inherent in a
   services under various government-sponsored                subsidy-led product programme by drawing
   programs.                                                  more banks into launching commercial loan
                                                              products and creating a stronger customer base
   Solar lighting preferred                                   among rural households
   With no electricity grid or erratic grid power, rural    • Pursues a commercial solution
   households are mostly without reliable lighting.           Creates a sustainable and replicable
   But even if a solar home system is the best                programme for lending to buy SHS; increase
   option, little or no access to credit means it is          retail and commercial lending to the this sector
   simply unaffordable, and without credit, the
   growth of the SHS market is also impeded.

   Indian Banks have ample financial resources and
   nearly 67,000 bank branches, of which over 70%
   are in rural areas. They are also required to lend
   40% of their loans for priority purposes (such as
   causes with strong social objectives), including
                    PROJECT STRATEGY & STRUCTURE
        Solving Several Challenges                              prudent. Since the overriding objective of the
        Most rural Indian households are not connected          Loan Programme is to develop a sustainable
        to a power grid. Even if the grid is available, it is   commercial market for SHS, it is targeted at
        often unreliable. These households depend on            those who can afford to service loans out of their
        kerosene for their lighting needs, which is costly,     own earnings.
        frequently unavailable, hazardous, and produces
        unhealthy fumes and smoke. Depending on their           The Indian Banking system can help the poor
        incomes, these households can consider a range          through other mechanisms. Group lending
        of alternatives, including SHS, Inverters, and          through Self-Help Groups (“SHGs”), for example,
        generators.                                             can reach “Below Poverty Line” (BPL)
                                                                households. Lending to SHGs has been a good
        One technology that is not favoured, however, is        experience for banks and UNEP support is also
        the solar lantern. Although they are the focus of       available for loans provided by the banks to
        most Government-sponsored programmes, solar             SHGs. In this way, poorer households can
        lanterns are not widely sold outside these pro-         benefit from the UNEP Loan Programme.
        grammes because they are perceived to be
        unreliable, due primarily to poor quality after-        Vendors need to do more
        sales service.                                          More than 50 Indian vendors of photovoltaic
                                                                products supply the complete range of solar
    A recent Customer             Despite high capital          lighting products, mostly for government-spon-
Satisfaction Survey for the       costs, Solar Home             sored programs. Vendors have limited geo-
    Indian Solar Loan             Systems have emerged          graphical focus with most sales concentrated in a
                                  as an attractive long-        few states, and further limited to specific regions
 Programme showed that
                                  term option. Such             of the state. Their business focus is concentrated
 customers bought SHS             systems guarantee             on selling their products to the relatively affluent
    because of power              good quality power and        sections of the population in semi-urban and
  shortages in their area.        offer            total        rural areas. Vendors have not been able to
                                  independence from the         market effectively
                                  grid, unlike other alter-     across diverse terri-      Apart from stimulating a
        native power systems. SHS are relatively simple,        tories,       mostly             higher level of
        reliable and quickly constructed.                       because of their own
                                                                                          commercial activity in the
                                                                limited       service
        Rising tariffs for conventional grid power are          infrastructure.            states of Karnataka and
        increasing the financial attractiveness of SHS.                                    Kerala, the UNEP Loan
        UNEP is facilitating commercial sales of Solar           KARNATAKA                    Programme can
        Home Systems by using the existing vast Indian
                                                                   STATE                   encourage replication in
        rural banking infrastructure                                                          other parts of the
                                                                The choice of the
                                                                Southern India state               country.
        Reaching Poor Customers
                                                                of Karnataka was
        Government-sponsored efforts reach out to un-           made for several
        electrified villages and rely on heavy subsidies to     reasons. The region
        provide lighting solutions to the very poor. The        is more developed in areas of literacy,
        financial contribution of most households is small      industrialisation, agricultural prosperity, economic
        and there is often limited motivation for them to       levels and other indicators of progress. Banks in
        want to pay for lighting needs.                         Southern India have larger branch networks,
                                                                higher volumes of business, a wider customer
        Banks often find that lending to the very poor is       base and report better quality of assets. The
        not commercially viable. Although they are keen
        to lend for SHS, they must also be commercially
                                        UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

region also has the highest number of vendors of               CREDIT ACCESS IMPACTS PV
PV products.
Further, Southern India is homogenous in many               Access to credit is improving sales of SHS
ways, making replication more easily possible in            because the initial cost of buying a SHS is high
all five States.                                            and only a small percentage of rural households
                                                            can afford to pay up-front to acquire a system.
The failure of the local grid also presents a good          Loans provided at concessional interest rates
incentive. Although Karnataka State claims to be            have made it affordable for households.
fully electrified (26,702 out of 27,066 villages
electrified2), only 31% of rural households have            Credit access has improved due to both the
electricity compared to 76% of urban house-                 increased number of Bank branches providing
holds. Chronic power shortages are endemic                  finance – now greater than 1800 – and the
and individual households face power shutdowns              reduced financial burden that the interest rate
for several hours during the day and night at               subsidy provides.
irregular times. Peak hour shortages were 16%3.
Power tariffs of grid power have gone up drasti-            Improving credit access
cally in recent times and further increases are             Banks only provide loans for SHS manufactured
expected.                                                   and supplied by the Qualified Vendors whose
                                                            products meet set Technical Specifications4.
Good business for Vendors                                   They adhere to their normal lending policies and
India’s largest vendors operate out of Karnataka            loan appraisal criteria, subject to UNEP-stipu-
and have a strong marketing base there, as well             lated conditions in line with objectives of the
as neighbouring States. In Karnataka, they prefer           Loan Programme. Market principles are followed
to sell their SHS directly to individual households         – product configurations, choice of vendors,
independent of the Government-sponsored pro-                pricing, etc – and the banks administer loans
grams. Karnataka has one of the largest after-              using a decentralized approach.
sales networks of any State in India.

The customer base is maturing with customers
willing to pay for SHS from their own funds and
not expecting support under the Government-
sponsored programmes as in several other
States. They also realize that the quality of grid            “The banking system touches the lives of
power is unlikely to improve in the short-term and           millions and has to be inspired by a larger
tariffs likely to increase.                                     social purpose and has to subserve
                                                              national priorities and objectives such as
Good banking infrastructure
                                                            rapid growth of agriculture, small industries
Karnataka State has a very large banking net-                and exports, raising of employment levels,
work with nearly 5,000 bank branches or 7% of
                                                             encouragement of new entrepreneurs and
total Indian bank branches. Most of these (67%)
are in rural areas and provide ready-made plat-                   development of backward areas.”
forms to deliver credit. The culture of banking is
strong and credit history good.                              Government’s banking policy since 1969

UNEP’s partner banks, Canara Bank and
Syndicate Bank, are among the biggest in India,
with headquarters in Karnataka and an extensive
State network of more than 1,000 branches.
India’s largest Grameen banks, eight of which
are owned by Canara and Syndicate Banks, are
also from Karnataka and maintain 800 branches.
                                                  - - 7
                                       UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

              WHY BANKS?                                   The Banks have considerable experience
India has a vast rural banking system with                 designing, customising, launching and imple-
national presence, comprising the commercial               menting special loan programmes in rural areas
banks, co-operative banks, Grameen banks and               where they operate. Some of their products
their allied concerns. They have an extensive              have been accepted nationally and adopted by
rural network and a wide range of banking prod-            the rest of the banking industry. They also
ucts for the poorest segments of the population.           maintain systems for handling special loan
Besides being driven by credit-linked poverty              programmes.
alleviation government lending initiatives, Indian
banks apply corporate social responsibility prin-         The Banks have    a strong stake in developing
ciples strongly in their                                                    their own capacity for new
businesses. Their credibility, Credit Access is Improving                   loan products with in-house
institutionalized management • Increased number of Banks                    training facilities and the
and control systems,                  providing finance for SHS;            resources to reach potential
understanding of local socio-     • Reduced financial burden for            customers. They have the
economic realities and stand-         borrowers;                            ability to significantly impact
ing amongst the communities       • Enabling continuity of bank loan        the local communities they
that they serve make them the         schemes beyond the tenure of the      serve, and their efforts have
best dispensers of rural credit.      UNEP Programme;                       ultimately gained them
                                  • Number of Bank branches lending         important           customer
Indian banks have over 47,000         for SHS is now around 1,800; and      relationships in those areas.
branches in rural areas, con-     • Effective interest rate for SHS         They also have the necessary
stituting over 70% of the total       loans started at 5% p.a. and is       skills to interact with and
number of bank branches in            now 7%, compared to a                 influence their customers –
the country. Loans to agricul-        commercial rate of 11%.               such competencies are
turists, small industries and                                               extremely useful for UNEP
the poor represent 34% of total lending.                   and helping Vendors expand the market.

Canara Bank and Syndicate Bank                             UNEP/Bank Partnerships

UNEP’s partner banks, Canara Bank and                      UNEP has formal “Fund Support” Agreements
Syndicate Bank, have a significant physical                with Canara Bank and Syndicate Bank to imple-
presence and strong brand equity in Karnataka,             ment the Loan Programme through their
particularly in rural areas. They also sponsor             branches and those of their Grameen Banks in
eight Grameen Banks in Karnataka, which allows             Karnataka. The Banks provide consumer loans
them to reach remote corners of the State.                 to buyers of SHS, stipulating that UNEP-qualified

 Financial Support to Banks

         Interest Subsidy                                         USD 900,000
         Awareness Programme Costs Grant
              Promotional Costs                                  USD 90,000
              Other Awareness Costs                              USD 10,000
         Total                                                   USD 1,000,000

    Interest Subsidy is the difference in interest rates that helps borrowers pay a lower effective
     interest cost while the Bank earns the Prime Lending Rate (PLR). Currently, the interest subsidy is
     the difference between the PLR and 7%, or approximately 11%. The entire interest subsidy is
     passed on to the borrower.
    Marketing Costs Grant helps the Banks market the SHS loan product and partly compensates
     them for the high transaction costs involved with disbursing small loans.

                                                 - - 8
                                       UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

Vendors adhere to strict technical specifications,             performance; and
after-sales service and good practices. The                   Assisted banks in training their personnel.
Banks have created tailored lending policies for
SHS buyers, such as subsidized interest rates              Both Canara Bank and Syndicate Bank have
and simplified lending procedures and practices.           been sanctioning loans under the Government-
However, the credit decision is at the discretion          sponsored Solar Water Heater Loan Programme.
of a Bank that normally follows their standard             UNEP’s intervention has further helped them to
loan appraisal and management practices.                   enter the SHS market. To date, the five Qualified
                                                           Vendors have maintained good standards of
Banks are interested                                       product quality, information disclosure and after-
The banking system has ample capital and is                sales service.
keen to enlarge its portfolio of rural banking
products. Perceptions are positive about the               Building relationships
market potential for solar loans. Helping poor             To maintain a strong after-sales infrastructure,
rural households buy SHS makes a powerful                  relationships between the Banks and Vendors
social slogan in banking. Although vendors are             have been forged to safeguard against prema-
the main drivers for marketing SHS, in several             ture failure of the product. In these relationships:
places dynamic bank personnel have contributed                Banks have the comfort of a 5-year mainte-
significantly to increased sales. Most branches                nance contract to cover the full period of the
have internal business targets for sanctioning                 loan;
SHS loans. Following the Programme’s launch,                  Vendors provide long-term product warran-
SHS has proved popular in several new areas of                 ties;
the two States.                                               Vendor sales and service offices are situated
                                                               in close proximity to the bank branch;
More than a third of the total number of bank                 Banks work closely with Vendors to assess
branches5 in Karnataka State are involved in the               credit risk and process loan applications;
Loan Programme.                                               They jointly market the technology through
                                                               village meetings and other publicity plat-
   LOAN PRODUCT STRUCTURE                                      forms; and
                                                              Vendors help Banks recondition failed SHS
Demystifying a new technology                                  in the event of loan defaults.
Bankers seldom lend for an unfamiliar product
and SHS is no exception. The UNEP Loan                Encouraging good sales and service
Programme helps them understand the                   practices
technological issues while creating safeguards        SHS specifications have been standardized, and
such as good practices for               Banks participating in the Loan Programme
manufacturing, sales and
service. Branch personnel at                    Bank                         Number of Branches
grassroots level are educated                                                    in Karnataka
about the key concerns
                                          1     Canara Bank                          5421
pertaining to photovoltaic
                                          2      Tungabhadra Grameen                  169
technologies and the importance
                                          3      Chitradurga Grameen                  94
of after-sales service infrastruc-
ture. UNEP has:                           4      Sahyadri Grameen                     30
   Set technical specifications          5      Kolar Grameen                        65
    benchmarked against best              6     Syndicate Bank                       5061
    international product stan-           7      Bijapur Grameen                      93
    dards;                                8      Malaprabha Grameen                   248
   Created a set of good prac-           9      Varada Grameen                       31
    tices;                                10     Netravathi Grameen                   23
   Qualified the vendors and                   Total                                1,801
    monitored              their
                                             - - 9
                                        UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

common good practices for sales, warranties and             special promotions in the form of publicity and
service have been implemented. Pricing is trans-            information activities and to partly defray the
parent and determined by the market, promoting              transaction costs of processing loans.
competition and preventing price fixing. Although
price lists must be published in advance, prices            The participating banks draw support funds in
are not fixed by either UNEP or the Banks. They             advance based on a 6 monthly Business Plan,
are merely indicative and meant to serve as                 and branches can follow simplified procedures
benchmarks for Bank appraisal.                              for calculating subsidies and reporting on their
                                                            loan dispersements. Vendors are also permitted
Limited risk of loan default                                to assist Banks in the processing of loan
Rural lending is an attractive proposition for              applications.
banks since repayment records are generally
good. Banks did not see the need for a UNEP-     A wide spectrum of buyers
backed default risk guarantee.                               Loans are available for
The experience in the first 18                               households and small
                                Loan Popularity
months of operations has Loans are becoming popular due businesses. The poorest
been good with no defaults                                   households can access bank
reported to date.               • Reducing Down Payment o n loans through Self-Help Groups
                                       loans: from 25% to 15%, making of which they are members. The
The role of financial
                                       loans accessible to poorer Programme is structured so
incentives                             households;                           that:
Borrowers are offered loans at                                                  Buyers have to pay only
                                    • Reduced Lending Rates when
a reduced interest rate, which                                                    15% up front, as opposed to
                                       compared to equivalent
is about 4% below Bank Prime           consumer loans at about 13%;               the conventional 25%
Lending Rates. Even as                                                            deposit normally required;
                                    • Simplified lending requirements.
subsidies decrease, Loan                                                        Loans can be repaid over 5
volumes continue to rise,                                                         years against the normal 3
which clearly shows that it is the availability of              years for other non-home banking loan
the loan and not the interest subsidy that is                   products; and
driving demand. At the same time, an interest                 Loan security and documentation require-
subsidy presents a strong incentive for                         ments are simplified, making it easier for
customers to purchase a system. The interest                    borrowers to access the loans.
subsidy is:
 Back-ended: Banks charge customers at the                The Loan Programme is principally directed at
   commercial rates of interest and use the                helping rural households finance the purchase of
   interest subsidy to make the final payments.            a Solar Home System. Most of the demand is
 Phased: The amount of interest subsidy is                indeed in rural areas where the grid power is
   subject to change and will progressively be             unreliable or unavailable. Bank lending to non-
   reduced to zero when the UNEP intervention              rural SHS customers is restricted to 30% of their
   ends and loan interest then linked to prevailing        total loan portfolio and the Rs 25,000 ceiling on
   commercial rates.                                       loan size makes it less interesting for urban
                                                            households to take loans, as their funding
The effective rate of interest over the lifetime of         requirements are normally higher.
the loan was 5% for loans approved before
September 2004, and is 7% for current                       Building markets
                                                            The market for SHS loans is being built through
Financial incentives for the Bank                           village meetings to demonstrate products and
                                                            educate potential customers under the auspices
High transaction costs are one of the main deter-           of the Bank branch. UNEP helps to cover the
rents to extending low-value loans for SHS.                 cost of publicity materials used by the Banks for
Banks are paid a promotion fee of Rs 300 per                such events. Vendors help Bank personnel to
loan account to help them meet the costs of
                                                  - - 10
                                        UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

deal with customers effectively while UNEP helps            nating the need for UNEP to establish a credit
to train bankers.                                           risk default Guarantee Fund. Banks favour back-
                                                            end subsidies, primarily because they carry a
    COMMERCIALISATION AND                                   built-in incentive for prompt repayment by the
                                                            borrower, partially defray the cost of bad loans
         SUBSIDIES                                          and drive demand.

Subsidies and markets
In the initial stages of market development, front-         Phasing out interest subsidies
end capital subsidies were needed, but continu-
                                                            UNEP will gradually phase out interest subsidies
ing them has created expectations and a ‘sub-
                                                            by increasing interest rates up to the commercial
sidy mind-set’ in buyers, which has stifled com-
mercial SHS sales. Thus, despite the fact that
capital subsidies have been instrumental in
accelerating sales of SHS in the initial stages,               Has the Government reoriented its
they are now hampering growth of a healthy SHS                  own approach to its large SPV
market.                                                                  programme?
A subsidy should not be seen as the leading
factor to buy SHS; it has to be suitably packaged
                                                               “The [new MNES] interest subsidy
to ensure that customers buy SHS because it is                 scheme is aimed at expanding the
a preferred option to supply energy. The UNEP                      commercial market for SPV
Loan Programme is devised with this in mind,                   products in the country so that the
helping the borrower with a ‘back-end’ interest                capital subsidies can be gradually
subsidy conditional on prompt repayment of the                    phased out.” – MNES policy
entire loan. Further, the interest subsidy is
progressively reduced over the Programme’s 3-
                                                                 statement in December 2003”.
year life.

Improving access to credit is a higher priority             levels prevailing at the time when the Loan
than reducing interest costs. The pressing need             Programme ends. The first mark-up in interest
is to increase the number of Banks and branch               rates to 7% took place in September 2004 with a
networks offering loans to buy SHS. Providing               second increase to 9-10% (close to current PLR
financial incentives supplements the financial              rate of 10.75%) scheduled for 2005.
ability of the borrower, creates market awareness
among customers and bank managers, and                      This gradual removal of subsidies will enable the
provides a moderate incentive to buy the                    UNEP Loan Programme to reach approximately
product.                                                    23,000 households by the time the Programme
Interest subsidies encourage lending
The back-end subsidy ensures that loans are not                  VENDORS & AFTER-SALES
tainted by the stigma of front-end subsidies, and                      SERVICE
the levying of commercial rates on the loan
ensures borrowers absorb the amortisation costs
themselves. This approach also recognises the               Building market infrastructure
reality that SHS buyers are more concerned with             The key issues in building market infrastructure
obtaining access to financing than specifically             are:
reducing the cost of systems.                                Technical standards, allowing flexibility in
                                                              system types and configuration;
The back-end subsidy is a quasi-Guarantee                    Good practices for sales, service and dis-
Fund for the Banks, providing them collateral in              closing information; and
the event of default by the borrower and elimi-
                                                  - - 11
                                        UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

 Qualified Vendors
        Vendor                                    Number of Sales/ Service Offices in Karnataka1
                                                           In 2002                     Today
 1      Kotak Urja Private Limited                            5                          5
 2      Selco Solar Light Private Limited                     17                        23
 3      Shell Solar India Private Limited                     10                        16
 4      Tata BP Solar India Limited                           8                         14
        Total                                                 40                        58

 Qualified vendors capable of providing quality            Qualified Vendors offer standard product warran-
  products and reliable after-sales service.                ties and have firm service contracts for the full
                                                            five-year term of the loan. Besides routine serv-
The Programme has benchmarked technical                     icing, they are responsible to the Bank for
specifications to international standards, but              repairs/ replacements/ resale of Solar Home
aligned to Indian operating conditions. These               Systems that are repossessed from defaulting
standards mandate product testing and certifica-            customers.
tion by independent bodies, and defines restric-
tions on warranty support and after-sales service.                   COMMERCIALISATION
Banks and buyers have access to information to
make informed decisions and to be aware of
incidences of sales malpractices.
                                                            The UNEP Loan Programme operates on market
Unlike other programmes, UNEP sets standards                principles. Vendors are qualified through an
for disclosure of pricing information. Actual pric-         ongoing transparent selection process with no
ing of SHS, however, is a decision between the              restrictions on the number of qualified vendors.
vendor and buyer.                                           Vendors are free to decide their product configu-
                                                            rations6 and prices, and customers are free to
Qualification of Vendors                                    choose a vendor.
The Programme maintains an on-going qualifica-              Banks are also free to package their loan
tion process for Vendors, who will be added and             products as they wish. The only stipulations are
deleted from the Programme from time to time                that the borrowers get the full benefit of the
depending on an assessment of their perform-                interest subsidy while the Banks adhere to the
ance and compliance with the criteria. The initial          principles of simplicity and ease of offering loans.
qualification was based on an open bidding                  More banks beyond the ten7 who are partnered
process - A Request for Proposals was published             by UNEP are free to participate in the Loan
in October 2002, and Vendor Participation                   Programme, although the present budgetary
Agreements signed with 4 selected Vendors in                constraints only allow UNEP to provide technical
December 2002. The process is still open; any               support and not financial assistance.
Vendor can obtain the qualification package and
apply for qualification. One further vendor was             The subsidy will be phased out and interest rates
qualified in 2004, bringing the total to five.              will be progressively moved up to commercial
                                                            rates of interest by the end of 2005.
Qualified Vendors are reputed leaders in the
Karnataka commercial SHS market with sales                  Subsidies promote commercializa-
and service networks across the State. They                 tion
participate in advertising and publicity initiatives
associated PV technologies, SHS and the Loan                The Loan Programme demonstrates an alterna-
Programme; demonstrating their products,                    tive to the capital subsidy-approach. Banks
attending village meetings and helping to train             charge their borrowers at commercial rates of
bank personnel.                                             interest, although the effective interest cost to the

                                                  - - 12
                                        UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

borrower is reduced through the mechanism of an                The Grameen Banks with region-specific
interest subsidy. This is similar to MNES interest              operations and dedication to rural banking.
rate subsidy programme for promotion of solar
water heaters. However, the UNEP approach                   The Loan Programme sets standards for other
differs as interest rates are scheduled to go up            similar banking entities to follow. Independently,
over a period of time and reach market rates                some vendors are already discussing with other
within 3 years from Programme launch. The                   banks ways to replicate the same lending model.
Programme will be considered successful if it
concludes with loan figures continuing to grow as           The role of Banks
the subsidy is removed.                                     Banks customarily lend to their existing custom-
                                                            ers and Canara, Syndicate and the Grameen
Marketing emphasis is on the easier access to               Banks are no exception to this banking practice.
bank loans, not the subsidies that go with it.              Even under the UNEP Loan Programme, it is
Subsidies are being reduced in 2 stages with an             largely the existing customers of the participating
initial interest rate increase in 2004 and                  Banks who have sought loans to buy SHS. This
subsequent increases in 2005 that will end with             has stifled the buying ambitions of other
loans charged at commercial interest rates.                 households, which applies peer pressure on
                                                            other Banks to follow the lending model and
High standards                                              launch their own Loan
The Loan Programme has set high standards for               Programmes so cus-
sales and service that empower both the banker              tomers are not left out.
and the SHS buyer. Thanks to the availability of
                                                                                           When the Programme
loans, Qualified Vendors have a dominant role in            Other banks operating            was launched, the
the industry and setting benchmarks for the other           in Karnataka, including          Qualified Vendors
vendors to follow. Safeguards built into the Loan           Vijaya, Corporation,             operated out of 40
Programme ensure free market dynamics and                   Karnataka Bank and            offices. They have now
ensure sustainability of the lending products. The          Krishna Grameen               expanded to 58 outlets.
partner-Banks adopt appraisal and lending prac-             Bank,             have
tices that serve as a model for other banks to              approached UNEP to
follow.                                                     create partnerships to
                                                            launch their own Loan Programmes. With
               REPLICATION                                  budgetary constraints, UNEP has offered non-
                                                            financial assistance in guiding similar Loan
Conditions in the rest of South India are similar to        Programmes at these Banks. The interest
conditions prevailing in Karnataka State. The four          displayed by the Banks demonstrates that the
other South Indian states suffer the same elec-             replication strategy is working.
tricity shortages and offer the same infrastructure
in terms of banking. Some similar lending initia-           Both Canara Bank and Syndicate Bank have
tives have been launched in the neighbouring                proposed to extend the Loan Programme to
state of Andhra Pradesh8 along the lines of the             other districts in the neighbouring states of
UNEP model. Both Canara Bank and Syndicate                  Kerala and Andhra Pradesh. In early 2004 the
Bank have launched similar Loan Programmes                  loan Pßrogramme was extended to some regions
(with limited funding support from UNEP) in the             in Kerala, and 340 loans were processed
neighbouring State of Kerala.                               between April and November. UNEP is in
                                                            discussion with the Rayalseema Grameen Bank
Currently, the Loan Programme works with 2                  in Andhra Pradesh to adopt the same lending
tiers of Banks:                                             model with limited UNEP support.
    The Government-owned nationalized Canara
     Bank and Syndicate Banks that have a
     national presence, cosmopolitan banking
     culture, reach and business focus: and

                                                  - - 13
                                       UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

Built-in replication                                       dealers will be permitted to seek loans for their
The Loan Programme is structured to operate in             customers. This moderation in the entry criteria is
a decentralized fashion, which relies on grass-            expected to aggressively drive dealership sales
roots marketing and loan sanctions. Other than             and stimulate loans in certain areas.
basic guidance and control systems, individual
offices of Vendors and Banks transact loan busi-           Government
ness independently and follow simple procedures            In December 2003, the Government announced
for funding, capacity building, loan processing            its intention to launch a loan programme to
and reporting. There are no special banking pro-           finance photovoltaic (PV) systems using the
cedures to be followed, and the Loan Pro-                  subsidized-interest model. When launched, it is
gramme conforms to the normal standards of                 likely to complement the existing UNEP Loan
bank policy and practice. Any bank at any loca-            Programme and result in a larger coverage of
tion in India can replicate these procedures with-         bank branches for solar lending.
out any special intervention.
                                                           Village Projects
By its design and structure, the Loan Programme            Qualified Vendors have reported successful mar-
will hopefully encourage commercial loan repli-            keting to household clusters in some villages,
cation through:                                            which has resulted in SHS sales for 50-150
 Larger loans: Banks now finance at commer-               houses at a time. This mass conversion has the
  cial interest rates larger SHS where the loan            potential to motivate other villages to follow suit
  size exceeds Rs 25,000, the loan ceiling of the          and signals a significant shift in the customer
  UNEP Loan Programme9.                                    mindsets and Vendor marketing strategies.
 Alternating Current SHS: Currently, the tech-
  nical specifications only permit funding to buy          The Shree Kshetra Dharmastala Rural
  DC Solar Home Systems. The increasing                    Development Project (“SKDRDP”) has been
  popularity of higher-end AC systems is putting           working in several dozen villages to help
  pressure on banks to extend loans at                     disadvantaged households in 2 districts in
  commercial rates of interest for AC systems.             Karnataka to buy Solar Home Systems entirely
 Government-sponsored programmes: Banks                   on commercial terms. Of late, SKDRP-sponsored
  have been granting loans for SHS that use                households have also started seeking loans
  capital subsidies provided by the                        under the UNEP Loan Programme.
 Simplicity of lending model: With its Vendor
  qualification process, the UNEP Loan
  Programme can serve as a model for other
                                                               SELF HELP GROUPS (SHGs)
  banks to follow regardless of whether financial
  assistance is available or not.                          Reaching poor households
                                                           In a customer survey, 7.5% of households in a
Vendors and Dealers                                        portfolio of around 850 loan accounts11 in several
Prior to the launch of the UNEP Loan                       branches of Canara and Syndicate Banks
Programme, SHS were popular in only some                   revealed that most borrowers earn upwards of
regions of the State. But the marketing strategies         Rs 50,000 per annum. This is primarily because
employed, strengthened by the easy availability            (a) these customers have the capacity to repay
of loans, have encouraged Vendors to venture               the loans, and (b) Banks view them as an
into new regions in the State and to build new             acceptable credit risk. In view of their higher
markets.                                                   social standing, it is also expected that they
                                                           serve as demonstration models for poorer
Up until April 2004, only the Qualified Vendors            households to follow. Vendors appear to skew
were eligible for funding under the UNEP Loan              their SHS marketing to the more affluent rural
Programme. Recognizing that Qualified Vendors              households.
often have dealers who are active and dynamic
marketers of their suppliers’ products, these
                                                 - - 14
                                       UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

Vendors have no marketing strategies for the               financial and technical assistance. The financial
very poor despite the fact that each bank branch           support sanctioned for the ensuing half-year is
has several credit-linked Self-Help Groups12               then paid to the Banks in advance. The Business
(“SHG”)13. For the most part, the Banks’ enthusi-          Plan also defines the plan of action for increasing
asm to lend more money to SHGs is not matched              accessibility of the loans to the target customers
by marketing efforts on the part of the Vendors.           and reviews the process of commercialization.
Vendors need to be better informed about the
potential to sell SHS to SHG member-house-                 Vendor Review
holds and intensively market SHSs in collabora-            Meetings are convened every quarter with
tion with bank branches.                                   Vendors to review progress, discuss new busi-
                                                           ness strategies and troubleshoot problems. The
Consequently, SHGs are the best route to extend            four most important issues discussed to date
SHS to poor rural households and obtain loans              have been how to:
from the banking system.                                      Effectively market the Loan Programme to
                                                              Ensure adherence to good practices of sales
  BUSINESS PLANNING, REVIEW                                    and service;
        AND FEEDBACK                                          Prepare for the withdrawal of subsidies and
                                                               transit to commercial interest rates within 18
Bank Planning                                                  months; and
                                                              Introduce PV-GAP technical norms for their
Banks file a Business Plan every 6 months esti-                SHS products.
mating the volumes of loans that they expect to
disburse, which UNEP then uses to estimate                 Field Visits
  SHG Plan of Action                                       Field visits are conducted by UNEP representa-
  • Help Vendor sales personnel discover                   tives to various districts in Karnataka State to
    marketing opportunities in SHS member-                 monitor activity at the grassroots level.
    households and address banking issues                  Discussions are held with bankers, vendors and
    relating to credit off take by SHGs.                   customers to address issues relating to satisfac-
  • Village meetings are to be organised to help           tion with the product/ service, capacity building,
    Vendors interact with SHGs that are credit-            specific projects, etc. The field visits are held
    linked to the various bank branches.                   meet with officials at local offices of Vendors and
  • Large capacity building platforms for                  Banks at least once every 2 months with most
    interacting with SHGs will be exploited such           districts of the State visited in the past 12
    as training institutes run for SHGs by the             months. Every one of the eight participating
    Banks.                                                 Grameen Banks (except one) has been visited in
  • With the best rural banking networks and the           addition to Canara and Syndicate Banks.
    maximum number of SHGs, Grameen Banks
    will be motivated to carry out special SHS             Bank Branch Audits
    marketing campaigns and encouraged to
    increase the loan exposure to SHGs that buy            Participating Bank branches must be audited
    SHSs.                                                  during the tenure of the Loan Programme. During
  • The present ceiling on loan size will be               January-February 2003, 26 branches of Canara
    specially increased for lending to SHGs                and Syndicate Banks were audited, and certain
  • A different interest rate scheme will be               departures from the stipulations for sales and
    tailored for SHGs which will protect them from         service were found, mostly involving price trans-
    the progressive increase in interest rate – i.e.       parency and consolidating 5-year service con-
    SHGs may continue to take advantage of the             tracts.
    loans at the subsidized interest rate of 5%
    while the rate for other categories of                 Suitable remedial action has been initiated to
    borrowers will be 7.5% or higher.                      rectify these variances, including:

                                                 - - 15
                                        UNEP Indian Solar Home Programme: Overview and Performance, February, 2005

  • Stricter vigilance over the sales/ service                                   Reasons to Purchase SHS
    practices of dealers/ agents of Qualified
    Vendors;                                                                     100%
  • Higher standards of price transparency and                                    80%

    information disclosures for the customer; and                                 60%

  • Firming long-term service contracts.                                          40%
The next round of audits is scheduled for all 10                                         Lack of grid
                                                                                                            Save on
                                                                                                          Power Costs
participating banks in Nov-Dec 2004.                            Percent of Respondants      100%             10%           6%

Feedback from Customers
A Customer Satisfaction Survey was conducted                    Type of System Purchased
in January 2004 where 7.5% of the borrowers
spread across 6 districts in the State were visited                                                     Less than 4
and polled on various issues. According to the                                                             lights
                                                                 More than four
  • The predominant reason for buying SHS was                        lights
    the acute power shortage in their village;                        48%                                 Four lights
  • Nearly 75% of the customers polled have                                                                  39%

    opted for SHS with 4 lights or more;
  • Over 90% of the customers are happy with
    their Vendors; and
  • Customers are happy with the level of the
    Banks’ service and loan processing proto-                           Customer Satisfaction
Based on the findings from the Audit and
                                                                               Very Good
Customer Satisfaction Survey, procedure manu-                                     5%
als have been further standardized and are being
implemented at various sales offices Qualified
Vendors, their dealers and Bank branches.

                                                  - - 16
                              FUTURE INITIATIVES

Phasing out Interest Subsidies                         the poorest households in villages. To facilitate
Interest Subsidies are being phased out                lending to Self-Help Groups, the ceiling on loan
progressively with the first interest rate increase    size will be increased.
in September 2004. The Solar Loan rate will
eventually align with commercial rates.                Replicating in other areas
                                                       Discussions are being held with more banks in
Reaching poorer households                             Karnataka and neighbouring States to
Marketing efforts of vendors and banks are to be       commence loan programmes without any
intensified to sell more Solar Home Systems to         financial support from UNEP.
members of Self-Help Groups, which represent


1 Report of the Ministry for Non-Conventional Energy Sources, Government of India
2 May 2001
3 Year 2001
4 Stipulated by UNEP
5 Based on 2003 figures
6 Within the parameters of the Technical Specifications stipulated by UNEP
7 Canara, Syndicate and their 8 Grameen Banks
8 In areas contiguous to districts in Karnataka State where the UNEP Programme is being run
9 Under the UNEP Loan Programme
10 UNEP Loan Programme does not permit a borrower to take the benefit of multiple subsidies – hence, the

buyer who obtains the capital subsidy from Government is not entitled to interest subsidy under the UNEP
Loan Programme
11 Customers surveyed during the course of the Customer Satisfaction Survey conducted in Jan-Feb 2004
12 Representing the poorest households in the village
13 denotes that the SHG is entitled to credit facilities at that bank branch

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